Author Topic: Risks of buying 50K rental properties?  (Read 12692 times)

Bearded Man

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Risks of buying 50K rental properties?
« on: November 22, 2015, 09:53:55 AM »
It seems that you can get $800 a month rents from 50K rental properties around certain locations of the country. Is this a wise move though? I did some research on it and found an article on bigger pockets about how it's basically throwing good money after bad. Is it?

I get that it is from an appreciation/remodel perspective, but what about cash flow value? On one hand, money you invest to remodel the house when tenants turn over is not going to really increase the value of the house in that location, since it is likely that price due to the local economy.

So is the cash flow worth it? Or do you just have a house that is cheaper to demolish than to remodel, since remodeling doesn't really add value as far as appreciation? Or is the remodel cost just a cost of doing business for a cash flow only property, where cash flow is the only actual gain?

iamlindoro

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Re: Risks of buying 50K rental properties?
« Reply #1 on: November 22, 2015, 10:20:47 AM »
I guess I don't see where a "remodel" is necessary when turning tenants.  At most, with decent tenants, you might patch some holes, clean (or replace) carpets, touch up paint (or repaint), do a thorough cleaning, and then get it occupied again.  This is a few hundred bucks of mostly labor at most.

Sure, when you acquire a property in this price range, there are probably rehab costs involved to get it rentable, but those are acquisition costs, not recurring ones. I own properties between 55-70K.  Turnover (and capital expense) costs are built into the model and the cash ROI is still 15-20%.  I personally am only looking for the cash flow.  If the properties appreciate at or near inflation, that's fine by me.  The exit strategy is currently to hold until the mortgages are paid off, possibly longer (possibly shorter if my equities increase in value enough to cover COL without the extra work of owning property).

I do think that most people severely underestimate what their operating costs will be.  There are a LOT of "real estate investor blogs" out there that call every dollar not spent in a given month "cash flow," which is totally wrong.  If people buying <$100K don't take these costs into account when purchasing, there's precious little breathing room when they occur.
« Last Edit: November 22, 2015, 10:23:34 AM by iamlindoro »

arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #2 on: November 22, 2015, 10:23:41 AM »
People have their biases. You'll find people who badmouth a 50k, rents for 1k property, and those who love it.

And the opposite: those who badmouth a property with a super low cap rate (that will be cash flow negative if any sort of mortgage is on it), and those who love it, expecting lots of depreciation.

Don't just blindly believe one perspective or the other, but decide which investing style works for you.

And no, I wouldn't assume a 50k property is falling apart, or a remodel will cost that much, or anything. I've seen 50k properties that are ridiculously nice. And I've seen very crappy 500k properties.  The former may, or may not cash flow.  The latter may, or may not, appreciate.

But the purchase price of the home isn't what determines that. There's way more factors that are relevant. The purchase price is mostly a factor of the $/sq. ft. of the area.
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Rezdent

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Re: Risks of buying 50K rental properties?
« Reply #3 on: November 22, 2015, 10:27:42 AM »
Real estate is so highly local that it is possible to buy 50k houses and get +800/rents.

Currently, we've got one purchased at 60k, rented 1200.
This is because, locally the economy was booming (oil) but housing lags behind market.  Somewhat temporary conditions, and rents will likely be lower in the future as the boom subsides and the housing market catches up.

The downside is that flippers and other landlords are always looking for these market inefficiencies,  so the neighborhood is getting flooded with competition to buy.  We would have difficulty replicating the results in that neighborhood today.

We have done some remodeling, but nothing major.  It may be in your area a 50k house is in deep disrepair, but this isn't true everywhere.

I'm curious about your statements re: remodeling as a value add.  Were you referring to flipping?  My experience has been that major remodels usually haven't paid off via higher rents, because renters aren't looking at the same criteria as buyers.
We budget for make ready between tenants, usually drywall patching, paint, carpets.  If something like cabinets need replacing, they are usually replaced as equivalent, not upgrade.

Bearded Man

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Re: Risks of buying 50K rental properties?
« Reply #4 on: November 22, 2015, 11:38:51 AM »
Sooner or later the kitchen, bathrooms, carpet and paint become dated and need to be remodeled, replaced, etc. Same with the roof, etc. This can cost almost as much as the house, at least in my area. A kitchen remodel is about 30K here. Do people in the cheaper locales work for peanuts? I imagine you are spending almost the value of the house every 15 years or so in repairs and remodeling.

And why are these houses soooo cheap? Seems like you can buy them for less than the cost of materials alone, let alone labor.

arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #5 on: November 22, 2015, 11:49:09 AM »
No, it doesn't cost 50k every 15 years to remodel.

Yes, people in cheaper areas tend to have cheaper labor rates.

Yes, often they are below replacement cost because they are depreciated. It wouldn't make sense for something to be above replacement cost, aside from the cost of land.

Go read all of sammybiker's posts.  Here's a great thread to start you off, it should teach you a lot about lower end properties: http://forum.mrmoneymustache.com/real-estate-and-landlording/my-long-distance-lease-option-flip-project/

If they aren't for you, fine. I get the feeling you're posting to argue your point, rather than learn. If that's the case, and you've already made up your mind, no one here can convince you of anything.
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Bearded Man

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Re: Risks of buying 50K rental properties?
« Reply #6 on: November 22, 2015, 12:48:05 PM »
Not sure why you would think that. I asked several questions as to the cost of remodeling in these areas, labor, and why these houses are so cheap, less than the cost to build really. Not sure how that is construed as arguing a point against 50K houses. It's trying to find out how these are profitable in the long run. Appreciation is clearly not a factor here, cash flow is, but why soooo cheap?

There has to be a catch for that kind of cash flow with so little cash invested. Given the cost of the house, I wonder if you are not throwing bad money away after good. BP forums suggest that it is at least on one of the blogs there. But the COC returns seem favorable, at least in the short term. It's the long term that worries me, when it comes to cost of repairs, upkeep, improvements, vs. appreciation. But I take it you get your money back via increased rents instead.

