Buying a cheap property OOS - Case Study

All right everybody, I wanted to update you on my RE adventures. 

I posted a while ago about buying a cheap property out of state and what it's like and the numbers behind it. 

So my portfolio as of today sits at 15 units, all OOS. It's down from 23 at the peak. 

I bought an 8 unit for 200k outside downtown Cleveland, OH. Neighborhood is a C-/D+ neighborhood and I had inherited tenants in it. During my inspection, it didn't seem like a bad building and had good bones. The plan would be to increase rents to $625/unit with section 8 programs and renovations. 

I went under contract in late October 2020 and closed end of Nov right around Thanksgiving. 

Purchase - 200k

Monthly rent roll $3500 (8 units @ 450-500/month). Pro forma rent roll = $5k

Cash outlay: 

25% down for 150k HML @ 8%. Outlay = 50k. 

Monthly interest = $1k/month

Pro forma valuation = 625812 = 60k top line rev

Expenses = 50% or 30k NOI

Valuation = 30k/9% cap = 330k.

Refi 70% at 330k valuation = $231k cash back

Major expenses had come up like a plumbing bill of $600, pest control $1200 here and there. Trash was another big problem and residents from other houses in the area would dump it over there. 

My interest was 1k/month

Months 1-3, we had made minimal cash flow ($100-500/month), but then we had 2 evictions around March 2021. Vandalism happened and my windows were broken from old tenants. It was expensive to maintain and issues were happening. Rent collection was hard and it's hard to evict people. I was putting money in with new appliances and renovating 1 unit and painting common areas. 

Around April, I had 2 decisions to make.

Bet on the quality of future tenants and try to turn the building around for a clean BRRR. Or I could sell it and cut my losses. 

I put it on the market for 225k and ended up getting an offer for 190k. Over negotiations, we settled on $186k net w/4k seller credit. 

Money: 

$186k sale price

-$150k HML

=$36k back to me/partner. 

Out of the 50k investment, we lost $14k and didn't make any profit on monthly cash flow. 

Lessons: 

-8 units is too small and the risk/reward ratio was too small. The rent to price ratio is fantastic and I've got a 14 unit 20 minutes away that I picked up for 375k that brings in 7k gross. 

-The neighborhood I had to do better due diligence on as it turned out more of a D- neighborhood. There are plans for the neighborhood to be revitalized by the city, but COVID delayed construction and progress. I am willing to pay a premium to be in a better neighborhood. 

-Spreadsheet math ≠ real life. Things will go wrong even if you budget for additional unforeseen expenses. 

-The previous owner didn't do ANY tenant background checks or credit history. He just used it as if it was his personal piggy bank and didn't care how they paid rent. Unchecked tenants meant a lot of wear and tear to the property + bed bugs. 

-Understand the tenant base and some of their problems you'll anticipate. My PM was awesome about it and tried her best to find good deals for appliances/renovation. 

Overall, I'm very glad I took the plunge into it. Sure, it sucks to lose money but it'll serve me well in the long term. It's a very expensive lesson from the school of hard knocks. Luckily, I make a fair amount at my day job so it's not a huge hit financially. 

I have a 14 unit in a great C neighborhood and I found an awesome team. My 14 unit is being renovated and I should be able to BRRR it. Buying a 40-50 unit in the next 6 months! 

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Comments (15)

Jul 26, 2021 - 6:55pm

Thank you for your post!

I'm a 26 year old in southern California sitting on 185k in equites, and have the long term financial goal of building out a RE portfolio. Cap rates near me are pretty unimpressive, so I was also looking OOS, but have been worried about the logistical difficulties this would cause and hoping to avoid the overhead and risk of a PM.

Have you had a good experience on your 14 unit property?

Jul 26, 2021 - 11:57pm

Thanks for posting. Intern with 20k. Possible for me to start RE investing?

path less traveled

Most Helpful
Jul 27, 2021 - 1:51pm

First of all, good job saving that much. Wait a bit. Try to get to around $80-100K first. Also want to have an idea where you're living longer term. What I'd advise you do is buy a two flat in your market, live in one and rent the other out. You'll get better rates/financing because you live in the place. Then after a couple of years, move into another (maybe 4 flat??) and do it again. So long as you are fine moving often, you can build up a pretty nice portfolio with much less $ this way. I did not do this, but know many that have successfully. 

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Jul 27, 2021 - 10:51am

Find areas that are either seasonal or metropolitan to invest in as those tend to have more management companies. There are bound to be good ones if there is competition, look for reviews. 

Aug 28, 2021 - 2:55pm

I flew to my market and interviewed 3 that I really liked. You need to make sure your PM and your contractors like each other as they're going to be the ones that are working together. 

My PM is pretty good but it helps that I have more than 10 units so it gets me discounts. Definitely speak with other real estate investors and have a list of questions. 

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Jul 27, 2021 - 5:07pm

What's your involvement day-to-day or month-to-month in the maintenance/rent collection/eviction etc. given that you use a property manager?  How much are you paying the PM?  How do you source your deals?

How hard is it to find financing once you have 5+ properties?  Do you go through the same banks every time?

Aug 28, 2021 - 3:03pm

I'm not involved on the day-to-day, everything is farmed out to the property manager. My partner audits the numbers for rent collections and make sure everything is okay. 

Deals - I had a broker bring me stuff, but I plan on buying more deals in the future with partners - for future deals, I'll just cold call some owners. 

Depends on the size of the properties - anything multifamily >$1m has been really hard to get financing on. I've had to pay cash for some of the deals and get creative with financing. 

Aug 28, 2021 - 3:08pm

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