Cashflow ready houses. Too good to be true?

[Yash Tamta]

I'm analysing cities for buying my first rental. During my search I came across 6+ listings from the same seller all with tenant in place making some amount of cashflow, some of them even making $500+ cashflow(by Brandon Turner's definition).

On paper, it seems I'll make cashflow the moment I buy the property. Not sure if this is "too good to be true" category. I'm a newbie in real estate and seeking some expert advide.

[Michael Paling]

Hey Yash, It's hard to say if it's "too good to be true" without more information. Could you share numbers about the income and expenses, including CapEx, maintenance, property management, etc.?

Depending on your investment strategy, you could definitely have a property cashflow right away. Inheriting a tenant comes with risks, but if they're good tenants, that's great! 

[G. Brian Davis]

It's much harder than most new investors realize to find properties that actually cash flow well.

Whenever we're talking to new investors, the shorthand rule of thumb we share is the 50% Rule: that half of the rent will go to non-mortgage expenses, when averaged over time. Most splutter and say "Well how the heck am I going to find a property that cash flows well?!" To which we respond "Exactly - now you're starting to grasp the challenge."

I personally don't mess around with landlording and loans any more. I just invest passively in real estate syndications (group investments), notes, and a little crowdfunding. The downsides can include high minimum investments ($50K+) and just learning how to vet syndicators, but you can knock out both by joining a real estate investment club. For example, I invest $5K every month in a different deal in the club I'm in.

There's nothing wrong with active investing (buying rentals), just make sure you go into it understanding how much work it is, and be prepared for it to be a side hustle rather than a source of passive income. 

[Michael Smythe]

@Yash Tamta you can make anything look good on paper!

Deals like you describe are typically aimed at newbies that don't know anything about reality.

Often, you're being sold a Class C or D property that's using Class A or B numbers.

You don't find out until after you buy these properties that: 

The tenants aren't performing

There's a lot of deferred maintenance

Tenants are trashing the properties

The tenant pool is NOT what you thought

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

What else can we assist you with?

[Yash Tamta]

Quote from @Michael Smythe:

@Yash Tamta you can make anything look good on paper!

Deals like you describe are typically aimed at newbies that don't know anything about reality.

Often, you're being sold a Class C or D property that's using Class A or B numbers.

You don't find out until after you buy these properties that: 

The tenants aren't performing

There's a lot of deferred maintenance

Tenants are trashing the properties

The tenant pool is NOT what you thought

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

What else can we assist you with?

Makes sense, Thanks Michael!
My target is Class B neighborhoods at the moment.

Funny enough detroit is in the list of areas I'm researching but found out pretty quickly that I'd need some solid connections and boots on the ground for neighborhood information. But seems like your experience in detroit should suffice. I'll reach out when I'm pre-approved and have a list of potential properties in mind.

[Yash Tamta]

Quote from @Michael Paling:

Hey Yash, It's hard to say if it's "too good to be true" without more information. Could you share numbers about the income and expenses, including CapEx, maintenance, property management, etc.?

Depending on your investment strategy, you could definitely have a property cashflow right away. Inheriting a tenant comes with risks, but if they're good tenants, that's great! 

I don't know the numbers, but will find them out for future analysis. Thanks for pointing me in the right direction.

[Wilson Pereira De Oliveira]

I understand your situation. I've completed a few successful renovations, own two properties, and I'm also looking to scale my portfolio. However, analyzing deals and finding good opportunities right now is challenging. My search area covers Kansas City, Sedalia, Jefferson City, and up to St. Louis.

I have a 10-year background in construction, but I share your concerns about St. Louis properties with boarded-up windows and listings asking for cash offers with no contingencies. It's crucial to do your due diligence before investing in any property.

If anyone interested in a 50/50 partnership let me know.

[Alexander Porras]

It depends on the situation and what market you are in. 

I can tell you hitting the $500 + monthly on seems very rare these days for now. even if guaranteed what is the likely hood it will continue once the lease is up.

Right now we are "all in" on Southwest Fl. More specifically in North Port, FL in Sarasota county.

