The $30,000 Nightmare

[Justin Lemaster]

I work with a lot of out of state investors purchasing property in the Columbus, OH area. Many investors that I talk to have the notion they can purchase a 30-40k homes in a rougher area; put a little money in it and rent it out assuming they've made a great deal. As a property manager I wanted to share a few points that make deals such as these, less lucrative than initially thought. (Sorry to burst your bubble)

1.) Initial start up costs- a 30k property is generally going to need a large sum of money up front to make the home market ready (turn key). The areas that offer these properties have been neglected by previous owners, tenants etc. Simple things such as not changing a furnace filter regularly can ultimately cost the new owner $1,000's in replacement parts. From what I have seen, kitchen and bathrooms need updated, new flooring, painting, windows, roofs, etc. This will quickly turn your 30k investment into something much, much more. One should consider value after all the repairs have been completed.

2.) Rental turn over- Generally the 30k rental property is going to carry a much, much higher turn over rate. I've seen residents turning over in less than 120 days. Causing the owner to put forth more money to fix what has already been damaged, re-paint, clean a unit they just turned a short time ago. Even with a strict set of rental requirements, the area the property is located will not draw in the type of client you will ultimately desire. Again, costing you money.

3.) The blame game - Once your stress levels have reached a boiling point with questions such as 'why is my property always vacant?' Or, 'Why am I not receiving a dispersement check again this month?' You begin to push blame to your property manager, the tenant etc. Of course, this creates many problems especially if your an out of state owner. 

I feel it is very important to really take into consideration the area, and potential rental clientele your target properties will likely take on. Bumping your price even a marginal amount can relocate your prospects and give you more confidence in your investment with quality residents and a property that likely needs less maintenance/turn over, over time. At the end of the day if the margins work for you, the sale price shouldn't matter, especially if it will put you in a more desirable area.  

[Ryan Mullin]

I think what @Brent Coombs is saying about local knowledge is the most crucial aspect of this thread. 

My wife and I have several 30k properties that have performed like clock work for many years.  And, yes...  we have sold turnkey in that price range that perform too...   but on the other hand we have seen hundreds of 30k properties sold to out of towners that go bad right from the get go.  

The difference is knowing the areas.  AND...  good management. 

In Indy at least there are working class 30k areas and GHETTO 30k areas.  And looks can be deceiving.   Thats why so many out of state folks get stuck with ghetto crap.  It looks like a nice 3 bedroom ranch built in the 50's or 60's...   which is true.  But only ghetto tenants will live there!  

The 30k properties that we hold have no problem getting good tenants. some even with 700 credit scores.  They need to be within close proximity to highly desirable areas.  A lot of the times they need something a bit extra...  like a privacy fence, a garage or central air.  Making them stand out from the rest.  

One thing that I will say that not many people say on BP.   Sometimes its not the tenant or the property managers fault.  Sometimes its the investors fault!  Yes...  sometimes out of state, rookie investors that want to "drive the bus" end up making mistakes (Imagine that right..).  Some of the most common ones are trying to push rent to high and trying to cut costs on repairs.  A lot of times that is the reason why the property manager will end up feeling like they need to roll the dice on a not so great applicant.  and we all know how the story ends.  

I think overall in the whole "out of state investing" industry the major problem is the mindset.  Its the mindset that cash flow is everything.  Cash flow is not everything.  Equity is the single most important aspect of investing period.  IMO of course.   The reason why the Cali investor comes to the midwest is...   Cash flow.  And when I hear people saying that all thats important to them is cash flow I cringe.  Just because you came to the midwest for the cashflow doesn't mean that you should ignore all other aspects of investing.  You wouldnt buy a house in the ghetto in Cali, why would you go all the way to the midwest to invest in the hood?  Cause its cheaper and in way less demand?  Nonsense.  

The difference in buying in a select area of working class rentals in close proximity to something more desirable AND the ghetto is everything.  A lot of TK providers will simply go to auction and pick  up whatever is super cheap, rehab it and kick it out the door with whatever rental rate makes it look like a good deal...   

At the end of the day its on the investor to understand all of this and navigate "out of state" investing.   I don't think PM's are out the get the investors it just gets lined up that way because of all the market forces at work...   Its way harder to manage ghetto over priced over rented properties than ones that perform.  Im sure most PMs would rather manage the later.  

Just my 2 cents.   Good thread.