New Investor Floundering Around

[Andrew B.]

I am sure this is not a unique situation so I am curious to hear what others have to say about their experience and what they are doing. I live in the Cleveland market which is known to be a strong cash-flow market but has limited upside in terms of appreciation due to flat/declining population.

I spent April 2019-April 2020 learning as much as possible via BP Podcasts, books, articles, and analyzing deals. I was unable to start making offers during that time because we needed to first save more capital and second unload our primary residence (luxury condo that had the potential to turn into an albatross since other units were selling much lower than they were purchased for and we needed to sell that before moving forward in case we needed to bring cash to close). We purchased a duplex after selling the condo and are owner-occupying one unit and renting out the other.

Now that I have capital saved and have our primary home situation sorted out, I have been evaluating deals and submitting offers. In two months, I have run 20 full deal analyses (2-3/week) where I model the acquisition, estimate the rehab, analyze holding costs during the rehab, and model the cash-out refinance and proforma cash flows after rehab/refinance. In addition to that, I am filtering through 10-15 listings a week that I can immediately tell do not fit my criteria. I get the MLS digest emails first thing in the morning so that's literally the first thing I do every day.

Based on the above and since I am new to RE investing and only have a limited amount of capital at hand, my preferred strategy for investing to start out is to full/partial BRRRRs in my local market. I have enough saved to buy two SFHs for around $110k each that would cash flow $100-200/month, using 5% vacancy, 10% maintenance/repairs, 5% capex and 0% property management. So while I could do that, I want to BRRRR because if I buy two ready to rent properties, even with the cash flow generated by them, it will take me 18-24 months to save up enough to buy another one while maintaining sufficient reserves for all properties.

The issue that I am running into is one that I know is common. I can't get any offers accepted on the MLS at a price that makes sense based on how I am evaluating deals. I am looking at B class neighborhoods so I am competing with retail buyers and anything that is priced in the range to make a BRRRR deal work ends up with multiple offers in 1-2 days after listing. I have tried to compete but have lost out on all of those offers. I did get two offers accepted but once I walked the property with a contractor/home inspector, I had to walk away because the rehab was going to be too expensive to support the deal and the seller was not willing/able to negotiate the price down.

The next logical step to me is to find off market properties not on the MLS but since wholesaling is illegal in Ohio, I am hesitant to spend a bunch of money on marketing efforts since I can't wholesale any properties that I can't personally close on.

Right now, I am continuing to research my local markets to see if any of the various municipalities have properties that work but have thus far not had any luck.

My fear is that one, some or all of these things are true:

1. My deal analysis is too conservative.

2. My criteria for properties is unrealistic (B Class neighborhood where I can buy low, renovate, and appraise high enough to get 50% or more of my capital out in a cash-out refinance).

3. My local market doesn't support the strategy I am trying to execute.

4. I am being impatient and need to keep grinding away until I build momentum.

It seems like I have the following options going forward:

1. Continue to evaluate MLS deals in my local markets and hope that the market shifts in favor of buyers in the next year.

2. Change my investment criteria and/or deal analysis assumptions to make more properties work on paper.

3. Look for off market properties not on the MLS using direct marketing efforts.

4. Look outside my local market for a market where BRRRR deals are easier to find.

I feel like I am working extremely hard but have not made any progress. I know @Brandon Turner and @David Greene always talk about the bridge analogy and I don't want to start trying to build a bunch of different bridges but I also am afraid that I am trying to build a bridge to nowhere.

Do any seasoned investors have any advice to offer?

[Patrick Henry]

Here is my 2 cents. I have 3 rentals in Ohio. My last one closed in Jan 2020.
It sounds like you are going in the right direction. You even have your possible solutions in your post. That's awesome! Sometimes making the decision is the hardest part. Hopefully the responses you get will help you with that. Good luck! Keep moving forward.

1. My deal analysis is too conservative.- It might be a little, but you need to feel comfortable with what you do or you will tank, stressing about things.

2. My criteria for properties is unrealistic (B Class neighborhood where I can buy low, renovate, and appraise high enough to get 50% or more of my capital out in a cash-out refinance).- this is the same as 1, but you might look for ways to reduce cost in rehab. Also think about what you make on your money if it just sits.

