Newbie from Northern VA, looking to invest in Louisville, KY

[Diane Bartley]

Hello BP community!

Who I am (& Why I am already a Big BP Fan)

I am Diane Bartley: work in IT by day, chase an almost 3 year old child during the evenings, and during the later evenings have started to plot our eventual exit strategy via a diversified portfolio that I am convinced needs to include rental properties. Thanks to all of you who have made this such a helpful and informative site - I'm currently packing as much information as possible into my brain. Posts & discussions & comments - oh my!

Investment Strategy

My husband (Andrew) and I live in Northern VA and are big DIYers on our primary residence. Since metro DC prices are no fun, we've been refining the idea of investing in Louisville, KY, where Andrew grew up - and where he also still has family and a great network of friends and acquaintances. We're primarily interested in a buy and hold strategy, and would love to find a good cashflow-generating multi-family rental to start out with, get our feet wet, and then hopefully expand.

Management Strategy

In order to successfully manage an out-of-town property without tearing our hair out, we are considering a two-part strategy: first, we want a well cared-for property that will attract good people, generate fewer maintenance calls, and have less turnover. Second, my parents have been out-of-town landlords in a college town for years, and they have a carefully-constructed system that involves two key people - a smart and trustworthy handyman and a realtor - as well as a carefully targeted marketing system that greatly reduces vacancies. We're thinking of skipping a formal property manager for now and instead building a system along those lines. Feel free to chime in, though, if you think that would be a mistake, as I'm happy to learn.

Progress to Date - and a Question

I've spent the past month haunting MLS and constructing detailed cash flow spreadsheets to try to understand our options. We've had our realtor and my mother-in-law (who is good with a camera and very opinionated) do an initial review of a number of properties. At this point we're eyeing one property in particular that I want to ask you all about. The good part of this property is that it is extremely well-maintained with new systems and renovations and has, by all appearances, good quality and long-term tenants. The bad aspect of this property is that when I look at these numbers, I involuntarily say "eh" and make a face. It has positive cashflow, but given current asking price and monthly income, it clearly doesn't meet the 1% rule - in fact the ratio is .8%. However the rents are a bit below market and could likely be raised without too much fuss, and we could likely get it for a bit below asking price, so I'm thinking we could get it to meet a .9% rule. (Too bad there is no .9% rule.)

So What's the Question Already?

Look, I get it, this violates the 1% rule. It probably violates other rules as well. But I like the fact that, based on what we've learned so far, it wouldn't be a complete pain in our butts. Also, when I compared this property with a nearby property that has great cashflow, we learned that great cashflow place has wall-to-wall transitory students, deferred maintenance, and a bedbug infestation. Although the numbers are so-so, the peace of mind would be pretty darn good, so is there any way that this would be a good deal overall? If we pass this up, do you think we'll find a better deal later or be kicking ourselves?

Many thanks in advance for your thoughts!
Diane

[David Beard]

Originally posted by Diane Bartley:

@Mya Toohey Thanks for the great advice! Our realtor is advising us not to do too much of a low-ball offer because of all the work that othe sellers have put into the property. But I like the idea of trying an embarrassing offer and seeing what happens! And yes - 20% below would be a great deal - definitely would meet the 1% rule.

Diane, your realtor's comment about "all the work the seller has put in..." rubs me the wrong way, and gives me the feeling that you don't have an investor-savvy realtor, nor perhaps one that has your best interest in mind, but is more interested in getting to a commission check as quickly as possible. Again, that's just an impression based on that comment, so it could be incorrect.

If the sellers have over-improved the property, for instance, that is their problem plain and simple, and what they've spent is irrelevant. Your goal is to get something that makes financial sense. A multi family at less than 12% gross rent yield in Louisville sounds very expensive and I'm not sure would even cash flow with a 75% LTV mortgage. Does the landlord pay any utilities? Have you reviewed the tax returns for a couple of years to verify economic occupancy and expenses?

You can buy brand new construction turnkey duplex to quadplex in a growing Texas market and get 12% gross rent yield (for example, Texas multi). And Louisville is by no means a growth market. You'll likely get zero appreciation. I live nearby to Louisville and worked downtown for 20+ years. So this looks like no cash flow and no appreciation, just tax benefits from depreciation and the slow paydown of principal (which doesn't do much for many years).

Sorry to be negative on the deal, IMO it just doesn't make sense. Some of these types of properties are fine for owner-occupant buyers where many othe issues come into play, but for a pure investment I don't see it.

Perhaps @Sharon Vornholt has a thought regarding the best areas for B quality or better cash flowing multi's in Louisville. Or @Michael Siekerka. I've honestly had difficulty finding "rational" pricing on multis in Louisville. I almost think I could build new multis in Louisville and do better than the housing stock on the market.