Here in my area, to remodel my 11 year old house in 15 more years (it's already starting to look dated, compared to marble counter tops and such) it would be more than 50K to remodel. A mid range kitchen remodel is 30K for me here. But then again you could buy almost 10 of these 50K houses for the price of my house. So maybe it is considerably cheaper there. Like 5K, lol
« Last Edit: November 22, 2015, 12:54:27 PM by Bearded Man »

iamlindoro

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Re: Risks of buying 50K rental properties?
« Reply #7 on: November 22, 2015, 01:02:59 PM »
Finish on properties in this price range isn't midrange, it's low end.  You don't put in granite countertops, you don't put in fancy appliances, you don't put in hardwood floors (unless the house is old enough to still have original hardwood, which they often do in the midwest).  You put in cheap carpet or laminate, inexpensive cabinets, and you put in laminate (or similar) countertops.  The kitchens (and other rooms) also tend to be quite small.  No appliances are provided.  Same in the bathrooms-- linoleum or basic tile, shower/tub, sink.

The type of tenant I am going for is "blue collar/working class."  Nobody expects these properties to have the amenities demanded in middle/upper middle class neighborhoods.  Adding those kinds of amenities to these properties *would* be a waste of money.  The properties need to be safe, clean, and functional.  And that's it.

Doing a $5K kitchen would be no problem in any of my properties, but frankly, I wouldn't remodel any of them even though they're already dated.  Dated is still functional, and comparable to everything else in the neighborhood.
« Last Edit: November 22, 2015, 01:09:06 PM by iamlindoro »

Papa bear

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Re: Risks of buying 50K rental properties?
« Reply #8 on: November 22, 2015, 02:22:08 PM »
Where the heck do you live bearded man??  A kitchen for 30k on a 50k rental??  Crazy.

My brother has bought a few 2 units at 80-90k, put in 30k each (2 kitchens, baths, windows, siding, HVAC all included) and now rent for 1800.  Remodeling shouldn't be that expensive.  Not everyone expects 8k countertops, and toilets that wipe your butt for you on a rental.

As for 50k for 800/month?  The higher cap rates are indicative of an area that probably has higher turnover and repair costs for properties.   You can make a boatload on these if you want.  That's not what I have, but I have many friends who are now very wealthy going that route.


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Bearded Man

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Re: Risks of buying 50K rental properties?
« Reply #9 on: November 22, 2015, 03:26:30 PM »
Where the heck do you live bearded man??  A kitchen for 30k on a 50k rental??  Crazy.

My brother has bought a few 2 units at 80-90k, put in 30k each (2 kitchens, baths, windows, siding, HVAC all included) and now rent for 1800.  Remodeling shouldn't be that expensive.  Not everyone expects 8k countertops, and toilets that wipe your butt for you on a rental.

As for 50k for 800/month?  The higher cap rates are indicative of an area that probably has higher turnover and repair costs for properties.   You can make a boatload on these if you want.  That's not what I have, but I have many friends who are now very wealthy going that route.


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I suppose the safest way to do it is to only buy one like this and try it out for a few years, see how it goes. Yeah, here in Seattle everything is expensive. You are not buying 15 houses here like you can for the same money in Vegas. That said, this area is more of an equity play area. All my properties cash flow, but largely because I either bought right, or put a lot of money down. The equity play is still handy in that I can 10-31 into other properties like in Florida for FIRE, however; the transaction costs eat a ridiculous amount of my equity. This is one huge turnoff for me in the RE industry. The buying and selling process is ridiculously antiquated. I can't believe people can make 30K to unlock a door and fill out a cookie cutter contract. Yes, RE agents have frustrations, but come on, 6% is a joke, just like a 10% fee on PM is a joke, 10% of my monthly rents is almost 40% of my profits, with little actual work or risk. I've been a LL for 3 years, and I must say this has got to be one of the easiest jobs I've ever had. It doesn't require a great degree of actual skill. Just some basic common sense and people skills.

Papa bear

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Re: Risks of buying 50K rental properties?
« Reply #10 on: November 22, 2015, 04:12:35 PM »

Where the heck do you live bearded man??  A kitchen for 30k on a 50k rental??  Crazy.

My brother has bought a few 2 units at 80-90k, put in 30k each (2 kitchens, baths, windows, siding, HVAC all included) and now rent for 1800.  Remodeling shouldn't be that expensive.  Not everyone expects 8k countertops, and toilets that wipe your butt for you on a rental.

As for 50k for 800/month?  The higher cap rates are indicative of an area that probably has higher turnover and repair costs for properties.   You can make a boatload on these if you want.  That's not what I have, but I have many friends who are now very wealthy going that route.


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I suppose the safest way to do it is to only buy one like this and try it out for a few years, see how it goes. Yeah, here in Seattle everything is expensive. You are not buying 15 houses here like you can for the same money in Vegas. That said, this area is more of an equity play area. All my properties cash flow, but largely because I either bought right, or put a lot of money down. The equity play is still handy in that I can 10-31 into other properties like in Florida for FIRE, however; the transaction costs eat a ridiculous amount of my equity. This is one huge turnoff for me in the RE industry. The buying and selling process is ridiculously antiquated. I can't believe people can make 30K to unlock a door and fill out a cookie cutter contract. Yes, RE agents have frustrations, but come on, 6% is a joke, just like a 10% fee on PM is a joke, 10% of my monthly rents is almost 40% of my profits, with little actual work or risk. I've been a LL for 3 years, and I must say this has got to be one of the easiest jobs I've ever had. It doesn't require a great degree of actual skill. Just some basic common sense and people skills.

You should be able to negotiate realtor fees somewhat.  Or FSBO.  That can help quite a bit.


