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 have a cash flow of over 40% per year. At Cash Flow REI we search, find and investigate markets with those high returns.
Through our research and acquisition phases we also found some very disturbing things. We have written this report as a public service to 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 we are continually surprised by some of the shenanigans and scams that are going on.
Below are some things we have discovered that investors should be wary of.
Deposit #1
Always keep in mind where the information comes from. Even if you have a licensed real estate agent representing you as a buyer’s agent, ask yourself how objective the information can be. They are still sellers.
We have experienced this ourselves and have had property misrepresented to us. This has happened using licensed real estate agents who work for major
brokerage with us fully disclosing our business model of sourcing property for investors. We have been told that one particular property is in an acceptable area, recently renovated with new vinyl windows. Upon further investigation and inspection, we found that the property is in a “red light” district and only a few new vinyl windows. Always remember that there are people out there (some even licensed) who will tell you anything to sell you something.
In other cases, we’ve been told that the rehab property we were about to buy needed about 10k of work to get rental ready. Come find out the property that needs over 30K work.
The only way to protect yourself regarding the condition of the property is to inspect it yourself or have it inspected by a third party.
Deposit #2
Another thing to look out for are city and county inspections and what is required of the property owner. In some areas, if after inspection there is not two years of life left on the roof, or the driveway is in disrepair, 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 go sour very quickly.
Each city and county jurisdiction has different laws and regulations. For the uninformed real estate investor, not knowing what to pay attention to can be a financial disaster waiting to happen.
Bail #3
Beware of vendors or merchants 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 complete property condition report, and comparable sales within the area.
In one particular case, a wholesaler in Atlanta, Georgia sent us a property. The email came with an image of a dumpy looking shoddy house and the following statistics.
Price: $48,000 Rehab Cost: $25,000 ARV (after repair value) $148,000. Cash only.
Upon investigation we found the property had an assessed value per county records of $14,000! How they got to the ARV of $148,000 we have no idea. The house looked like a typical meth house (houses used to make methamphetamine). 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 make it a very poor investment, even if the property was free.
Bail #4
Be careful buying 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. The numbers are easy to handle. Beware of people throwing out cap rates. Those numbers don’t make sense. You need real, all-inclusive numbers to determine if it’s a good investment, especially if you’re a cash flow investor.
Bail #5
Beware of herd investments 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 is artificially inflating property prices. Many investors are overpaying out of a sense of competition. If someone tells you that they have other offers from other investors, go ahead. Find another opportunity, another property and even another agent. Do not be fooled. There are many properties and opportunities for everyone. Be wise. Beware of the herd mentality and hype.
In other cases we have seen new construction developments marketed to investors. When there are too many rentals in a subdivision, this causes investors to compete for tenants. This lowers rents and results in neighborhoods of rental properties and few owner occupants. That’s never good for neighborhood property values or conditions.
Beware of websites and auction sites that market foreclosures and make you feel like if you don’t buy right now by clicking the button, you’ll miss out on the last good deal. Go away – it’s hype and a marketing ploy to get you to buy on impulse. It is never a good investment move to buy under competitive pressure.
Bail #6
Beware of owned mills. These are people with a hectic ownership business model. They typically have access to city property or bank-repossessed property. They buy property for cheap, sometimes just $1, make a few improvements, turn around, and sell it to an investor for an outrageous profit.
We have seen public records of purchases of $2,000 from the city/county government. The property was then rehabbed for $8,000 and sold to an investor for $50,000. Those investors sometimes go overboard without having enough reserves and when they experience a vacancy for a few months they can’t afford the maintenance costs and lose the house. The mills and beaters come back, get the property, and do it all over again, at the expense of unsuspecting investors.
We upload these mills weekly through our research. They are not doing anything against the law. After all, it is a free country and a free market for creative entrepreneurs. It only becomes illegal if final appraisal and financing figures can be proven suspect.
Bail #7
We work throughout the country creating contacts and business networks. We recently spoke with one of our attorneys who reviews our contracts and he said that he is noticing in the transactions that the rents are overvalued.
Think about that for a minute. A landlord/investor can tell a real estate agent any amount he wants. There are many caveats in all the paperwork. I’m sure you’ve seen them: “Information deemed reliable but not guaranteed.” A small stretch of truth can change all numbers. Unless we are working with a professional property management company (who have documented rental listings), it is very difficult to be sure that the rent amounts they are quoted 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 can reprint and share this report as long as the content doesn’t change and the contact information stays in place.
