Recipe for Disaster: A Quick Way to Burnout of Real Estate Investing

Every once in a while I get a desperation call from a real estate investor who has “just about had it”. Maybe the tenants are not paying on time. Or at all. Maybe the property has just been torn up again. Maybe the local housing authority has given a long list of inspection items that need to be repaired.

And I want to share with you what a very large majority of these callers all have in common:

They almost all own lower priced properties that attract lower paying clients.

Generally, an investor just getting started out will have to wrestle with whether or not they are looking for Growth or Cash Flow. And the would be income property owner that is strictly looking for cash will almost always end up drifting down into the lower price ranges of Kansas City. I’m talking about the homes priced in the $30s, the $40s and the $50,000 price ranges.

(Of course, they may also not be able to afford any more at this particular time. So you may be “forced” into this situation rather than be patient and accumulate more savings.)

Yes, it is true that homes for sale in those price ranges are very much more affordable. (Is that proper English?) It is also true that if you can pick up a rental house for $45,000 and rent it out for $500 a month that you will instantly be in a cash flowing position!

If you can collect the rent.

This is not a condemnation on every tenant only able to afford $300 to $600 a month for rent. Most tenants in that price range are good, hardworking and responsible people. It’s the ones that are not that get you in trouble. How good does that cash flow look when you have an eviction every 12 – 16 months? What about the cost of clean-up after a less than desirable person has finally vacated the property?

Turnover, for whatever reason, just seems to be a lot higher.

There are many real estate investors out there that focus on these lower priced homes as a strategy. And that strategy has served them well. But by in large, the calls I get suffering from Investor Burnout are almost always in the market described above.

4 Comments

Filed under Real Estate Investing

4 responses to “Recipe for Disaster: A Quick Way to Burnout of Real Estate Investing

  1. Jeff Brown

    Know what you mean, Chris. I wonder if these investors have thought about getting an experienced professional management company to take care of their rentals in these neighborhoods?

    It’s such an obvious solution – and it works. Also, I wonder how many of these folks are actually buying for cash flow, or are really trying to grow their capital and getting cash flow secondarily?

    If so, in addition to acquiring solid pro management, they can simply bank the very cool KC cash flow in anticipation of the occasional hiccup with a tenant. Meanwhile, their equity is getting larger each year, which was their plan in the first place.

    Falling in love with cash flow when you’re really a growth oriented investor is one of the most common mistakes made.

    As usual, Chris – you’ve identified an area of investor concern.

  2. Toby & Sadie

    I don’t mind the lower-priced units, but the key is to get the investor to understand a key differentiation between:
    1. What the apartment will rent for and
    2. What you want to rent the apartment for.

    I’ve got an “investor” (and I use that term loosely) that keeps getting burned because he always wants to make the most in rent he can, rather than backing off that max amount by $100 and being able to CHOOSE his tenants. He’s had nothing but problems and is becoming known as a bit of a “slum-lord” in the area.

    All over $100 a month. Money that he isn’t collecting anyway.

  3. Chris Lengquist

    Your point is an excellent one. And I’m not really as down on lower priced units as I sounded in this post. But there is a much high level of burnout at the lower price points.

    As pointed out by Jeff Brown, why not have a property manager do it and save the headache.

    But I suppose your landlord wouldn’t want that because then he’d be down $140. As you know, numbers should be based on reality, not fantasy.

    Thanks for stopping by!

  4. Great Post Chris I prefer the rentals that are in the $850 to $11000 range. The tenants in this price range and higher in my experience take better care of the property and tend to pay on time.

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