Investing out of state and in undervalued markets can be very profitable for real estate investors looking for cash flow. There are many markets that cash flow over 40% per year. At Cash Flow REI we look for, find and research markets with those high returns.
Through our research and acquisition phases we also find some very disturbing things. We have written this report as a public service for real estate investors. The team at Cash Flow REI are experienced investors.
We know what to look for and what to watch out for and are continually amazed at some of the shenanigans and scams that are going on. Below are some things we have discovered and what investors may need to be cautious of.
Always be aware of where the information is coming. Even if you have a licensed real estate agent representing you as a buyer’s agent ask yourself how objective can the information be?
They are still salespersons. We have experienced this ourselves and have had property misrepresented to us. This has happened using licensed real estate agents working for major
brokerages with us fully disclosing our business model of sourcing property for investors. We have been told that a particular property is in an okay area, recently renovated with new vinyl windows.
Upon further research and inspection we found the property to be in a “red light” district and only a few new vinyl windows. Always remember that there are people out there (some even with licenses) that will tell you anything to sell something.
In other cases we have been told that the rehab property we were about to purchase needed about 10k worth of work to get rent ready. Come to find out the property needed over 30K worth of work.
The only way to protect yourself with regards to the condition of the property is to inspect it yourself or have it inspected by a third party.
Another thing to beware of is the city and county inspections and what is required of the property owner. In some areas if upon inspection there is not two years of life left on the roof, or the driveway is in bad repair,
or there is any peeling exterior paint they will not issue a certificate of occupancy until the repairs are made. This alone will make what seemed to be a good investment go bad very quickly.
Every city and county jurisdiction has different laws and regulations. For the uninformed real estate investor not knowing what to watch out for can be a financial disaster waiting to happen.
Caution # 3
Beware of sellers or marketers asking for cash. This is a red flag. We have found that some sellers ask for cash because they know the property would not qualify for a mortgage.
Sometimes getting a mortgage on a property is a good insurance policy. The lender requires an appraisal, a full report of the property condition, and comparable sales within the area.
In one particular instance we’ve had a property sent to us by a wholesaler in Atlanta, Georgia. The email came with a picture of a trashy and dumpy looking house and the following stats.
Price: $48,000 Rehab Cost: $25,000 ARV (after repair value) $148,000. Cash Only.
Upon research we found the property had an assessed value per county records for $14,000! How they arrived at the ARV of $148,000 we have no idea. The house looked like a typical meth house (homes that are used to manufacture methamphetamines).
The toxic residue contaminates the entire property. The sad part is that some investor somewhere probably bought that house. The hazardous waste removal costs alone makes it a very bad investment even if the property were free.
Caution # 4
Be careful of purchasing a property that includes utilities in the rent. Get the actual bills from the utility company. Never trust fancy power point presentations or excel spreadsheets.
Numbers are easy to manipulate. Watch out for people throwing around cap rates. Those numbers are meaningless. You need real numbers that include everything to determine if it’s a good investment, especially if you are a cash flow investor.
Caution # 5
Watch out for herd investing and the buying frenzy. Following the crowd can be a bad investment for two reasons. In some markets the influx of investors and their investment money is artificially inflating property prices. Many investors are overpaying because of a sense of competition. If someone tells you they have other offers coming in from other investors–move on. Find another opportunity, another property and even another agent. Don’t fall for it. There’s plenty of property and opportunity for everyone. Be wise. Watch out for herd mentality and hype.
In other cases we have seen new construction developments being marketed to investors. When there are too many rentals in a subdivision this causes investors to compete for tenants.
This drives rents down and results in neighborhoods of rental property and few owner occupants. That is never good for the neighborhood property conditions or values.
Watch out for websites and auction sites that market foreclosures and make you feel if you don’t buy right now by clicking the button you’re going to lose out on the last good deal. Leave–it’s hype and a marketing ploy to get you to buy impulsively. It’s never a good investing move to buy under pressure of competition.