Advice on out of state investment

[Kenneth Ye]

Hi All,

I have been working with an out of state realtor for the past month for my first investment property in Phoenix. 

A "deal" was brought to her by an investment company that wanted to unload a townhouse "as is". Needs cosmetic updates and new rug according to the pictures. It is 30-40k below market comps. HOA covers everything outside except AC units. Water heater was replaced 2 years and and AC unit was replaced 5 years ago. It will COC 7.5%.

What are some other factors I am missing? 

[Kathleen McDowell]

Hi Kenneth.  Congrats on selecting Phoenix as an investment market! Phoenix is a great market with strong job growth and inbound migration - both fantastic for investors! I live in work here and love the amount of opportunity.

You're wise to wonder what you may be missing given this opportunity is 30-40k below market comps.  Since you mentioned the property is in Phoenix, I'm going to guess $30-40k is about 5% of the market price.  I would suggest asking your agent the story behind the sale. Is the current owner wanting to do a 1031? Sometimes that can squeeze them on timing and make them price to sell!  It often helps to understand the seller's motives.

I would be sure to read the HOA docs paying keen attention to:

1. Any upcoming assessments (a large one could prompt a seller to sell quickly at a discount) and any restrictions on rentals such as lease duration. 

2. Make sure there are no restrictions that will impact your rental forecasts.  

3. Be sure to review the financials and ensure the HOA is in good financial position.

4. Some townhomes also do NOT cover roofs so be sure to be clear on that.

A few other things to consider:

- Not sure what your cash flow projections are, but I advise my investors to build forecasts on max appreciation of 3.5% and rental appreciation of 2.5% - if it works on the conservative numbers, then you're good as PHX has seen ~25% appreciation and 16% rental increases the last year, but things are cooling. 

- In Phoenix most property managers charge ~8% so as an out of state investor, be sure to budget for that as well.

Best of luck to you in your real estate investing! 

Best,

Kathleen