Should I invest in these properties?

Question

There are 2 properties I am thinking of buying as a buy and hold in Creve Coeur, Illinois. Btw, this will be my first time buying.

There aren’t really much to fix, roofs are 6 years old, and there are tenants in these properties already. I ran the numbers conservatively and the annual ROI for this is over 30%. They will each give us around $3000 in cash flow a year, so total of $6000.

If there aren’t any major problems with these properties after inspection, I want to purchase them but they’re not in the area I was originally looking to buy.

The numbers make sense and they are great cash flowing properties. But they’re not necessarily in a good market (but is not bad either). Should I buy them just because the properties have great cashflow? Or should I only look into best markets?

Thank you,

Jonathan Greene · Answer

Nothing about what you wrote is good for you. You want to buy two houses, out of state, based on calculations online, you've never been to the area, don't know anyone in the area, can't confirm how much work needs to be done, don't know if any major appliances are near end-of-life, don't know the block...all of this to make $6,000 a year. And that's with a calculator. If one furnace breaks in either house, your entire profit is gone in one day. Walk away and spend the next year learning about how to invest in areas near you that are the next up-and-coming town instead of throwing your money into something in a city you know nothing about for a profit you will never get.

Mami Asakawa · Answer

Hi Jonathan, thank you for the reply. That is what I was afraid of. I live in bay area California so it is very hard to start out here. I have been looking at properties out of state, like Cleveland/Euclid, Detroit, Burmighman, Jacksonville, all up and coming areas with great cash flow/appreciation and high demand.

I have clarity now. Thank you.

Ivan Guillen · Answer

@Mami Asakawa I would recommend that you stick to your buying criteria, and invest where you feel most comfortable. It seems that you are unsure about the area, and you desire an area with a higher demand. If I was in your shoes, I would look at what factors are driving demand in the areas you have mentioned and see if that makes it more appealing than Creve Coeur. Do some extra due diligence determine what city you are most comfortable investing in.

You mentioned Indianapolis, and from being local, a RE broker, and investing in the area I can tell you that it is a strong SFR city. The city has been progressing quickly, and due to this it means that areas vary from block to block. If you are investing in Indy, make sure you have a strong team in place. Your broker should know all the areas in the city along with the values of the properties in the area, and your PM should be able to back their knowledge up. Relay your buying criteria to your broker, and give them feedback on the opportunities they provide.

If you have any questions about the Indianapolis market then feel free to reach out! Good luck!

Nik Corbaxhi · Answer

@Mami Asakawa, I would have to agree with @Jonathan Greene. I have not personally invested in out of state properties for all of the reasons that Jonathan mentioned. You have to have a good feel and be connected with your properties at all times, which to me means close proximity to the property and being able to know the properties and upcoming expenses for each of them. I would also be  very cautious/worried about why these properties are still available, with cash flow of over 30%? If these 2 properties were such good deals, they would be gone by now from the in-state investing gurus out there. (Think about that for a second and reverse the roles. If you had a great investment opportunity locally, which would give you 30% return, would you jump on it? or let it sit and have an out of state investor come and take it over). Seems like too good to be true and you don't have enough information to answer your questions.

Theresa Harris · Answer

@Mami Asakawa  I'm not sure what you mean by a good market.  Do you mean a good area or where you think the market is at in its cycle?  If it is location, only you can answer that.  I wouldn't buy a rental in a rough area, but plenty of people do and do well.  I prefer to buy places in good locations-where families would live and were I'd live, not high end, but good, solid neighbourhoods.

Dan H. · Answer

You indicate you ran the numbers but did you run the numbers or did the OOS realtor provide you the numbers?  What would be the cash flow using the 50% rule?  I do not believe an annual ROI of 30% with legit analysis numbers and no value add.

So let us know what the 50% rule indicates!  Also my view is the 50% rule is too aggressive in low rent, low unit count, OOS markets.

If the 50% rule shows a 30% ROI with rents of at least $1200 I think it warrants consideration (I do not expect that it will).  By consideration, you would then need to research the area to determine vacancy rate, class of tenant, if market trending up (appreciation)/down/stable, is population increasing/decreasing/stable, is population getting older/younger/maintaining, etc.

I suspect someone provided you very optimistic numbers that the 50% rule will expose.

Good luck.

Paul S. · Answer

Knowing everything that goes in to owning property... I cannot imagine how people expect to buy more than 2 hours from their home and make a profit.

Mike D'Arrigo · Answer

I believe that as long as you have clearly and well though out criteria, you're better off sticking to it and not bending your criteria to fit some deal. How sound is your criteria and your rational behind it?

Mami Asakawa · Answer

No, no. They are great insights. I rather be a little more cautious. And being this my first time, I am cautious more than ever. And yes, I am in the process of researching more, thank you. I don’t want to be stuck in a difficult situation later if I could prevent it.

I really would like to invest locally but living in bay area California does not help.

Nik Corbaxhi · Answer

Then look into the credibility of the agent you are working with. Have you worked with him/her before? are they trustworthy? do you know someone else that is doing this in the area? have you done research to see how many houses are available in the area, what they go for, how long do rentals stay in the market for?

I don't want to sound pessimistic at all, just making sure you are well informed before you take action. The more of this you do in the front, the better prepared you will be for any scenarios that come your way.

Should I invest in these properties?

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