First Time Rental Investor in Pittsburgh - what am I missing?

Question

Hi everyone! Just joined this forum last week and finding it super insightful.

My offer on a home just got accepted last night and was looking for any advice from seasoned investors - I have 10 days from now to do an inspection and finalize everything so I wanted to ask if there were any red flags before I go all in.

The home is 190k, 7.5% interest rate, 30 year mortage.

It's a triplex in Pittsburgh. The neighborhood isn't amazing (couple of abandoned homes around the block) but it's working class and some section 8 properties scattered about. My main goal here is cash flowing. I plan on holding long term so I would assume that in 20+ years the house will be worth at least a little more but it's not my main concern. I don't want to house hack because I don't want to live in PA..

I'm 24 years old and looking to get started in the real estate investing world. (I live in Miami, FL so this is OOS) Would love to have a handful more properties in the next few years. Looking into cash-out refinancing and DSCR loans and all of that but I'm getting ahead of myself as I don't even have the 1 yet lol.

Nobody in my family has any experience with this sort of thing so I'm just hoping someone can give me their opinion on if this investment makes sense.

The home is currently being rented for 2900 total (all tenants are month to month and have been there about a year each) and my monthly costs would be 1,200 included taxes, insurance, mortgage etc.

I am considering putting the home on section 8 because the fair market rent would make my monthly rent 4k+ but I'm weighing the pros and cons on that avenue.

From what I understand the biggest costs to me as a home owner would be a new roof or fixing the pipes for any reason.. The roof was replaced 5 years ago and my inspector is going out sometime this week but for the sake of this post lets assume everything is fine, give or take 5k in any maintenance I might need to do. (If the house comes back a mess after inspections I'm pulling out as I have 0 contracting experience and don't want to pay for anything crazy)

Here are the numbers I ran (calculated at a 3% value appreciation per year, and 3% rent increase a year)

I found a great PM who I trust, she's 10% a month (Is that standard?)

-Do you see a common vein in why people might fail in real estate investing? What are the reasons?

-Do you for-see any issues for me?

I read somewhere that a good IRR is somewhere between 18-20% so this being 33.60% already seems almost too good to be true.. And the IRR would only go up if I decided to do section 8..

This was a high and best offer situation, it started at 165k and I won. Consdering the IRR I was almost certain I was going to be outbid and it's kind of scary that I wasn't?

I guess I'm just looking for some general advice/insight.

Also in regards to the location, Pittsburgh isn't really a hotspot. I've heard some a bunch of reccs for places like Ohio etc but not much about Pittsburgh. How afraid of that should I be? That the city slowly dies out over the years.. My assumption is that people will always need a place to live, but perhaps if the city is dying I won't be able to raise rent yearly) Being from Miami I also have no clue about how winter weather affects the home.

Thank you so much!

Jamie Dietz · Answer

Since you are an out of town investor, I would get 2nd opinion on the location.  It sounds like you may already have some concerns about the neighborhood. Your property manager and agent are a good first start but he/she has an economic incentive.  Reach out to experts on this thread or post the address and I bet you will get a lot of feedback.

Leo R. · Answer

@Jaya Laun in response to your specific questions:

Yes, 10% is typical for a PM.

Yes, inspect the roof carefully (and study up on how much a roof costs to replace).

ALWAYS scope the sewer line on any property you're trying to buy (a new sewer main is expensive).

I also always do a meth test for any property I'm trying to buy.

If I'm trying to buy a property OOS and I can't inspect it myself (I have extensive experience inspecting buildings), I have a foundation pro (different than a regular inspector) check the foundation. This could be particularly important in Pittsburgh, because a lot of properties there are built on hillsides (and there's a lot of rain), both of which can cause foundation problems that can cost a small fortune to fix.

Yes, cold winters (and also all the rain) in Pittsburgh will degrade a building MUCH quicker than in a warm, dry climate. All the rain and the freeze/thaw cycles speed up the degradation of masonry work, wood work, paint, and can cause many other issues that don't occur as often in warm, dry climates.

Regarding your appreciation estimates: in a C or D area, you may or may not get 3% property and rent appreciation--lots of C and D areas depreciate (without a LOT of data and research, it's impossible to know what the future holds...and even with a lot of data and research, it's impossible to know what the future holds!).

Yes, I foresee many potential issues that you'll want to consider carefully before pulling the trigger on an OOS property in a C or D area (see my previous post for details).

Good luck out there!

Leo R. · Answer

@Jaya Laun I'm very familiar with Pittsburgh (lived there for years, and I do regular PGH market analyses).  PGH has some great neighborhoods, but it also has some very, very rough neighborhoods (and some areas that are OK, but which may become rougher over the next 5-10 years).

At its root, your question is whether you, as a first-time investor, should buy an OOS property in a C or D area because the property cashflows well on paper.

This is one of the most commonly discussed topics on the forums; here’s my response taken from a previous thread:

Usually, "new investor" and "out of state" don't mix.  This is 100x more true if the property is in a C or D area.

I'd suggest reading up on the topic on the forums, where you'll find many examples of inexperienced investors crashing and burning hard trying to do OOS REI...the story is usually the same--they had no experience with REI, they couldn't find any cashflowing properties locally, but they saw that properties in other states (often the Midwest) cashflowed well on paper.