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arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #11 on: November 22, 2015, 05:17:51 PM »
You're coming from the perspective of a single market that's very different from those, BM.  Start to learn about some other markets, from middle of nowhere to SF, and you'll see where Seattle fits in, and how it's the same, and different.
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mr_orange

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Re: Risks of buying 50K rental properties?
« Reply #12 on: November 22, 2015, 05:50:24 PM »
In general lower-end rentals will have:

1.  Higher economic vacancy
2.  Higher capex costs

than stuff that is mid-range. 

Item 1 is because you'll get skips, late-pays, evictions, etc.  It doesn't matter how great your screening is.  People that make less money simply can't afford for anything to go wrong.  If a single thing doesn't go as expected you can expect to have trouble with them paying.  You may need concessions to get the place rented as well, which will impact your economic vacancy.

Item 2 is because people in these units will probably tear stuff up more often.  D class properties will have windows broken, grease fires, etc.  I had a D-class apartment burn down in Killeen about 7 years ago and have since decided that chasing the extra yield isn't worth the hassle to me. 

It is fashionable on BP and other places on the internet for people to discard the impact of appreciation as a "bet" and all manner of other nonsense.  For some people they can afford to speculate modestly and they're capable of finding projects in nicer neighborhoods where you have to trade off a bit of cash flow for upside on appreciation, depreciation, and loan amortization.  Just be aware that how you model the returns and how they operate in the real world will probably be very different.  You'll want to involve an experienced property manager on any modeling assumptions you make.  Make sure that they are familiar with both the locale and the type of property you'll be purchasing.  Garbage is is garbage out. 

I run an investment meeting monthly with very wealthy investors that attend.  Some have done very well investing in the outskirts with modestly-priced rentals and own literally hundreds of these.  Some have done very well buying with slightly negative cash flow in high appreciation markets like Austin and own far fewer.  Some do both.  There is no right answer and what works for you may or may not work for someone else. 

In general if you're very busy I would shy away from lower-end rentals that will be time sucks with or without property management.  In general I would model your cash flows for lower-end rentals with extremely conservative rent and economic vacancy assumptions too.  You'll also want to beef up your capex expenditures along with their frequency.  The "50% rule" is NOT accurate for lower-end rentals in many cases. 

REI2015

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Re: Risks of buying 50K rental properties?
« Reply #13 on: November 22, 2015, 07:53:29 PM »
It seems that you can get $800 a month rents from 50K rental properties around certain locations of the country. Is this a wise move though? I did some research on it and found an article on bigger pockets about how it's basically throwing good money after bad. Is it?

I get that it is from an appreciation/remodel perspective, but what about cash flow value? On one hand, money you invest to remodel the house when tenants turn over is not going to really increase the value of the house in that location, since it is likely that price due to the local economy.

So is the cash flow worth it? Or do you just have a house that is cheaper to demolish than to remodel, since remodeling doesn't really add value as far as appreciation? Or is the remodel cost just a cost of doing business for a cash flow only property, where cash flow is the only actual gain?

It depends on what the $50k property is… If you're purchasing a $50k property that after repair is worth $100k, then remodeling adds value. If you're talking about having only $50k invested into a rental, then you need to buy lower and have room to have equity if the place needs work. $50k properties generate rental income all over the map. I own two duplexes that I bought/invested less than $50k in and they both generate over $1000+ per month. 

The remodel does add value if the property has equity that can be gained.  You're not approaching the concept of investing in real estate the correct way when you're thinking of remodeling being just part of the business.  Investing in real estate has several different areas to make money.  Remodeling should only be done if you're going to increase value more than what you're going to invest. I know several people who buy "low" and then remodel the home way to nice for the area. They think it'll be worth so much more than it really is.  Biggerpockets is a great website, but please let me caution you to take everything on that site with a grain of salt. I used to be quite the active member of BP until things started getting a little ridiculous.  Just be careful when putting the information from that site to use. 

Rentals:  To make a property more profitable you need to increase cash flow and or decrease expenses.  Only way to increase the value is to increase cash flow and or add sweat equity.

Let me give you an example of a rental that I own.  My less than $50k investment brings in $1100 a month. I do not buy "turn-key" rentals. I buy properties that people would go… there's no way you can make money with that

-- Property was on craigslist, yes I said Craigslist!  Haha. The guy was asking $58k for a duplex. I ended up purchasing it for $26k.  I remodeled both units as they were in horrible shape. My remodeling costs were about $8k in materials and then I paid myself a little bit, since I did all the work myself as I enjoy construction/carpentry work I saved thousands over hiring someone else. 

I took out a few extra thousand at closing to fix central air units, electrical etc. Let me break down how I created my equity.
Purchase Price: $26k
Remodel: $8k + $3k labor :)
Extra Cash Pulled out at Refi: $7k
Total Investment: $44k
After Repair Value Est.: $70k-$75k
I just created $26k-$31k equity.
Cash Flow: $1100 gross… Net of around $470 per month after PITI, vacancy, maint./Cap Ex. Etc.

When you're talking about tenant turn over… figure $1-$2 per sq.ft. of the property is what you'll have to stick into the unit in-between tenants. Each time a tenant moves out you won't have to remodel the whole place… unless you pick some bad tenants!! ha.

monarda

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Re: Risks of buying 50K rental properties?
« Reply #14 on: November 22, 2015, 10:43:46 PM »
Here in my area, to remodel my 11 year old house in 15 more years (it's already starting to look dated, compared to marble counter tops and such) it would be more than 50K to remodel. A mid range kitchen remodel is 30K for me here. But then again you could buy almost 10 of these 50K houses for the price of my house. So maybe it is considerably cheaper there. Like 5K, lol

Even in Seattle, I can't believe a mid-range kitchen would ever cost 30K.  For a rental? Where are you shopping? What are you buying? We do really quite nice kitchens for about 2K. Be mustachian in your remodel. Doesn't sound like you've done due diligence for shopping and design. 
« Last Edit: November 23, 2015, 07:52:42 AM by monarda »

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Re: Risks of buying 50K rental properties?
« Reply #15 on: November 23, 2015, 04:34:56 AM »
I lost out on a 3/1.5 brick ranch because I bid too low.  Happens that way sometimes.  House sold for $48K.  Move in ready.  Needed a coat of paint.  Rent would have been $750.

