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 generate cash flow above 40% per year. At Cash Flow REI, we research, find, and research markets with these high yields.
Through our research and acquisition phases we also find some very disturbing things. We have compiled this report as a public service for real estate investors.
The Cash Flow REI team is made up of 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 occur.
Below are some things we found and what investors should be careful of.
Always be aware of where information is coming from. Even if you have a licensed real estate agent representing you as the buyer’s agent, ask yourself how objective the information can be? They are always sellers.
We have experienced this ourselves and had misrepresented goods. This happened by using licensed estate agents working for large
brokers with us fully disclosing our property sourcing business model to investors. We were told that a particular property is in a decent area, recently remodeled with new vinyl windows. Upon further research and inspection, we found that the property was in a “red” neighborhood and only had a few new vinyl windows. Always remember that there are people (some even with licenses) who will tell you anything to sell something.
In other cases, we were told that the rehabilitation property we were about to buy required around 10,000 works to prepare the rent. Come and discover the property that required more than 30K of work.
The only way to protect yourself as to the condition of the property is to inspect it yourself or have it inspected by a third party.
Another thing to watch out for is city and county inspections and what is required of the homeowner. In some areas, if upon inspection the roof has less than two years of life left, or the driveway is in poor condition, or there is peeling exterior paint, they will not issue a certificate of occupancy until repairs are made. This alone will cause what seemed like a good investment to deteriorate very quickly.
Each city and county jurisdiction has different laws and regulations. For the unsophisticated real estate investor, unsure of what to watch out for, this can be impending financial disaster.
Beware of sellers or traders asking for money. This is a red flag. We have found that some sellers are asking for money 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 condition of the property and comparable sales in the area.
In one particular case, a property was sent to us by a wholesaler in Atlanta, Georgia. The email came with a picture of a trashy, chunky looking house and the following stats.
Price: $48,000 Rehabilitation cost: $25,000 ARV (after repair value) $148,000. Cash only.
After research, we discovered that the property had a assessed value according to county records of $14,000! How they arrived at the $148,000 ARV, we have no idea. The house looked like a typical meth house (houses used to make meth). The toxic residue contaminates the entire property. The sad thing is that an investor somewhere probably bought this house. The costs of hazardous waste removal alone make it a very bad investment even if the property were free.
Be careful about buying a property that includes utilities in the rent. Obtain the actual bills from the utility company. Never rely on fancy PowerPoint presentations or Excel spreadsheets. Numbers are easy to manipulate. Beware of people who throw cap rates. These numbers don’t make sense. You need hard numbers that include everything to determine if it’s a good investment, especially if you’re a cash flow investor.
Beware of crowdfunding and buying frenzy. Following the crowd can be a bad investment for two reasons. In some markets, the influx of investors and their investment money artificially inflates real estate prices. Many investors pay too much out of a sense of competition. If someone tells you they have other offers from other investors, move on. Find another opportunity, another property, and even another agent. Do not fall into the trap. There are plenty of goods and opportunities for everyone. Be wise. Beware of herd mentality and hype.
In other cases, we have seen new construction projects marketed to investors. When there are too many rentals in a development, investors compete for tenants. This drives down rents and results in neighborhoods of rental properties and few homeowners. This is never good for neighborhood conditions or property values.
Beware of websites and auction sites that market foreclosures and make you feel that if you don’t buy right away on clicking the button, you’re going to lose the last bargain. Leave it — it’s hype and a marketing ploy to get you to buy on impulse. It’s never a good investment to buy under competitive pressure.
Watch out for real estate mills. These are people with a churning ownership business model. They usually have access to properties owned by the city or seized by a bank. They buy a property for little money, sometimes only $1, make some improvements and then turn around and resell it to an investor for an exorbitant profit.
We have seen public records of $2000 purchases from the city/county government. The property was then renovated for $8,000 and sold to an investor for $50,000. These investors sometimes stretch too far, not having enough reserves and when they experience a vacancy for a few months, they cannot afford the carrying costs and they lose the house. The mills and churns come back, reclaim the property, and start over, at the expense of unsuspecting investors.
We make these mills every week thanks to our research. They don’t do anything against the law. After all, it is a free country and a free market for creative entrepreneurs. This only becomes illegal if it can be proven that the valuation and final funding figures are suspect.
We work all over the country creating contacts and business networks. Just recently we spoke with one of our lawyers who reviews our contracts and he said he noticed with the transactions that the rents were overstated.
Think about it for a minute. An owner/investor can tell a listing agent how much they want. There are a lot of caveats in all the documents. I’m sure you’ve seen them – “Information believed to be reliable but not guaranteed”. A little bit of truth can change all the numbers. Unless we work with a professional property management company (who have documented rent listings), it is very difficult to be sure that the rent amounts shown 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 reprint and share this report as long as the content is unchanged and the contact information remains in place.