According to the real estate books and even on paper -it looks so easy. Buy a few rental properties, paint them up, fill them with residents, recieve checks in the mail, and some 3, 5, 10 years later after a few rounds of adding more, you’ll be on ‘easy-street’ as its simply that easy -at least on paper.
It’s natural. I was there too… after 3 months of collecting an ‘on time’ rent check in the mail with my first rental I thought… “wow…, I need a 100 of these things…” 🙂
Now I do not mean to make light of a real way to fulfill a passion, create independence, or even wealth… As it can be and is done every day. Check out “A Tale of Landlording That Anyone Can Replicate”
What I am saying is that real estate requires as much hard work and dedication as anything else does… I want to highlight one little facet of residential rentals that does not always come up on the technical analysis of ‘what the numbers look like’ on paper. The other night at the Charlotte Landlord meeting I was leading a loose discussion on rentals and how we are experincing healthy double-digit rent increases in certain pockets of our local Charlotte, North Carolina real estate market. The issue of buying cash flow properties (as a generalization looked at as lower-income properties) versus properties that are more apt to appreciate (yet typically lack double digit cash flow rates of return) came up. Of course I smiled and said “Well yes that great cash flowing property looks great on paper; however, one’s ability to manage it properly to actually achieve that great cash on cash return is another story” Of course those who have gone down that road -chuckled.
You will hear me say at times “that I may be the problem”. My point is that properties that appear to work on paper may not always perform that way in reality. I would caution you to think twice and get a lot of independent advice before pulling the trigger on your first low income property that is a cash-flow king -and if its a multi-family look out! In that meeting I asked a fellow real estate investor about how he ‘really feels’ about that 15 unit he sold on Coxe some 2-3 years ago…. He smiled and said “I hated it!” It only took him some 5 years to admit it publicly. 😉 LOL
A lot of my rental portfolio focus has been on multi-family as I can get a greater rate of return (or cheaper price per door) and create a larger impact at once. It’s fun when you rehab that duplex, 8 unit, or 14’r…, with fresh paint, landscaping, and other capital improvements which creates a buzz of excitment that attracts your target market. For me -if we’ve spoken, you will know what I call the ‘Creative Loafer” is my target market… it’s not an age, nor even an income level. it is a mindset. I love and can identify most with creative loafers and they love to venture into my emerging (real estate) markets.
In “Rinse & Repeat“, I briefly touch on my Firth Duplex that was originally a boarding house when I bought it. A weekly rental with a common kitchen and furniture. Nice -as it was mainly marketed to the worst of that market. Perhaps its why the seller was motivated to sell? That’s a hint right? So when we are buying dysfunctional property, the goal is to correct that dysfuction in order to untap its true worth. The property was built as a duplex with a good layout and was in the Plaza Midwood neighboorhood after-all. So on paper 2 -2/1 units with an anticipated total cost of $85k and a conservative rent of $1,200/mo with great upside potential looks good.
What wasn’t in writing was the specific location:
- below grade area of neighborhood and specific property location
- heavy percentage of investment property in specific area (mostly un-improved)
- poor reputation of location with drugs, prostitiution, and street people wandering by
If you have heard me speak, one of my comments with real estate is what is the percentage of homeownership to absentee-ownership (investment property). You will only be as good as your fellow neighbor -especially with rentals. Sure you can over-improve, but attracting and retaining your ideal residents may go against the grain of feel for your street and/or neighborhood. You see this little corridor of Firth, Landis, and Hamorton still had a heavy concentration of multi family residential, vacant land, and run down single family homes not to mention that it sat below the natural grade of the Plaza Midwood neighborhood itself.
So there I was… a freshly rehabbed duplex with all the amenities that worked in my other plaza midwood locations and I wasn’t quite attracting the ideal nor the conservative rents. I knew that it may take awhile as changing a reputation takes time; however, I quickly had a revalation about one facet of a boarding house that had not occurred to me. You see my residents were all snuggled in one night when an overly drunk and dirty homeless man fresh off an inbound train insisted that the back bedroom be his and that no worries he wouldn’t bother anyone… LOL
Sorta like a McDonald’s right? you know where its at.., and when you need it -what do you do? you go eat at Mickey D’s!!!
I quickly learned that lighting, fencing, and re-working of landscaping could help make one realize that things were not the same; however, when the old target market is a drunk -it takes time to catch their attention and alert them to change…. I sold that property within 2 years (as I mentioned in the ‘Rinse & Repeat” article above) but we constantly fought the occassional straggler showing up on the front porch. Definitely not good for slowing the turn (resident turnover) and maximizing one’s cash on cash return.
And just think -this is just one mere aspect of issues a landlord faces with creating positive cash flow.
So when your looking at that duplex and say its only $30,000 -my gosh I can easily rent each side for $500/mo!!! Think twice… It may not perform just as easily as it looks on paper; after-all it is for sale for a reason. Not saying it can’t be done -just asking that you think twice, educate yourself, and go slow… Protect yourself, but talk about the opportunity with seasoned investors that are actually in the trenches. Remember, I like getting paid to wait too…, just like dividends & stock though -one has to be certain that a payout will actually occur.
Happy Hunting as now is as good as any to find opportunity. Real Estate Investing is Ripe with Opportunity was my article from this time last year looking into 2013 with regards to our investing markets…. Check it out -I hope to come out with some 2014 predictions soon.