Bought a 3/1.5 for $45K.  Could have rented as was for $700 per month but it wasn't really "nice" and I would have had tenants in and out as they found better accommodations.

I invested an additional $25K (new roof, new windows, new bathrooms (down to the studs), new kitchen, new light fixtures, new carpet, new kitchen flooring.  NEW.  Rather than spend time over the next few years making improvements, get it all in at once and be done for awhile.

Rents for $800 and has a market value of $100K (based on other similar houses on the market in the same area).

You CAN make money on lower end housing depending on your area.  You can also lose money.  You have to know the area, the median rent, the median cost of a house and the housing shortage.  Helps to know the labor force and the average income of your target audience.  You also have to know what improvements add value (increased rent or desirable location) and which ones only cost you money.

Vilgan

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Re: Risks of buying 50K rental properties?
« Reply #16 on: November 23, 2015, 01:13:45 PM »
Not sure why you would think that. I asked several questions as to the cost of remodeling in these areas, labor, and why these houses are so cheap, less than the cost to build really. Not sure how that is construed as arguing a point against 50K houses. It's trying to find out how these are profitable in the long run. Appreciation is clearly not a factor here, cash flow is, but why soooo cheap?

There has to be a catch for that kind of cash flow with so little cash invested. Given the cost of the house, I wonder if you are not throwing bad money away after good. BP forums suggest that it is at least on one of the blogs there. But the COC returns seem favorable, at least in the short term. It's the long term that worries me, when it comes to cost of repairs, upkeep, improvements, vs. appreciation. But I take it you get your money back via increased rents instead.

Here in my area, to remodel my 11 year old house in 15 more years (it's already starting to look dated, compared to marble counter tops and such) it would be more than 50K to remodel. A mid range kitchen remodel is 30K for me here. But then again you could buy almost 10 of these 50K houses for the price of my house. So maybe it is considerably cheaper there. Like 5K, lol

This post comes across as very critical rather than actually trying to understand and empathize so you know what's going on. Rather than dwelling on the value of your house and your ridiculously high estimates of a kitchen remodel (we remodeled our kitchen for 2k a few years ago), perhaps instead you should spend some time understanding who lives in these neighborhoods. How much do they make? How consistent is their employment?

I lived in flyover country for a while and it has absolutely no relation to what real estate in Seattle is like. I rented a 2 bedroom house w/ front and back yard for way less than $800. Nowadays it looks like rent in that neighborhood is around $800 but that is hardly the dregs. Its families and young people and its a 3 minute drive to one of the biggest employers in the region. The "cheap" part of town is a few miles away and rent is more like $300/month.

That's the sort of place I'd consider buying a 50k house. There are places in Seattle where a 250k house is going to attract a far crappier tenant than a 50k house in other parts of the country. When federal minimum wage is considered "a good job" and the standard rate that tons of people are making then $800/month in rent isn't going to be the dregs.

Some houses for 50k are going to be slumlord style and some are going to be legit neighborhoods. So why not spend some time looking around for neighborhoods where stuff is cheap and then try to understand the dynamics of that area instead of throwing around 30k for a remodel numbers that are absurdly high even for Seattle let alone places where "skilled labor" makes $10/hour.
« Last Edit: November 23, 2015, 01:17:36 PM by Vilgan »

Bobberth

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Re: Risks of buying 50K rental properties?
« Reply #17 on: November 24, 2015, 08:35:33 PM »
If you're referencing the '$30k are pigs' articles written by Ben on BP, there is a lot of truth and a lot of crap in what he says.  Remember that he is selling a product and he needs to differentiate himself from his competitors so you buy his educational program and use his services.

The only thing I agree with Ben about is to keep in mind the minimum rental amount. He says to stick with $1000 or higher per month. I try to make sure I'm getting $600+ for multis and $750 for houses in my chosen market. A new water heater costs the same whether the house rents for $400 or $1400.

I have 8 houses and 2 duplexes for a total of 12 rentals. The most I have paid is $48k for one of the houses. The cheapest was a house for $11k. The biggest rehab was $20k and half of that was converting the duplex from radiators to forced air heat & central ac (including duct work). I have a short sale duplex under contract for $35k right now (needs maybe $5k work if I reconfigure the rooms to add a bedroom. waiting to hear from bank so who knows if it will go through). Everything I own has been in the middle of Ben's "pig" zone. I think I am doing pretty good. I've had 1 eviction in 7 years (crazy story).  1 issue of a tenant trashing the kitchen before leaving in the middle of the night. I'm 16 out of 21 for tenants staying longer than 1 year (3 moved at a year and 2 left before their lease was up, 1 got a promotion out of area and 1 had a baby and didn't really fit any more). I have several more tenants that look to be staying once their original 12 month lease is up. Not typically what Ben or others talk about when bashing $30k-$50k properties.

Here's the rub though: I would actually advise you against investing in these properties for the most part. Here's what else I guess I agree with Ben about: These types of investments should be left to the locals in most cases. Now I'm not trying to keep you away from my deals (well...maybe I am) but because it is so hard to know what is actually a deal and what is not. St. Louis, like many other older cities, can change a lot block by block. A half mile radius from my first $18k purchase there are $1million+ Victorian mansions and $10k houses that are over priced. The difference is the area. How do you know if that $50k house is in a good area or a bad area? If you are out of state, you have to trust the person who is trying to sell you the house-either the seller or your agent. The dumpy house may be a better buy than a rehabbed house if it's in a better area but you'd never guess that looking at online pictures. A 1% deal might be killer in another location but will be passed up in St. Louis.

