Probably the most educational experience of our trip (excluding our time with our mentor) was in a rental agent's office. We got to witness a new investor learn, in a heartbeat, how easy it is to self-destruct if you don't do your homework.
Our local realtor in Lee County operates out of an office that includes a property management firm and a title company. The property management firm basically takes care of rentals for non-local landlords - primarily students of a local investment guru. One afternoon we popped in unannounced and were waiting for our realtor to finish with a closing. Siting in the lobby, a young buck strolled in and wanted to talk to someone in rentals.
When the rental lady came out, this young man puffed up and declared that he had just bought two 3 bed/2 bath houses. He wanted to know how much he could rent them for. The lady told him that, sight unseen, they might be able to get 850 a month, maybe more if they were pretty good.
That young man turned three shades of white. And I'm pretty sure his mouth went dry since the humidity level in that office dropped about 20%.
This young fellow did not tell the rental lady how fantastic his houses were. He didn't describe their features, praise their locations, or brag about their upgrades. But he did ask one very typical question, for the current Florida market that is: "How much would they have rented for last year?"
And the lady told him about 1100 to 1500, but the market was crashing and rental values were still going done. (Note: this does not exactly match what our realtor told us earlier, but he was trying to sell us these depreciating termite mounds - this lady's job was to get the sales contract).
What was wrong with this scenario? Absolutely nothing. House prices crashing, rental incomes down, property taxes high (that place about 400 to 500 a month), no local industry to speak of, major bank closing branches and not opening brand new buildings just constructed - all normal in a recessionary downturn.
The situation was what it was - not good or bad, right or wrong. But that young investor really screwed up. He should have known what his expenses were before he walked into buying a house in that area - let alone two. He should have done his homework and had the rental rates mapped out in advance.
Big lesson for that young man. But will other's learn from it? I know we did, but physical proximity to disaster tends to catch your attention and fix your mind pretty quickly.
Know your exit strategy - run the numbers, find your buyers/renters/partners, etc. FIRST, know what the resale values are, and a ton of other tidbits too much to mention in this little space. And use real, current numbers. Don't rely on websites along. Talk to realtors, managers, landlords. And talk to the purchases or renters.
We pulled out because our exit strategy become compromised by conditions we didn't expect - particularly the heavy oversupply that wasn't apparent until we saw it first hand. Pricing was a problem, especially since the market is still in free-fall.
One big issue was the ethical side. We did have a solid exit strategy based on resale to a specific market and with a decent marketing strategy. But how do you sell a house, with a smile, that you KNOW is going to devalue another 20, 30, or 40%. Not going to do it. Not for this cowboy.
And all that's there is peanuts, because you have to buy and flip almost immediately - sight unseen for the end user in most cases. I can find better uses for my time and money.
0 comments:
Post a Comment