Episode Transcript
[00:00:00] Speaker A: Hey, everybody, you're kicking it with, kicking
[00:00:02] Speaker B: it with, kicking it with the home.
[00:00:10] Speaker A: Hey, everybody, you're kicking it with the Homeboys and the Homeboys podcast, where we talk everything in the world of real estate investing, whether you're just getting started or you're a seasoned vet. Scotty and I are going to give you our over 50 years of combined real estate experience.
Today we have a really interesting question.
Do investment properties under $100,000 still exist?
[00:00:36] Speaker B: It's a great question. So we're going to talk about not only do. Do they still exist, but we're going to talk about what to look for on a pro forma, and we're going to use a under $100,000 property as an example in case you do find them. So kind of a spoiler alert there. Going to go over a property that's actually under 100,000.
So the answer to that is, yes, they still exist. The real question is, should you actually invest in those?
[00:01:06] Speaker A: I'm just honored to be back in the studio with you. I know we've been kind of away for a little bit. You're just getting back from a Key west adventure.
[00:01:16] Speaker B: Yeah. It's impossible to have a bad time in Key West. I always say.
For my wife and I, it's a perfect mix of fun restaurants, going out to eat, you know, even listening to some live music, having some. Some beverages. But it's also got a lot of relaxing downtime for us and then a lot of nature, too. So we get to. We get out and I'm a big ocean guy, so I get out on the water and we do a lot of. It's a. It's a good mix for a vacation of a lot of different things.
[00:01:45] Speaker A: You know, I think it's interesting. We live in a. We both live in the suburbs of Indianapolis, and you and your wife go to Key west more often than you go to downt Indianapolis. It's not even close, really. It's like tenfold. Yeah.
[00:02:00] Speaker B: If you can be on an island in two, in just about two hours, two hours and 15 minutes. It's. It's hard to pass up a flight like that. And it's allegiant air, so it's cheap, it doesn't cost much.
[00:02:12] Speaker A: And hey, we just flew Frontier Airlines to.
To Disneyland, which I recommend. We love Disneyland.
Weather's much better than Disney World. But I will say, at lax, they treat Frontier Airlines passengers like the steerage on the Titanic. Like, it's really remarkable. They shuttle you on this bus to another wing of the Airport. And yeah, you just walk around just feeling about an inch tall. But I did save money and that's important.
[00:02:44] Speaker B: It's the greyhound of the skies.
[00:02:46] Speaker A: That's right.
Well, anyhow, this is an exciting topic because this is something that, yes, there are some more inexpensive properties that still exist, but I think that there's some caveats out there that people need to be aware of. You know, also, whenever you're looking at this, I think it's why it's important to, you know, to go over the numbers. And you always keep in mind, you know, we still really, really, really stress good properties in good neighborhoods.
[00:03:12] Speaker B: Yeah. And in this case, that is a very rare commodity at these price points.
In fact, I would say 99% of the properties out there, maybe even higher.
You should avoid.
99% of properties that are under $100,000, you should avoid. They may look amazing on paper.
The Performa looks like it's going to be a great returner, but most of them are in bad areas and or both. A bad property and the cycle of death will occur. And again, the cycle of death, for those who haven't listened to us talk about it, is pretty simp. It's when you don't have much choice. So you move in a tenant that is really not super qualified. They trash the place, they don't pay, you evict, you have to go in, spend a ton of money to fix it back up, and then the cycle starts again. You have to move another tenant that isn't qualified, they trash the house, and before you know it, you are bleeding and bleeding. And all you have to show for it is a piece of paper that says you should be getting 20% returns, but really you're getting negative 100% returns because you're not collecting any money and you are constantly spending money fixing the house up. So again, you have to be very careful with these houses. It is so rare for us to have a property under 100,000. We're talking. We get out of hundreds of properties. We may get one every couple of years.
We happen to have one right now. And that's kind of why we wanted to go over this, because we've got a unique property that's in an area where we don't mind having properties and the house itself is decent.
And that is a rare thing for an under $100,000 property. We also have one at 110,000. That is a cool house. It's in, again, a good enough area that it will rent. You can find qualified renters, but you know, these are rare for us to have properties like these. And we thought, well, let's talk to people about this because it's easy for them to come. It's easier for us to poo poo on the idea of a house that cheap. Because most of the time you should not buy these. But what about the ones you should? Let's go over one that somebody could.