Here are a few of my personal experiences with users on Bigger Pockets:

Got a colleague request and a message asking me about a great deal on a 4 family and it's big, fat numbers that he is looking to buy. Sends me the link and it's from a local "wholesaler" who had been marketing this property for a couple of months by then. I respond with 5 other 4 families in the area that are listed on the MLS for $10k+ less and ask him why he would want to pay that much over market value and that two of them are in better locations than the one he was looking at. Never heard back from him and I didn't get another email marketing that property.

3 weeks ago I get another colleague request and questions about investing in St. Louis from a California investor. I respond with a long message, even with specifics-I like these zip codes and to be VERY careful in this zip code. He sends me a wholesale deal he is thinking about. Yes! I like that area, I like that block. I own 2 houses in that neighborhood to the west and one to the east and under contract with another to the east. Doesn't go through with that deal for some reason. Sends me two more deals. They are both in the zip code I warned him about. I'm not sure about the specific area from looking at the map as there are a couple of 'good block islands' in that area so I would have to drive it. Look at MLS, these are 2 out of the 3 most expensive multifamilies in the zip code and they have both been on the market for 9+months. I respond back letting him know that for that price he should be buying a 2 fam in the best zip code in the city instead a 4 fam in the sketchiest one in south city. I warn him, "63118 is where out of state investors go to die. The returns look juicy but you will never realize them." And also with, “We’re not stupid in St. Louis. There’s a reason those have been on the market for over 9 months.” He responds saying that he already has them under contract because a local agent that posts on BP is working with him and said they were a good deal since they were already rehabbed and mostly rented. I haven’t heard back from him. One is still on realtor.com and one is not.

While conversing with the above guy, I see another message thread from a guy who had been stationed at the nearby Air Force base and was excited to start investing in St. Louis because the numbers were AMAZING! He talked about his first 4 family and how it was going so well (first 2 months) and that he was going to buy another right away. He closed on the second 4 fam. I ask him where they are located. In 63118. Ask him more specifically where. Near Gravois Park (Oh Shit. That's the worst place in south city! But I don't tell him that since he already bought and is super excited; maybe he will get lucky). It had been 11 months since our last message so I contacted him again to see how his rentals were doing. He wasn’t nearly as enthused as earlier. Vacancy, non paying tenants and repairs were hurting him. I’m fairly certain those returns he was forecasting will never be attained.

There is another out of state investor who I haven’t conversed with but who has posted a lot about St. Louis on BP. He came in and bought 40-some North County houses at once and became the ‘St. Louis Expert’ and posted a lot about the market, and his knowledge of it, for a while after the purchase. Then he laid off on the posting. Then when he did post, he admitted things weren’t quite going to plan. Amazingly the vacancies, non-payers and repairs were a lot more than he expected. Once he even mentioned selling off some of the, “Better ones” to keep the worse ones afloat!

I only know of one out of state investor who is doing ok in South City and that is through my friend/agent. But I know of a lot of out of staters who, “Went to 63118 and died” from the siren song of big returns only to crash upon the rocks of vacancies, non-payers and repairs. Out of state investing can be done, Arebelspy is proof of that. But you have to be EXTREMELY careful and then some doing it in the sub-$50k market. My suggestion is to stay away.

arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #18 on: November 25, 2015, 03:16:08 AM »
My suggestion is to partner with Bobberth and have him do the legwork for you!

;)
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Re: Risks of buying 50K rental properties?
« Reply #19 on: November 25, 2015, 03:16:36 AM »
Great post Bob!  Spot on.
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Re: Risks of buying 50K rental properties?
« Reply #20 on: November 25, 2015, 03:53:18 AM »
Great post from Bob, and can be applied to ANY market that appears to have tons of great deals: Cleveland, Detroit, Pittsburgh, Milwaukee, etc. 

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Re: Risks of buying 50K rental properties?
« Reply #21 on: November 25, 2015, 12:21:39 PM »
One big downside of buying in this range is that you lose a lot of financing options to leverage up your returns, since many institutions have a minimum loan value of $50K ($62.5K price) or $60K ($75K price). I think that this issue, in addition to higher expense ratios, explains the higher gross cap rates on super-cheap properties.

You should be able to negotiate realtor fees somewhat.  Or FSBO.  That can help quite a bit.
This is technically true - every consumer and every agent has the right to negotiate commission, and in many places (even here, with very weak consumer protection laws) the setting of a "market rate" or even claiming one exists, is illegal.

That said, the professionals seem to have developed clever, unspoken means of fixing that price, and defending it - subtly, but steadfastly. It is exceedingly rare to see commissions here other than 5% or 6%, with the exception of flat fees on certain niche listings. I've had a real estate license for 18 months, and I understand more than ever why there's so much negativity about members of the profession. There are many who add value far beyond unlocking a door and filling out a form, but for every one of those, there's a smarmy jackass manipulating people for max commissions without giving so much as a word of good advice. When you're an agent, someone's got their hand out at every turn, sucking a minimum of a couple grand a year just for the privilege of trying to make money at it - which adds to the real or perceived motivation of many agents to just make all the money they can, and taints the industry as a whole with an impression of greed.

I took the "can't beat 'em, join 'em" approach in getting licensed. I knew I'd do enough of my own deals to break even and eventually profit as our acquisition rate increased, but the biggest draw was to build my skillset and become my own best advocate. There are many ways to approach this issue and as always, YMMV. :)
« Last Edit: November 25, 2015, 01:39:46 PM by zephyr911 »

SwordGuy

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Re: Risks of buying 50K rental properties?
« Reply #22 on: November 25, 2015, 01:21:46 PM »
Here's the kitchen in a $37,000 property I bought last February.  We put less than $2,000 into upgrading/repairing it:

New Laminate countertops.
Repaired a few missing 1/2" tiles on the island top.
Repaired a burned spot (looked like an iron burn) on the floor.
Replaced stove.
Added two new cabinets under the counter next to the stove.
Put wooden wall next to dishwasher under cabinet.
Stripped, stained and varnished cabinets.
Applied a band of textured wall paper and painted it for color accent.
Put in new sink.
Had plumber fix the leak under the sink I couldn't fix.
Removed weirdly placed outlets in the cabinet.
Replaced vent hood.
New light over sink.
Added blinds.
Painted walls.
Had GRCI outlets put in by electrician.

