What's the catch with these properties that seem too good to be true?

Question

Hi all,

I've been doing some research into real estate investment for a while now and am starting to get serious about making my first purchase.  My goal is to purchase a multi family unit for a monthly cash flow.  Any appreciation is nice, but that's secondary.  After a year or two, continue the process with another purchase, and keep going from there.

I see quite a number of extremely low priced multifamily homes in small towns, mostly in the south or midwest, that rent for a massive premium over what a mortgage would be (assuming I didn't just pay in cash).

These are usually located in small town America, although with a college or military base nearby that brings in a steady stream of renters.

As a couple of quick examples, one I've found is a duplex with an asking price of $43k.  Both sides are currently rented by long term tenants for a combined $975/mo.  Another duplex has an asking price of $35k, has a brand new roof and water heater, and has tenants currently in place that are paying a total of $925/mo.

Those are just a couple of examples.  I've seen some even as low as $25k with similar circumstances.

From the pictures, it doesn't look like the homes need any major repair work (obviously I can't really confirm this until an inspection), and even if you factor in property taxes, insurance, the occasional month or two of vacancy, basic repairs, maybe a property management company since I live nowhere near these places, etc... you should still be coming out way ahead on a $40k home that rents for close to $1k a month.

Which leads me back to the title - what's the catch?  It sounds like a great idea on paper, but it's setting off my "too good to be true" alarm.  I assume if it were this easy to find dirt cheap properties that have such a positive cash flow, everyone would be doing it.

Thanks for your input!

Brent Coombs · Answer

@Tyler Brown, this is EXACTLY the reason for BP's existence, because everyone SHOULD be doing it! Welcome to BP.

These sort of returns ARE available!

But of course, when you do "factor in property taxes, insurance, the occasional month or two of vacancy, basic repairs, maybe a property management company", not every property will stack up the same way as your quoted examples.

The single biggest reason why people say they don't do it is simple:- who will lend them the money needed?

The next biggest reason seems to be:- fear of taking the next step. (Or are these reasons the other way around)?

Be encouraged! Keep researching. Set up some "Keyword Alerts". "Search the site" for your areas of interest; become familiar with how to grade neighborhoods. And that's just the beginning! All the best...

Mark Elliott · Answer

hi tyler. somethings are too good to be true. you have to watch out for these. the more deals you do, the better you will become at spotting the deals that are too good to be true. some people are selling simply because they are tired of the landlord game for whatever reason. some people are just trying to dump a property which is a problem for them, for whatever reason. just because the property is a problem for them does not mean it will be for you. do some research on the tenants in the properties. find out if they have had the landlord in court for any reason or several times. thats a problem tenant and the seller is trying to dump a problem property. go to the local municipal building and talk to the code enforcement people. maybe the property is a problem for repair issues. ask around to everyone that you can think of and see if you can find out why it is too good to be true. you may find some that you need to run away from, and you may find some that have issues that will not be a big issue to you.

Tyler Brown · Answer

Well, I'm certainly glad to hear it isn't too good to be true!

My biggest problem is my distance from the unit.  The eastern portion of Pennsylvania is about as close as I can find deals like this, and it's about a two hour drive from New York City, so while I don't mind going every now and then, this won't be a weekly or even monthly visit either, hopefully.

The second concern is that I am not a handyman by any stretch of the definition.  I can change a lightbulb, and that's about it.  This is why I'm looking at properties that are as turnkey as possible.  A fresh coat of paint, some new appliances, etc... are no big deal, but I'm not equipped to tackle any kind of renovation job, at least not for my first purchase.

And on to your third point about good management - I'm tempted to say that for a basic duplex or triplex I could manage it myself by doing online background checks of prospective tenants and hiring a local handyman when something needs repair, however for my first purchase I think its best if I go with a good local management company.

If anyone has any thoughts to add, I'm all ears!

Account Closed · Answer

im reading all of this post, and I feel like I must be  living in some sort of utopia, .....why? I consistently have the ability, between my thorough/ hands on property management team ( that I assembled and manage), construction ability encompassing all aspects, and successful tenant placement procedures...to acquire houses, renovate them, and have them pay me rent of 9-1000 a month over and over again, while costing me right at what you are talking about out the door.  I have nearly 40 units, some duplexs and most single family homes, and continue to do what your brain is telling you "whats the catch" on...over and over again successfully.......I don't consider myself a magician either, alI i can tell you, is that the key to success in these properties, is good management, which is not easy to find. perhaps that's the catch.

Amy E. · Answer

@Tyler Brown

I have similar type deals in my area, they aren't too good to be true at all.  But, as others have said, you are likely looking at a low income area or Class C neighborhood and the key to this type of property is good management.  To lower the risk that sometimes comes with low income tenants, I chose to go with Section 8 tenants for the most part and it's worked out great.  You may want to look at that in your area too.  Most local housing authorities post their Housing Quality Standards online, so if you think something is too good to be true, you could go tour the home with this checklist in mind.

My "too good to be true" scenario would be these types of returns in a Class A neighborhood.....anyone heard of that?

Ali Boone · Answer

Hey Tyler! The catch to those properties is likely the tenant quality you are going to get in them and just that they are low-income in general. That in itself comes with a certain amount of inherent risk, and then definitely the true condition of the property could be a risk. That part can be checked out though, so not as big of an issue there, but I can tell you from my experience that low-quality tenants are the biggest risk to any rental property (at least they have been in mine), and at that price point, that is what you will attract.

With that said, maybe the properties are great and you won't have any problems. But you are taking on a greater risk of things getting chaotic at that price point.

Tyler Brown · Answer

Those are great ideas, unfortunately I live in New York City, which really precludes pretty much anything in my immediate geographic area.

About the closest that I've been to find similar deals like these is the eastern edge of Pennsylvania, in towns like Scranton or Allentown.  Those are a 2 to 3 hour drive away, so not something I'd be doing every week, but once in a while would be manageable.

Tyler Flagg · Answer

Hey @Tyler Brown welcome to BP!...awesome name by the way.

It's definitely not too good to be true. There are plenty of properties still on the market (especially in the midwest) where cash flow is very impressive. The properties I own I bought for about 50k, and they rent for $850/month. So although they don't meet the "2% rule" exactly, they're pretty close at about 1.7%.

However, there is a caveat to that. Like @Mark Elliott alluded to, cheap properties don't necessarily mean great investments. Lots of new investors will get sucked into buying dirt cheap properties that have great cash flow without factoring in higher maintenance costs, capital expenditures, vacancy, eviction costs etc.

Take a look at this article written by Ben Leybovich.

Start running the numbers on a bunch of properties using the BP Rental Property Calculator and you'll quickly get a good idea of which properties will be good investments over the long term.

Best of luck brother!

What's the catch with these properties that seem too good to be true?

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