3. My local market doesn't support the strategy I am trying to execute- this is very possible. You may want to focus here. If you can find markets that meet your criteria for the cash flow when you buy retail, you should be able to BRRRR without too much of an issue.

2. Change my investment criteria and/or deal analysis assumptions to make more properties work on paper.- Keep it accurate, but don't force it to work. That can lead to big headaches and little or no money/profit.

3. Look for off market properties not on the MLS using direct marketing efforts.- Definitely a solution, making things lean in your favor. Just remember marketing will be an expense, but if done right it pays for itself and then some.

4. Look outside my local market for a market where BRRRR deals are easier to find.- Hell yes. If your system works in another market go for it. Make it easier on yourself. 

[Ryan Evans]

Keep in mind, whether or not you approve of wholesaling, you're almost always going to need to pay cash to buy those deals. Sure, hard money is an option, but it doesn't usually pencil out for under 100k properties even if you can find a lender. 

There are a bunch of areas where you can buy good houses for 70-80k that will cash flow immediately. You buy those all day long over in Garfield Heights, Maple Heights, Euclid, etc.. They might not be home runs, but it could get you going and they don't have a lot of headaches if you buy right. 

[Andrew B.]

Originally posted by @Patrick Henry:

Here is my 2 cents. I have 3 rentals in Ohio. My last one closed in Jan 2020.
It sounds like you are going in the right direction. You even have your possible solutions in your post. That's awesome! Sometimes making the decision is the hardest part. Hopefully the responses you get will help you with that. Good luck! Keep moving forward.

1. My deal analysis is too conservative.- It might be a little, but you need to feel comfortable with what you do or you will tank, stressing about things.

2. My criteria for properties is unrealistic (B Class neighborhood where I can buy low, renovate, and appraise high enough to get 50% or more of my capital out in a cash-out refinance).- this is the same as 1, but you might look for ways to reduce cost in rehab. Also think about what you make on your money if it just sits.

3. My local market doesn't support the strategy I am trying to execute- this is very possible. You may want to focus here. If you can find markets that meet your criteria for the cash flow when you buy retail, you should be able to BRRRR without too much of an issue.

2. Change my investment criteria and/or deal analysis assumptions to make more properties work on paper.- Keep it accurate, but don't force it to work. That can lead to big headaches and little or no money/profit.

3. Look for off market properties not on the MLS using direct marketing efforts.- Definitely a solution, making things lean in your favor. Just remember marketing will be an expense, but if done right it pays for itself and then some.

4. Look outside my local market for a market where BRRRR deals are easier to find.- Hell yes. If your system works in another market go for it. Make it easier on yourself. 

Thanks for responding!  I am going to dedicate time to evaluating other markets in adjacent counties to Cuyahoga County (where I've been looking) and then expanding beyond, if necessary.  

[Andrew B.]

Originally posted by @Ryan Evans:

Keep in mind, whether or not you approve of wholesaling, you're almost always going to need to pay cash to buy those deals. Sure, hard money is an option, but it doesn't usually pencil out for under 100k properties even if you can find a lender. 

There are a bunch of areas where you can buy good houses for 70-80k that will cash flow immediately. You buy those all day long over in Garfield Heights, Maple Heights, Euclid, etc.. They might not be home runs, but it could get you going and they don't have a lot of headaches if you buy right. 

That is a great point about needing to pay in cash.  We are actively saving to build up enough capital to purchase and rehab using our own cash.  Initially, I thought I was going to be able to use hard money but like you said, it doesn't pencil when you are less than $110k range for acquisition/rehab.  Closing and holding costs devour any potential equity upside.  We should have $100k available to us by January if we don't do any deals by then, more if I take out a 401k loan.  I am very hesitant to take out a 401k loan though with all of the uncertainty in the world.  I consider our W-2 jobs to be stable and resilient and that has been the case thus far but you never know when things could change.

[Account Closed]

Great thread @Andrew B., following!

And @Michael Swan - listening to your podcast now and love your energy, enthusiasm, and courage to take action.

[Michael Swan]

Thank you @Account Closed,

Feel free to reach out to me anytime.  I love talking RE and helping people.  Recently I was sent by somebody on BP that podcast 238 that they had me on is still the 3rd most downloaded ever!!

Swanny