Looks better than the kitchen in my current home!

Total after repair cost was about $52,000.

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Re: Risks of buying 50K rental properties?
« Reply #23 on: November 25, 2015, 01:32:32 PM »
Rental #1:

Purchase $38,400.  Total after repair cost (including purchase), circa $47,000.   Current value circa $80,000. 3br/1bath

Rents for $750.   I plan on counting circa $400 of that as income, for circa $4,800 a year.  The rest will go towards repairs (both current and sinking funds for roof, hvac, etc.), updates, property management, vacancy, taxes, insurance, and surprises.

Rental #2:

Purchase $37,000.  Total after repair cost (including purchase), circa $52,000.  Current value circa $80,000. 3br/2bath

Offering it for rent at $800.    I plan on counting circa $400 of that as income, for another circa $4,800 a year.

Rental #3:

Purchase circa $33,000.  Expected total after repair cost (including purchase), circa $44,000.   Expected after repair value circa $80,000. 3br/2bath

Plan to offer it for rent at $800, with circa $400 of that as income. 

These are nice, livable, pleasant houses.  They are attractive and a good place to raise a family in.  The first two have nice neighbors.   We haven't been doing much work at Rental #3 yet so we haven't really gotten to know the neighbors.  (But we expect they'll be nice, too.)


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Re: Risks of buying 50K rental properties?
« Reply #24 on: November 25, 2015, 01:33:12 PM »
Nice, SwordGuy. Love it.
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Re: Risks of buying 50K rental properties?
« Reply #25 on: November 25, 2015, 01:46:03 PM »
@Bob, it was the article on BP. The "throwing good money after bad" is what really stood out to me.

But when I see posts like SwordGuys, it makes me take a second look. Some guy on BP emailed me one time and told me not to buy the turnkey rentals, as they are priced 10-20K above market....

I sometimes wish I lived in one of these ideal rental market areas. Seattle SUCKS for rentals. A 400K house in my neighborhood get's about .5% rents. And out here, you are not remodeling the kitchen in one of these places for anything less than 30K. And that's just the kitchen.

I've already considered relocating for retirement, partly due to the lower cost of housing/living but also due to the awesome rental deals in some areas, like Las Vegas, Tampa, etc.

Perhaps I should just call it quits sooner, and relocate to one of these places and manage my rentals as a part time job. I could have bought and renovated 7 rentals in NC for the price of my current house...Ridiculous.

Alas, the equity growth is great here, but the dreaded excise tax, and realtor fees take a sizeable chunk of profit that makes it a bad deal to sell. I mean, I'd still be turning a profit, but watching 35+K go to transaction costs alone hurts...

Will be trying to cut the sellers agent out to save 50% of that using a flat fee MLS listing service, but still...

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Re: Risks of buying 50K rental properties?
« Reply #26 on: November 25, 2015, 01:58:00 PM »
@Bob, it was the article on BP. The "throwing good money after bad" is what really stood out to me.

But when I see posts like SwordGuys, it makes me take a second look. Some guy on BP emailed me one time and told me not to buy the turnkey rentals, as they are priced 10-20K above market....

I sometimes wish I lived in one of these ideal rental market areas. Seattle SUCKS for rentals. A 400K house in my neighborhood get's about .5% rents. And out here, you are not remodeling the kitchen in one of these places for anything less than 30K. And that's just the kitchen.

I've already considered relocating for retirement, partly due to the lower cost of housing/living but also due to the awesome rental deals in some areas, like Las Vegas, Tampa, etc.

Perhaps I should just call it quits sooner, and relocate to one of these places and manage my rentals as a part time job. I could have bought and renovated 7 rentals in NC for the price of my current house...Ridiculous.

Alas, the equity growth is great here, but the dreaded excise tax, and realtor fees take a sizeable chunk of profit that makes it a bad deal to sell. I mean, I'd still be turning a profit, but watching 35+K go to transaction costs alone hurts...

Will be trying to cut the sellers agent out to save 50% of that using a flat fee MLS listing service, but still...
I still think you should get licensed before you sell... at those rates, even one sale would pay for your startup costs many times over.

I'm planning to move back to the PNW to FIRE, but I'm probably never going to buy anything as long as prices are like they are. I can't imagine it being sustainable in the long run. But stranger things have happened.

SwordGuy

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Re: Risks of buying 50K rental properties?
« Reply #27 on: November 25, 2015, 06:29:01 PM »
I still think you should get licensed before you sell... at those rates, even one sale would pay for your startup costs many times over.
There are advantages to being a realtor, but there are also deals you cannot make because of it.
Of course, if you have a partner who isn't a realtor, that might give you the best of both worlds.

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Re: Risks of buying 50K rental properties?
« Reply #28 on: November 25, 2015, 07:05:04 PM »
All real estate is local.  It really helps to know the area.

In our area we're aiming for the $800/month rental at the moment.  As time goes by we may go up towards $1k/month properties.  But at the moment we have little interest in $1200+/month properties. 

Why?

Because back when the national real estate bubble was frothing away our community got a double bubble.  The military moved thousands of jobs from the Atlanta area to here.   Prices in our community went up 60% or more overnight when the news was announced.  Plus lots of really fancy houses got built in the area.  People bought properties at the height of the double bubble.

Now it's 8 years later and prices are still not back to double bubble levels.   Lots of folks here are military and had to move to a new duty station.  They couldn't sell the house because they were underwater.  So there's been a glut on the market for high end houses.

Plus, while there are a surprising number of very wealthy folks in this community, most people are not super well paid.   We're aiming for a larger market segment.

