Low purchase cost and high rental, is that possible?

Question

Hello everybody at BP,

I am looking at some buy to let properties in the US through a UK property company. The cities we are looking at includes Detroit, Atlanta, Toledo and Cleveland in Ohio, Buffalo and Niagara Falls in New York..

What I really find weird and makes me step back a little on the final move is the very high net return this property can give you despite a very low purchase price. The vast majority of the houses we are looking at vary from 35k to 50k and they are already rented out for at least 600$ per month.

So this properties give out anything from 15% to 22% Net return. This is something unseen in Europe.

What I am asking myself is: why are this people renting this low value houses for this high rentals when they could easily buy them and pay less per month for a mortgage? Does my doubt make sense?

Another piece of advise I am looking at is: how to know if a property company is legit or they are just trying to steal your money?

Thanks a lot for any help guys!

All the best

Matteo

Mike H. · Answer

My advice would be to be very careful buying those low end homes. On paper they always look good. But they can be a big money pit too. Homes in that price range tend to be in some of the lesser areas which also tends to equate to more vacancies, more collection problems, higher turnover costs in terms of repairs, more evictions, and on and on.

The numbers on paper look great. But the reality is those types of properties require an incredibly tough property manager to make any money from. And if you aren't making money on rent, you aren't making money - because there is no appreciation and very little principal paydown going on with those low end homes.

I would set my sights a little higher and try to get into the 100k to 150k price range of homes to where the rents are in the 1300 to 1500/mo range. You'll be in much better areas (assuming the same midwest towns above as California doesn't ahve 100k homes. :-).  You'll get much better renters so there should be higher occupancy rates, less collection issues, less make ready costs and repairs, etc, etc.

And the real value is that you'll make money off rental income, principal paydown, AND appreciation.

I've known a couple of people that made some good money on the low end stuff. But that was before the landlord laws were put in place (he would evict by showing up and removing their door) and it was a herculean effort to stay on top of them.

Quite honestly, your chances of going bust and/or losing money for a given year are every bit as good as they are at making money. I don't like those odds.  But thats what happens when you are in those areas.

Ali Boone · Answer

I'm with Mike on this one too.

I'm automatically judging this company some. Having focused on several markets around the US for my own properties, and I even focused for a long time on helping internationals buy in various markets, this particular list of markets this company is promoting makes me raise an eyebrow. Atlanta is old news, there are some declining markets in there, and any property in the $30-50k range renting out for $600/month is going to be a risk disaster. There's no way around it. The reason the people renting them aren't buying them is because they don't have that kind of money. We aren't talking the classiest of the classy here in properties that cheap.

If you want to send me the name of the company or if they have a website I can check out in a direct message, I'm happy to take a look. Maybe they are fine, but there is risk written all over what they are offering you.

With that said! It still can be done. The price range Mike suggests is good, still with impressive price-to-rent ratios, and you can even go cheaper ($80k or so) with good ratios. But in better, more stable markets.

Being that you are international, you really want to ensure you know who you are working with. Internationals are the easiest to scam because it's rare any of them can or ever come see their properties, and sellers know that.

Happy to chat anytime in more detail if you'd like!

Andrew Fidler · Answer

@Mike H. is absolutely correct in the basic idea that lower end is not a “remote management” “rent and forget” proposition for owners.

We have become very adept at keeping economically strained tenants focused on the reality that they need to pay their housing before their other expenses. (We already had the reminder in our weekly LaPlante meetings that we are headed into the dreaded Black Friday and Christmas season where tenants can attempt to pay their rent with excuses...we have to be direct and aggressive in our chosen market to collect rent or begin eviction. Otherwise we will end up in January with half the portfolio owing)

Success in Toledo depends on your management skills (tenant, contractor, buyers, vendors and business in general)...in my opinion you can play the patsy in any class neighborhood and and up with a failing investment.

I consider the >$100k neighborhoods as “easy level”. $50-100k are moderate. The $30-50k range is advanced...and less than that you better like wearing guns to your properties.

Andrew Fidler · Answer

@Matteo Cancian-

PM me know with the properties you are looking at in Toledo. If these are from a flipper I wouldn’t doubt they are overpriced...I get regular phone calls for management assistance from investors who were sold a bill-of-goods in Toledo only to realize they were had.

That rent to purchase range is actually pretty narrow. I buy in 3/1 houses in 43612 for $30k and rent $750...43608 for $25k and rent $700.

I live here and manage here so I’m an oddity. Let me know if I can help you vet any Toledo deals.

Andrew

Majic Jones · Answer

@Matteo Cancian Hi Matteo. Steve is correct, some tenants are not in position to qualify for bank financing to purchase a home at the same price points you're able to purchase, let alone most banks wont issue a mortgage on such a low value unless it is to the owner as part of a blanket loan with multiple properties. That combination can create some nice returns for you as the landlord.

As far as property management, in Atlanta where I am, the property manager has to be a licensed GA real estate agent so you can always check if they're in good standings with the Georgia Real Estate Commission's website. That's where you would file a grievance as well.

If you want to look at a few rental property options we have or get property management firms we refer to our international clients, give me a shout.

Cheers!

Matteo Cancian · Answer

@Steve DellaPelle @Andrew Fidler @David Hansen @Kyle A.

@NA Jones @Mike H. @John Wassink  @Engelo Rumora @Fred Heller @Rashard Alomari @Alvin Neal, I am using an UK company just for convenience really, being European is much easier to travel to the UK and have a chat with these people instead of flying to the US. (I don't like to do things only by phone calls or emails). I understand that it is a risk but by not being a full time investor my free time is quite limited unfortunately..

Once more thanks everyone for your help!!

Matteo

Fred Heller · Answer

Those low-end properties look good on paper, but the reality is you'll be losing a lot of your ROI in more repairs, problem tenants, and a higher tenant turnover.

Like all investments, it's all about risk. With a higher-risk investment, you should get a higher return. And low-end rental properties definitely bring a higher risk.

Engelo Rumora · Answer

Matteo,

Focus on the people first and not the stats/demographics of an area.

Also, only buy B class and nothing lower than that.

Numbers will look great on paper but not achievable in real life.

Much success

Caleb Griffin · Answer

Hey @Matteo Cancian, I would simply agree with everyone our peers have said. You never know what people are going through in their current situation, so it's hard to generalize an answer. People do some very odd things.

To be honest, I'm wondering why you are using a UK company to buy you deals in the US...? Maybe it's just me, but I feel like you could easily cut out the middle man and deal with a company that is local to put you into your properties. Just a thought since you are already questioning this one company. Cheers!

John W. · Answer

What he said. In areas with nice schools where people are lining up to rent your property, people are embarrassed and terrified if they are late with your rent and will gladly pay late fees. In lower income areas, you are dealing with more people problems.

Low purchase cost and high rental, is that possible?

Most Popular Reply