We are all in on this area because it of the trends we are seeing when it comes to population growth and Average Salarys, and the amount of jobs coming to our area. Not to mention Sarasota County has the best school system in the state! For all these reasons we will confident in this area.

We have similar deal going on where we sell our properties with Build in Appreciation (8-10%) we do free property management for 1 year, and guarantee rent for 1 yr (rent gap credits.) 

Would you like to hop on a call and go over product more in depth?

[Andrew Syrios]

How good is the area? If it's in a bad area, the numbers on paper will probably only ever be on paper as the operating costs will almost certainly be higher than standard assumptions. 

[Michael Smythe]

@Yash Tamta Detroit will be on everyone's radar once the media attends the NFL Draft later this month and we get a lot of positive exposure:)

PM us, so we can send you some cool & helpful info (we'll get chastised by BP Moderators if we share here).

[Milton Chamberlain]

We have plenty of sexy properties like that in Kansas City. TONS of SFR listings in the Troost corridor heading up to the river and then curving East along independence Ave.

But they present many challenges; vacancies  (due to below C market tenant pool), increased maintenance and repair costs (due to below C market), and increased cap ex due to homes in this particular region being older (many century homes).

Then, even if at the end of the year it does well from a financial analysis standpoint, you may struggle to find the necessary and diligent and high performing property mgmt necessary to manage said property…so then if you self manage OOS, you will need a strong ‘boots on the ground’ team.

many challenges come with these ‘$ sexy’ properties. If it sounds too good to be true…

Personally, I have one SFR investment in a rougher area. To illustrate the challenges I have faced in the last three years; robberies, vandalism, assaults, evictions and vacancies. You might get lucky and dodge these issues, but I would expect these challenges investing in below C category markets

All that being said, it’s still a solid producer financially. But my property manager hates it. And I’m pretty sure the only reason he still manages it for me is bc I’ve given him a lot of business on the construction side of his business.

[Andrew Syrios]

Quote from @Michael Smythe:

@Yash Tamta Detroit will be on everyone's radar once the media attends the NFL Draft later this month and we get a lot of positive exposure:)

PM us, so we can send you some cool & helpful info (we'll get chastised by BP Moderators if we share here).

 I sincerely doubt the NFL Draft will move the needle on the real estate market in Detroit; which is still pretty rough, at least in the city itself

[Alexander Porras]

Quote from @Andrew Syrios:

How good is the area? If it's in a bad area, the numbers on paper will probably only ever be on paper as the operating costs will almost certainly be higher than standard assumptions. 

The area is great! People are moving to North Port because of its lower-than-average crime rate, Peaceful neighborhoods and It is safer than the majority of the country and is in the 78th percentile for safety, making it a terrific choice for families. On top of that it is the 2nd fastest growing city in America for 2 years in a row . 5th richest county in America, and all schools in North Port are graded A & B schools. 

 Attached a couple of Links for your reference! 

1. https://sports.yahoo.com/north-port-adapts-second-fastest-11....

2. https://www.mysuncoast.com/2023/01/31/north-port-ranks-secon...

3.https://www.simpleshowing.com/blog/wealthiest-counties-in-fl...

4.https://www.northportfl.gov/City-Services-and-Safety/Residen...

Operation costs are lower than average because they are new construction properties and if you choose to let us manage its hassel free because we know every nail, color scheme.

The house is under warranty by us ( the builder) and comes with manufacture warranties as well. We design this properties for the future by making sure we use high quality materials. For example: Ceramic Tile throughout the entire home, 2 inch Quartz countertops in kitchen and baths, 2 toned real wood cabinets just to name a few. 

Did you have a chance to see our finished product?

[James Likis]

Quote from @Michael Smythe:

@Yash Tamta you can make anything look good on paper!

Deals like you describe are typically aimed at newbies that don't know anything about reality.

Often, you're being sold a Class C or D property that's using Class A or B numbers.