Of course, now that I know more about the rental business, and once we get all three of our rentals rented out, I wouldn't pass on a great deal for a more expensive house.  But it would have to be a great deal because I could otherwise have 2 to 4 smaller properties for the same price.

Bobberth

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Re: Risks of buying 50K rental properties?
« Reply #29 on: November 26, 2015, 07:32:11 PM »
One big downside of buying in this range is that you lose a lot of financing options to leverage up your returns, since many institutions have a minimum loan value of $50K ($62.5K price) or $60K ($75K price). I think that this issue, in addition to higher expense ratios, explains the higher gross cap rates on super-cheap properties.
THIS! THIS! THIS! But I view this as an advantage as an investor. Here houses (mainly foreclosures) will stay around the $60k-$65k price point for a long time as that is the lowest price they can sell and a buyer can get an 80% mortgage. Then maybe the price will drop around $55k looking for a buyer with a 5%-10% downpayment program. Then the price quickly falls below $40k as there are no buyers in between--homeowners can't get a loan and investors won't pay that much. Another tip along this line is that a house without functioning water lines is technically considered uninhabitable. Being a habitable dwelling is a major consideration in obtaining a loan. Because nobody can get a loan on the property, that leaves only cash buyers. I can replace the water lines in a single story house for about $200 of Pex and a weekend day. Doing just that can add $20k+ to the market value as the house would now qualify for a mortgage. I find missing water lines an attractive feature in an investment property.

These quirks have helped me greatly with my investing. For $30k, I'm not buying a true $30k property. I'm buying $50k+ property that is a 'victim of the circumstance'. Before the housing market crash, these houses were selling for $60k-$120k or even higher for peak purchases. Looking at tax records, I'm buying these houses at the same prices that they sold for in the early to mid 90s.

@Beard, Turnkeys piss me off. I suggest staying away from them too.

SwordGuy

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Re: Risks of buying 50K rental properties?
« Reply #30 on: November 26, 2015, 09:10:24 PM »
Bobberth is absolutely right about the reasons why the price points are where they are.

Plus, if the place hasn't been looted for the year it's been empty, it's a good clue about the neighborhood...

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Re: Risks of buying 50K rental properties?
« Reply #31 on: November 29, 2015, 05:04:52 PM »
I would consider your time to be the biggest risk. 

I would rather have two rentals at 200K each at the 1% rule than having 8 rentals at 50K each at the 2% rule.

arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #32 on: November 29, 2015, 05:13:22 PM »

I would consider your time to be the biggest risk. 

I would rather have two rentals at 200K each at the 1% rule than having 8 rentals at 50K each at the 2% rule.

Good property managers are tough to find, but well worth the cost.
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GrayGhost

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Re: Risks of buying 50K rental properties?
« Reply #33 on: November 29, 2015, 08:40:37 PM »
There are a few $50k properties in my area that rent for $800 a month. I've been somewhat interested in them on my parents' behalf, as they need to start to look into ways to mitigate their high taxes, while bringing in some passive dollars. I know a property manager that will work there and everything, but I am pretty hesitant to pull the trigger.

It just might not be worth the trouble, even with a property manager. These are neighborhoods where people get shot, where drug deals occasionally happen in daylight. It's totally plausible, in my opinion, for a house in these areas to become a real horror story. Maybe it could be used as a meth lab, or someone gets killed there, or it gets vandalized, et cetera, et cetera, et cetera.

It seems elitist, but in this case, I think we're above needing to go to those extremes to get those dollars.

YMMV. There are places in the Midwest, the Rust Belt, and rural South where a $50k property brings in $800 a month from a decent tenant, but in my area, the answer, for me, is no thank you.

SwordGuy

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Re: Risks of buying 50K rental properties?
« Reply #34 on: November 29, 2015, 09:34:16 PM »
There are a few $50k properties in my area that rent for $800 a month.... These are neighborhoods where people get shot, where drug deals occasionally happen in daylight. It's totally plausible, in my opinion, for a house in these areas to become a real horror story. Maybe it could be used as a meth lab, or someone gets killed there, or it gets vandalized, et cetera, et cetera, et cetera.

Are you really sure about that?  Are you sure you aren't suffering from tiny details exaggeration syndrome?

I lived in downtown DC for several years.   People who lived in the suburbs often thought that when I stepped off the metro to walk back to my apartment I would be mugged, beaten, stabbed, robbed again, and God knows what else.   They had absolutely zero concept of the actual reality on the ground.

So, what factual, statistics-based evidence do you have for your assertions?

Because I live in a ritzy part of town and I've seen drug deals in daylight.  They are just a bit more discrete....

adamcollin

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Re: Risks of buying 50K rental properties?
« Reply #35 on: November 29, 2015, 10:11:41 PM »
Renting a 50k property can be a wise decision, according to my opinion.

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Re: Risks of buying 50K rental properties?
« Reply #36 on: November 29, 2015, 10:42:54 PM »
In 2013 we bought was a small rental property for $77,500, which is bringing in $805/month.  After expenses it has been putting out a consistent $583/month.  ($6996 per year).

We have the risk of no tenants, repairs, etc., but with the potential for the equity aspect of the investment increasing, available to leave to heirs, and the potential of raising rents in the future. 

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Re: Risks of buying 50K rental properties?
« Reply #37 on: November 30, 2015, 11:39:20 AM »
4 out of the 7 properties I own were purchased in the 44k to 67k range renting from $700 to $1050.  These are great for cash flow and that is the only reason why I am buying them.   Im not banking on appreciation at all and that would just be icing on the cake.  If your plan is to build enough passive income to retire then these will be good assets to have.    Of course you cant just buy any 50k house.   You have to do a lot of research and have a lot of patience to find the right properties.     For example, all the ones I have purchased are in good working class neighborhoods with low crime and they all had full rehabs prior to me purchasing them.

One of the most important if not the most important aspect of making these work is to have good property management.  Assuming you are not local like myself.  I buy out of state and I make sure I have a good PM before I buy.  So far its working out well for me but only time will tell.

