First Investment Property sounds to good to be true. Is it?

Question

Hello Everyone,

My name is Connor and I am looking to buy my first investment property. I am concerned about the offer that has recently presented itself to me. I found a property management company that sells homes to investors that have tenants already in them.

My biggest question is, is this a common thing for management companies to do? Why would they sell a home that is bringing in a profit like this?

As I said before, this is my first real estate investment but it feels like it was to easy. I have read books and asked questions, but I don't want to overlook something.

I don't want to learn a $30,000 lesson, because of ignorance.

Any advice?

Most Respectfully,

Connor

Kenneth Hynes · Answer

@Connor Burnett

Welcome to BP.  I would echo what Karen said.  there are alot of other expenses to take into account when owning a SFR.    BP has a good rental property calculator  under the TOOLS TAB that can take you step by step -   That will give you a better idea of how good the deal is and your potential ROI

Karen O. · Answer

Would you feel differently if you were to consider allowances for repairs (5%), vacancies (5%), capex (10%) and $440 in prin/interest in your calculations?

Clayton Mobley · Answer

@Connor Burnett you've gotten a lot of good feedback already, and I would second the following advice:

- You need to know and incorporate the expenses for maintenance and vacancy costs. The company you're working with should KNOW these figures, be able to back them up with long-term data, and provide them to you promptly so you can do a full analysis.

- The location and comparable property prices/rents ("comps") in the area are very important to know so you can decide if this truly is a deal.

- It is always a good idea to go see the property for your first deal, ESPECIALLY if it's in an area you are unfamiliar with. This also allows you to meet the people who will manage your investment face-to-face, gauge their character, and see how they operate. This can go a long way to giving peace of mind or helping you realize that you need to dodge that bullet, fast.

I would also add the following advice:

- You should really know who is providing/managing this property. If they do their own rehab, what is entailed, etc. Is it a PM company that just markets props owned by other companies who then contract out the management to the company you're working with? How many parties are involved? More moving pieces can mean more chance for trouble, but not always. "Turnkey" is a term that has come to be used by a wide range of business types - some do everything in-house (like Spartan), others only sell and manage and contract out other services (like rehabbing and maintenance), some are actually just marketing companies that have no hand in your investment other than making the sale - which you should look out for.

- You need a TON more information to properly analyze this deal, or any other. I come across this issue a lot, so here is a link to a post I wrote a while back with a list of questions any investor should be asking of any turnkey operator they consider working with. https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca

Turnkey can be a really amazing investment, and is particularly good as an entry point for those with little experience who still want to put their money to work. HOWEVER, as I'm sure you've read by now, there are plenty of charlatans out there just looking to sell you whatever dressed-up dumpster fire they happen to have on hand and then leave you holding the bag. Due diligence is the name of the game here, so take the time to get some real, data-backed info before you make the leap.

If you have any questions about turnkey, anything I've said here, or the market down in Birmingham, feel free to reach out any time.

Best of luck!

Clayton

Adam V. · Answer

looks to me like your Cash on Cash is 17 or 18%.. that doesn't really scream "too good to be true" to me.

Ali Boone · Answer

It is normal but I would say before that to be sure you understand the numbers on it. Make sure it's scheduled to profit as they may advertise it is or whatever they are saying. For basics on running numbers, check out-

https://www.biggerpockets.com/renewsblog/2013/01/1...

After that, you just want to check out the property and any risk factors, location, etc.

Brent Coombs · Answer

@Connor Burnett, to me, this one only looks "too good to be true" IF similar homes sell for much more. The "1% Rule" (each month's rent grosses 1% of purchase price) is far too commonly available for it to automatically be considered a great deal.

But, it's all about the LOCATION of said deal! eg. If the normal gross return in the area is 0.5%/m, then it IS a great deal (which would mean that the identical home next door sells for $219,000!)

Conversely, if the normal gross return there is 2%/m, then, it's an absolutely TERRIBLE deal!

Location, location, location! Have you ever heard of those three rules? How's ITS location?

Have you accounted for its OTHER expenses (Vacancy, Maintenance, Cap Ex)? Cheers...

Leigh C · Answer

@Connor Burnett

Plenty of people could supply you with something like that.

Connor Burnett · Answer

Thank you all for your inputs. The reason this offer appears to good to be true is that is felt like it was too easy to find and set up.

Home is $110,000.

25% down

APR of 4.625%

Rent is $1095 a month

Property tax is $131 a month

Property Management is $100 a month

Insurance is $60 a month

First Investment Property sounds to good to be true. Is it?

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