You don't find out until after you buy these properties that: 

The tenants aren't performing

There's a lot of deferred maintenance

Tenants are trashing the properties

The tenant pool is NOT what you thought

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

What else can we assist you with?

This is a great breakdown, thank you for sharing it!

[Andrew Syrios]

Quote from @Alexander Porras:

Quote from @Andrew Syrios:

How good is the area? If it's in a bad area, the numbers on paper will probably only ever be on paper as the operating costs will almost certainly be higher than standard assumptions. 

The area is great! People are moving to North Port because of its lower-than-average crime rate, Peaceful neighborhoods and It is safer than the majority of the country and is in the 78th percentile for safety, making it a terrific choice for families. On top of that it is the 2nd fastest growing city in America for 2 years in a row . 5th richest county in America, and all schools in North Port are graded A & B schools. 

 Attached a couple of Links for your reference! 

1. https://sports.yahoo.com/north-port-adapts-second-fastest-11....

2. https://www.mysuncoast.com/2023/01/31/north-port-ranks-secon...

3.https://www.simpleshowing.com/blog/wealthiest-counties-in-fl...

4.https://www.northportfl.gov/City-Services-and-Safety/Residen...

Operation costs are lower than average because they are new construction properties and if you choose to let us manage its hassel free because we know every nail, color scheme.

The house is under warranty by us ( the builder) and comes with manufacture warranties as well. We design this properties for the future by making sure we use high quality materials. For example: Ceramic Tile throughout the entire home, 2 inch Quartz countertops in kitchen and baths, 2 toned real wood cabinets just to name a few. 

Did you have a chance to see our finished product?

I believe the OP is buying in St. Louis. What does North Port have to do with this? 

[Linda Labbe]

Know its possible because we sell turn key properties in toledo . They are newly renovated, rented and properly managed and cash flow from day one . IF you are interested is what we do we could chat

[Francisco Hernandez]

Quote from @Yash Tamta:

I'm analysing cities for buying my first rental. During my search I came across 6+ listings from the same seller all with tenant in place making some amount of cashflow, some of them even making $500+ cashflow(by Brandon Turner's definition).

On paper, it seems I'll make cashflow the moment I buy the property. Not sure if this is "too good to be true" category. I'm a newbie in real estate and seeking some expert advide.

 This happens all the time and the responses are right on target. Investors with experience know how to dress a property well for a newbie investor and they try to unload a problem to you. 

[Manny Vasquez]

Yash - I would highly suggest that you run the numbers for yourself.   Furthermore be careful of the "sales pitch", the Seller may be trying to sell you on.  Often times, Sellers used what called "Pro Forma" numbers.  What this means is that the Seller is providing you with "ideal numbers" which means that they are using "top of the market numbers" for rental rates.  This means that if the property was able to rent at top of the market rental price, call it "X", you would yield "Y" in cash flow based on the sales price and rental rates.

Here is where you have to sharpen your pencil and if possible, visit the property in person.  

-Analyze the neighborhood where the property is located and figure out what a property of similar size, bedroom and bathroom count will rent for.  You can do this by going on Zillow, Trulia, Homes.com, etc.  

-Look at the pictures of the properties commanding top rental rates. What amenities do they offer? look at the aesthetics of the property, the amenities, etc.

Now take that information you collected above and determine if the "sales pitch" that the Seller is trying to sell you on is true.  Remember, you can also offer a lower price to make the numbers work for you as well. If you need an extra set of eyes, than you can share that info here on BP and any number of BP members will more than happy to help you.

I hope this helps and good luck!

[James Wise]

Quote from @Yash Tamta:

I'm analysing cities for buying my first rental. During my search I came across 6+ listings from the same seller all with tenant in place making some amount of cashflow, some of them even making $500+ cashflow(by Brandon Turner's definition).

On paper, it seems I'll make cashflow the moment I buy the property. Not sure if this is "too good to be true" category. I'm a newbie in real estate and seeking some expert advide.

 Real estate investing makes money. That's been proven over 100's of years. Still need to do your due diligence though. Get an appraisal and 3rd party building inspection and you should do fine.