All investments are risky, some more then others.  I think buying these kinds of houses definitely pose more risk and its up to you to decide what your risk tolerance is going to be.


GrayGhost

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Re: Risks of buying 50K rental properties?
« Reply #38 on: November 30, 2015, 06:58:44 PM »
There are a few $50k properties in my area that rent for $800 a month.... These are neighborhoods where people get shot, where drug deals occasionally happen in daylight. It's totally plausible, in my opinion, for a house in these areas to become a real horror story. Maybe it could be used as a meth lab, or someone gets killed there, or it gets vandalized, et cetera, et cetera, et cetera.

Are you really sure about that?  Are you sure you aren't suffering from tiny details exaggeration syndrome?

There have been cops around both times I have been in the area, a would-have-been-tenant complained about the violence, and my research into the crime incidence in that area/neighborhood yielded unfortunate results. I don't have a problem with blue collar or working class neighborhoods, but if people are getting shot and it's actually hard to find contractors willing to work in the area due to the violence, yeah, it's not a matter of exaggeration.

zephyr911

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Re: Risks of buying 50K rental properties?
« Reply #39 on: December 02, 2015, 07:37:45 AM »
There are advantages to being a realtor, but there are also deals you cannot make because of it.
Around here, the only deal I can't do is where I'm a party to the sale, AND the agent for both parties. The conflict of interest is too high. But it's such an unlikely scenario, and so easily remedied by simply bringing in another trusted agent to represent the other side, that I doubt I'll ever see it and if I do I don't view it as a problem.

Good property managers are tough to find, but well worth the cost.
ARS, I've yet to find commercial prop managers in my county who do small multifamilies. And my business is near the point where paid management will be absolutely necessary. Do you have any suggestions?

One big downside of buying in this range is that you lose a lot of financing options to leverage up your returns, since many institutions have a minimum loan value of $50K ($62.5K price) or $60K ($75K price). I think that this issue, in addition to higher expense ratios, explains the higher gross cap rates on super-cheap properties.
THIS! THIS! THIS! But I view this as an advantage as an investor. Here houses (mainly foreclosures) will stay around the $60k-$65k price point for a long time as that is the lowest price they can sell and a buyer can get an 80% mortgage. Then maybe the price will drop around $55k looking for a buyer with a 5%-10% downpayment program. Then the price quickly falls below $40k as there are no buyers in between--homeowners can't get a loan and investors won't pay that much. Another tip along this line is that a house without functioning water lines is technically considered uninhabitable. Being a habitable dwelling is a major consideration in obtaining a loan. Because nobody can get a loan on the property, that leaves only cash buyers. I can replace the water lines in a single story house for about $200 of Pex and a weekend day. Doing just that can add $20k+ to the market value as the house would now qualify for a mortgage. I find missing water lines an attractive feature in an investment property.

These quirks have helped me greatly with my investing. For $30k, I'm not buying a true $30k property. I'm buying $50k+ property that is a 'victim of the circumstance'. Before the housing market crash, these houses were selling for $60k-$120k or even higher for peak purchases. Looking at tax records, I'm buying these houses at the same prices that they sold for in the early to mid 90s.

@Beard, Turnkeys piss me off. I suggest staying away from them too.
Damn, that just helped a bunch of my latest musings and theorizations coalesce into a real strategy. THANK YOU.

WRT turnkeys: they can be good training wheels. Just my $.02. Of course, the first two my LLC bought were supposed to be turnkey, and turned out to be far from it... fucking nightmares. Learning experiences.

arebelspy

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Re: Risks of buying 50K rental properties?
« Reply #40 on: December 02, 2015, 07:53:08 AM »

Good property managers are tough to find, but well worth the cost.
ARS, I've yet to find commercial prop managers in my county who do small multifamilies. And my business is near the point where paid management will be absolutely necessary. Do you have any suggestions?

I don't know how hard you've looked, but unless you're really out in the middle of nowhere, I'd bet you could find an agent to do it.

If you are just out in the middle of nowhere, and it is absolutely necessary, hiring and training someone yourself is the best solution, IMO.  Advertise for a handyman that you want to repair and manage your properties. Put both in the job description.  I'd bet there are a ton of out of work or underemployed handymen, and you interview, find a good one, and train them in management. Oversee them very carefully at first, and start them with one property, then more. Have them go with you when you show a property, and see how you choose tenants, etc.

If your business has scaled to that point, insourcing to your own employee on a salary may well be worth it even if you can find a PM to do it for a percentage of rents.

You get maintenance and PM for a flat cost.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

zephyr911

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    • Pinhook Development LLC
Re: Risks of buying 50K rental properties?
« Reply #41 on: December 02, 2015, 09:47:44 AM »
Much food for thought, and thanks. I thought I had a decent candidate for that role earlier this year but he flaked out and disappeared on us.

In between now and our next buy, I'll probably make more calls and see if I can find an existing company, but I think we'll also start talking about plan B.

rachael talcott

  • Bristles
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Re: Risks of buying 50K rental properties?
« Reply #42 on: December 09, 2015, 06:00:00 PM »
It works in my city.  But I'm not buying 50K houses for 50K.  I'm buying 75K houses for 40K + 10K in repairs/upgrades, and putting sweat equity into them. Also, the part of the city where these cheap houses are found is gentrifying, so young hipsters want to live there. 

zephyr911

  • Magnum Stache
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    • Pinhook Development LLC
Re: Risks of buying 50K rental properties?
« Reply #43 on: December 14, 2015, 09:51:52 AM »
It works in my city.  But I'm not buying 50K houses for 50K.  I'm buying 75K houses for 40K + 10K in repairs/upgrades, and putting sweat equity into them. Also, the part of the city where these cheap houses are found is gentrifying, so young hipsters want to live there.
There's an area here that appears to be on the cusp of that. We are watching closely for more signs, and are incredibly excited about the potential.