So, they bought an OOS property (usually a freshly rehabbed A-grade house in a C or D area) because the house looked awesome in pictures, and the cashflow looked good on paper. The PM they found welcoming and happy to get them to sign a contract to take 10% of their rent. Fast forward a few months, and they have non-paying tenants who are wrecking the place, and a MIA property manager who (understandably) won't put in the ENORMOUS amount of effort required to manage a property in a C or D area for a small-time client from another state. Think of it from the PM's perspective: if you were them, would you deal with the significant headaches of a C or D area (non-paying tenants, trashed properties, crime, police calls, etc.) for a 10% cut of a single property (probably just a few hundred bucks a month) ...I wouldn't.

To make matters worse, the property isn't appreciating (because it's in a low appreciation market, or even a depreciating market), and the tenant pool is primarily made up of people with bad credit, low/no income, and a history of property damage at the previous places they've rented. So, now they're stuck with a non-appreciating (or even depreciating) property, that only attracts bad tenants, that no PM in their right mind wants to manage. Not a good situation.

Let's put all that aside for a moment, though, and assume you can avoid all those pitfalls. You find an OOS property that appreciates, attracts good tenants, and is easy to manage. Even then, OOS REI will come with some significant challenges...

Specifically, one of the MANY reasons OOS REI is so difficult (esp. for beginners) is that it requires you to assemble, manage, and incentivize a team of people you'll be completely reliant on from hundreds of miles away (sometimes without even meeting those people face to face). That's a huge challenge, even for experienced real estate investors who understand everything their team needs to do, and who have the money to incentivize their team's performance. But, if you're not experienced with the things your team is doing (e.g.; finding, analyzing, acquiring, and managing a property), then it becomes exponentially more difficult.

Think of it this way: forming and managing a team of real estate professionals (agent, inspector, property manager, contractor, etc., etc.) without any real estate experience is a bit like trying to form and manage a law firm without any legal experience, or trying to establish and manage an auto repair shop without any automotive experience--those would be monumental challenges even locally, but doing it from hundreds of miles away is near impossible. Can it be done? Yes. Are there ways of getting started in REI that are a thousand times easier? Definitely.

Trying to go OOS for your first REI deal is a bit like trying to surf a monster 100 foot wave before you've learned to swim, or trying to ski a double black diamond for your very first run.

Fortunately, there are simpler strategies that are much better suited for a first time RE investor (house hacking, specifically). I've written a lot on the forums about all the reasons house hacking is the best strategy for beginner investors--feel free to take a look at those posts.

I'd suggest starting with a more beginner-friendly strategy, get your experience from that, and THEN (if you want), try the more difficult strategies like OOS REI.

If you're dead-set on OOS REI, then I'd suggest studying up on the books, articles, forum posts, videos, etc. on the subject, and talking with as many OOS investors as possible (ESPECIALLY inexperienced investors who tried OOS REI for one of their first deals). There are plenty of those folks in the forums. In particular, I'd suggest asking those folks about what types of challenges they encountered, lessons they learned, and mistakes they made with OOS REI ...It's a lot easier, safer, quicker, and cheaper to learn from other peoples' mistakes than to make your own...

Good luck out there!

Alex Hileman · Answer

10% is standard for property management fees.

One thing I wanted to mention is winterizing and winter maintenance. You may want to hire a landscaper to keep your sidewalks and driveways clear from ice and snow.

Keep a good HVAC contact in case of furnace or A/C emergencies. If you hire a property manager, they will most likely have a maintenance team that takes care of emergency calls for you.

Definitely do a sewer scope inspection. Old Pittsburgh houses can have tera cotta pipes that crack. There could also be old knob and tube wiring that could cause a fire.

The inspection will bring up any red flags. It seems like a great deal!

Jeremy Taggart · Answer

@Jaya Laun just looking at your numbers, you are light on maintenance/capex. For a triplex built in the early 1900's (I'm assuming if it's in the city) in a lower income neighborhood, you should likely be at least $250 for both maintenance and capex per month. Right now you are only at $125/month for maintenance and no capex. Property taxes could also go up closer to $2,000/month if they were to re assess after the sale. Insurance likely will be higher than $1,020/month nowadays but depends on your coverage and who you go with.

I would also maybe do some more due diligence on the neighborhood because it seems like you are a bit unsure of that. Being out of state if it's a management intensive neighborhood you are going to have a tough time with getting a property manager to give good service there if it's too rough. I tend to prefer the nicer pockets of the lower income neighborhoods to have the best success there especially if you are out of state.

Nicholas L. · Answer

@Jaya Laun

wow, there's a lot in your post.  i'm not even sure how to tackle it all.  my main concerns are (1) this property has substantial deferred maintenance that you're not aware of, and (2) vacancy and turnover will be high, and together those factors are going to consume all of the cash flow for several years

but, it sounds like if that's the case, you're going to back out.  here are just a few questions I'd be asking... this is just off the top of my head

-what kind of shape is the sewer line in?

-what kind of shape is the electrical in?

-what kind of shape is the plumbing in?

-does the interior need cosmetic updates - paint, carpet, lighting, or even heavier cosmetics - appliances, kitchens, bathrooms?

-are all of the utilities split, or are some not split and paid by the owner?

-do the tenants pay on time every month, or are there issues with rent collection?

-what is turnover like in the neighborhood?

i would strongly recommend that you come up here yourself for the inspection.  have you seen it in person yet, or just been relying on your agent and PM?  let us know what neighborhood it's in and other investors in pittsburgh will probably jump in...