Cash-flowing rental easy to find?

[APowers]

Okay, so....am I just missing something really obvious here?

I am so close to FI, but one more rental that cashflows moderately (~$400-500) would put me solidly there. So I found myself on Zillow, browsing the housing markets. Here in Colorado Springs, the prices are too high for my budget, so I started looking elsewhere, and stumbled into the midwest (Wisconsin, Ohio, etc).

It appears that I can buy a duplex in, say, Oshkosh near UWO for about $80k and rent it for ~$1400 gross. Following the 50% rule, that's $700/mo cashflow. I could do a similar thing in Cleveland.

This seems a bit too good to be true-- good cashflow? Only $80k? I back-of-the-enveloped mortgage, taxes (higher than here, for sure), insurance, management, and rehab/maintenance, and the numbers still look pretty good. But....if these are as good of a deal as they seem, why aren't they all bought up already?

Two thoughts occur to me: (1) I'm missing something that scares off more local/diligent investors, like hidden repair costs; or (2) these "good deals" are mediocre in comparison to the other opportunities that I'm not seeing, and the investors aren't buying these okay deals, because there are bigger/better fish to fry if you know what you're doing.

[Papa bear]

I’ve got some great rentals in the cleveland market.  And there are a lot of properties that would still be decent cash flows. 

You better do a dam good job vetting PM’s though.  There are a lot of out of town investors and a number of cheap PM firms that do a terrible job with maintenance and upkeep.  Those places also do not get the prime rent rates. 

If you can go visit an area, get to know it, and make some informed purchases, you can do pretty well.


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[waltworks]

A duplex will do worse than the 50% rule, usually, but yes, there are some reasonable deals to be had in the midwest still.

Keep in mind that the reason is that those markets are in places (generally) with declining populations and often public pension/property tax situations that are a disaster waiting to happen. You should not expect to *ever* be able to sell the place, let alone see it appreciate, unless you get very lucky.

Papa Bear is also right - real estate is all hyper local. If you buy a place purely based on numbers that you don't know well, you are taking a huge risk.

If you only need $500 a month to be FIRE, there are a lot of ways to pull that off.

Good luck!

-W

[Jon Bon]

Walt brings up a good point.  The other point I bring up with cheap rentals is this.

The roof on a rental that is worth $450,000 goes for $5000 a month, costs about 8k.

The roof on a rental that is worth $80,000 goes for $1400 a month costs about 7,500.

Same can be said for Furnaces, ACs, etc. Just because the property is cheap does not make maintaining it cheap. When you have cheap property and cheap rent you still have to maintain them. These rentals only provide nice cash flow if nothing ever breaks. Replacing the roof wipes you out for an entire year.

[NonprofitER]

While the 50% rule is good for the back of the napkin, I'd evaluate any property I was seriously considering with more detailed figures for:
~ Vacancy (what's typical for the area - 5%? 10%)

~ Verify rental income range with local agents - NOT Zillow's Rent-estimate (not just what things are advertised at, but how quickly they get rented, if their prices drop, etc.)

~ Capital Expenditures (roof, HVAC, plumbing) - obv this is challenging when looking online but you can usually tell by the age of the property what's been updated and what's likely due in the next 5 years.  I buy properties from a distance but you can usually find out the age of major systems by having your realtor talk with the listing agent.

~ Pad your numbers with misc. costs for annual maintenance

~ Verify with local agent how utilities/ lawn maintenance/ snow removal (if applicable), etc. are generally divided between landlord and renter. If the LL pays for any utilities, call the local companies and get a sense of how much these run per month.

~ Look up the taxes on the local assessors website. Factor in the tax rate * purchase price or estimated value.

I buy rentals 6 hours away with a strong RE Agent who works almost exclusively with investors, so he knows how to evaluate deals for cashflow and can help me vet my thinking.  That said, he's helped me buy both off-market deals and MLS listed properties at "retail value" that cashflow ($300/door) by meeting or exceeding the 1% rule.  It can be done, but as others point out, be aware of the market and potential growth or indications of a stable local economy.