[00:05:22] Speaker A: Well, I'm going to poo poo on it just real quick because I'm glancing at your computer screen and you know, it's just giving the highlights of one of these houses and I'm looking at the cap rate and the cash on cash returns. Generally when I get something that looks like that in front of me, I'm going to call bs and that kind of goes into the cycle of death that we talk about. I'm so scared of the cycle of death, I look at that and that's the first thing that comes to mind. So I'm going to try to drive that point home that so many times if it looks too good to be true, it probably is. There are cases where it is not. This is one of those cases.
But whenever I look at what you have up on your computer screen, first of all, is that cash on cash accurate? Yes, that is a 20.4% cash on cash return.
And I'm going to tell our listeners that well, north of 90% of the time you see a cash on cash return of that you need to be very, very careful.
Do you agree?
[00:06:37] Speaker B: Listen, this is the exception, not the rule.
[00:06:40] Speaker A: And I think that you have to say, okay, is this going to be an area that's going to present the cycle of death and what is unique about this area? I know this area and I know that there's a lot of revitalization in this area and we believe in the Runway for a 10 year plan in this area. But you know, most of the time I would caution our listeners when you see a cash on cash return like that. So explain like how a person were to kind of go through the analysis of a property like this.
[00:07:16] Speaker B: Well, first of all, you need to know about the area. That's probably the most important thing with the property. Right before we get into the pro forma, we happen to know this area very well. There's some things that are, you know, that hurt this area as far as what the values of properties are. But this one's in a way kind of protected from it. So it's on, it's at the dead end of a street and that dead end if, if the road went through, gets into some really bad areas. And this isn't in that area. This is in a little pocket where there are cute little houses. And this is, this is the end of that area.
And so, you know, you have to really get granular on those areas, especially if you're going to be buying these less expensive houses.
It matters so much. But on a pro forma, when you see these returns at a 20% cash on cash, you have to dig in deeper on the areas. You got to make sure that the house in that case is not going to be falling down on you. And in this case, we've done the rehab on this property. It's freshly rehabbed, it's going to come with a full inspection report. So, so some of that risk has been taken away a little bit. But you're not getting the Taj Mahal here. You are getting a simple house that is three bedroom.
That's, that's one of the beauties of this for sure. And, and with $400 a month and over $400 a month in cash flow, it's easy to get caught up in those numbers. $400 a month cash flow, 11% cap rate, 20% cash on cash. And you just go, okay, I want that. Well, I can show you 100 of these that you shouldn't buy for every one that you should correct. So, you know, I think one of
[00:08:58] Speaker A: the things like, you know, for this particular house is the story, you know, behind the neighborhood.
This particular neighborhood, you know, we're talking about the largest subdivision of Indianapolis that was an auto working, you know, city is where a lot of auto workers were, GM plants.
And coming through the Great Recession, those plants pulled out and we saw a drastic hit in this particular neighborhood or in this particular suburb, I should say. And we happen to know that there are tons of businesses that are entering back into this community.
Nestle is a big one. Ntn there are some new auto movement that's going on and we know that the economic development commission in this area is really aggressive with bringing businesses in. So there's a really interesting story, you know, behind this.
There's going to be a lot of people that are transitioning out of the area to the south of it because real estate is overpriced. So I think that my biggest advice would be, hey, really dive in to the neighborhood and the suburb and really ask yourself what is the 10 year outlook for, you know, any investment property. But anytime that you see an investment property that you think looks a little less expensive, you Know, make sure that the upside potential for that area is, has a, has a positive outlook.
[00:10:29] Speaker B: Yeah. And the right now with this property is kind of interesting because we put it out there for rent at 999 and we had a line of people lining up to rent it because it's so inexpensive and rented within literally days of putting on the market.
[00:10:43] Speaker A: That tells you a lot right there. And if you've got rental demand like that, if you put a property on the market and then you've got people literally fighting, you know, over it, you get to pick, you know, the best quality tenant from, you know, a pretty large pie, you know, that provides a lot of safety. And this particular property did, you know, as soon as it was on the market, people were literally fighting over it. And that says a lot about a, you know, a neighborhood and an investment property, you know, that is on the less expensive side.
