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{d4f7c08805e41e9b9974dfba619ed7230ec2da6e442055d48085a7994e8adaef} 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.
Caution #1
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.
Caution #2
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.
Caution # 6
Watch out for property mills. These are people with a business model of churning property. They usually have access to city owned or bank foreclosed property. They buy property for little money, sometimes only $1, make some improvements and turn around and sell it to an investor for an outrageous profit.
We’ve seen public records of $2,000 purchases from city/county government. The property was then rehabbed for $8,000 and sold to an investor for $50,000. Those investors sometimes over extend themselves not having enough reserve and when they experience a vacancy for a few months they can’t afford the carry costs and they lose the home. The mills and churners come back in, get the property and do it all over again– at the expense of unsuspecting investors.
We turn up these mills weekly through our research. They are not doing anything against the law. After all it’s a free country and a free market of creative entrepreneurs. It only becomes illegal if it can be proven that the appraisal and the end financing numbers are suspect.
Caution # 7
We work throughout the country creating business contacts and networks. Just recently we talked with one of our attorneys who reviews our contracts and he said that he’s noticing with transactions that the rents are being over stated.
Think about that for a minute. A landlord/investor can tell a listing agent any amount they want. There are plenty of caveats in all the paperwork. I’m sure you’ve seen them–“Information deemed reliable but not guaranteed”. One little stretch of the truth can tweak all the numbers. Unless we’re working with a professional property management company (who has documented rent rolls) it’s very difficult to be sure the rent amounts they quote are true.
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Our goal with this report is to educate investors and hopefully help them avoid a bad decision when investing in real estate. Readers may re-print and share this report as long as the content is unchanged and the contact information remains in place.