[00:11:15] Speaker B: Yeah, the, the closer you, the cheaper you get of a house on a pro forma, you need to watch for that, that those returns to go up. So the cheaper the house is, you should expect those returns to go up. And when you get to that hundred thousand dollar price point, you should be expecting around that 1% golden rule that used to exist. And if you don't know what that is, that just means rents should be about 1% of what the purchase price of the house is. So for $100,000 house, you should expect rents to be $1,000. That doesn't exist in really nice areas. It simply doesn't. If you're spending $160,000 in our market plus you're not going to be getting $1,600 rent. You're going to be getting close to 1,300. So the cheaper you get, the closer you do get to that ratio. But you're adding risk, the cheaper you go on these houses. So you know, again, we could offer hundreds and hundreds of these properties but it's rare that we find any that are worthy of being offered to.
And when we do those returns, they're almost laughable. When I look at a pro forma and see 20% cash on cash, I almost laugh totally like, like this is silly, you know, but it's true. And so for, I would not suggest these for your first time investor. There is a higher risk profile on these properties. Even though it's a good property in a good area, the person that pays these lower rent prices does not have usually the resources that somebody who is paying sixteen hundred dollars a month in rents has. As far as fall hard times where this tenant, if they were to fall on hard times, even if they're qualified now, it's less likely that, that they could find their way out.
[00:12:55] Speaker A: So I don't know, it's pretty attractive. 20% down is 18 grand. Oh, you know, it's pretty sweet.
[00:13:01] Speaker B: It is. I'm a big believer in these. And in fact, we have another property for sale right now for 110,000 that, you know, I talked to you about keeping it because I love it, I love it. But the problem is, is we've got clients who need these, you know, smaller investment properties, cheaper ones to get in. That is one of the beauty of these, these less expensive houses is it only requires that $23,000 down payment and you've got yourself an asset that the tenant is paying down that mortgage for you. You're capturing that appreciation and you're getting over $400 a month in cash flow. And keep in mind that cash flow over time goes up, rents go up, while your mortgage payment stays the same. So this is, this is an accelerating, accelerating investment. So 20% cash on cash isn't even the full picture. That's the crazy part.
[00:13:54] Speaker A: But let's face it, you know, we're, we're in the Midwest Indianapolis market.
Yes, there are still some, you know, inexpensive investment opportunities. That makes sense. This house makes sense.
But there's not a ton of areas across the country.
You know, like if you're, if, if you're in, I'm just trying to think of some like, you know, if you're in Las Vegas, I'm not going to Los Angeles or New York City or something else because we, we know what, what that is. But like if you're in Vegas or some of these other, you know, relatively. Phoenix is a good example. Atlanta, you know, it may be a little bit more difficult and the caveats may need to be thrown out there a little bit more. So you needed to ask yourself, you know, what area, you know, are you investing in? Yes, here in Indianapolis, which we really fully believe in Indianapolis. As far as real estate, investment property, it's a great market. It's boring.
You know, we do have appreciating rents. We don't see the huge, you know, declines that some of the other areas have. But you know, finding inexpensive properties are a little bit easier than some of these other markets.
[00:15:04] Speaker B: Yeah, it's a good, it's a great point. And you know, we've got a six page report, I'm sorry, a ten page report of six things to demand from any operator, any company before you invest in a property from them. And that's on our website. And if you want that free report, it's pretty robust. It gives you a ton of tips before you invest in properties of any sort, much less a property like this, I, I think that people should take a look at that report and pick those tips up before they start talking with any operators, especially on these less expensive houses, because you have to be so careful. And all you have to do is go to our website, homeboyspodcast.com and you can get that download for free. And it's really useful. And for properties like this, those pointers are going to save you from getting into some big trouble.
[00:15:53] Speaker A: Well, those are wise words from a very smart man. And that man happens to be my best friend. His name is Scott Adams. You want more from him and from me? Tune in to the homeboys. We're going to keep bringing this to you. We believe in real estate investing. We feel like every investment portfolio should have real estate in it. It's been big for Scotty and I. We're going to keep bringing you content. Follow us on social media till next time, everybody. Thanks for tuning in and happy investing.
