The Worst Rental Properties to Buy (We’d Never Invest in These)

Ashley:
We are constantly telling rookies to do one thing, take action. Don’t wait for that home run deal to magically fall in your lap. Find a deal that fits your investing goals and get that first property under your belt. But the truth is there are some rental properties we would actually never buy.

Tony:
These deals can be incredibly convincing. When you run the numbers, they might even look profitable. They may have less competition, a lower purchase price, and a narrative that makes you believe you’ve just found a diamond in the rough. But beneath the surface, these properties come with all kinds of issues and risks.

Ashley:
They’re tempting, but if you’re not careful, they can drain your time, eat through your cash reserves, and really just set you back for years. Today, we’ll tell you exactly what they are and why you should steer clear, especially if you’re a rookie investor. This is the Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. And with that, let’s get into the first type of property, and this is properties in a dangerous neighborhood. Now, obviously everyone’s got, I think, a slightly different definition of dangerous, but I think when we talk about dangerous in this setting, we’re talking about areas where there’s maybe higher crime, more distressed properties. The tenant population itself might see higher unemployment rates. Generally just speaking, just –

Ashley:
Not a lot of job growth, just declining population in general, people trying to move out of that area.

Tony:
Generally speaking, just not the best place to invest into.

Ashley:
Tony, before we go forward, I think a good thing for rookies to understand is talking about the class of neighborhoods, because you’ll hear, oh, I’m in a B class neighborhood, D class. So maybe we can walk through real quick kind of the differences as there’s no set rule, but A class, B class, C class, and D class neighborhood.

Tony:
That’s a great point. And again, to your point, there’s no set definition. Everyone might define these differently, but I’ll give you my take and ash, I’m curious what yours is. An A class neighborhood would be like, think about a neighborhood where you can command top of market rents. At least where I’m at in California, there’s luxury apartments with all of these really cool amenities and you’ve got the pool and the gym and the spa, and it’s like a thousand units in one place. These super luxury places, especially if you’re in downtown LA that gets super, super expensive. So A class is just top of the market, nicest of the nicest. All of the amenities, you’ve got the nicest finishes inside the units themselves and the rent reflects that luxury that you’re paying for. And then a B class is just like a step below that.
It’s still nice, but maybe it doesn’t have all of the amenities. Maybe the finishes aren’t as nice. And because of that, the rent profile is a little bit lower as well. But when you think about the tenant pool, there’s still really strong tenants, obviously in a B class area as well. They’re just not willing to pay the same premium that someone is in an A-class neighborhood.

Ashley:
And then with C class, it’s a little lower income, not nice of a school district maybe. And it’s kind of probably more on the outskirts of these nicer neighborhoods where most people want to live. And then there’s D class, which is where there’s very high crime, maybe lower income and kind of the distressed properties. And these are kind of the areas we’re going to talk about now as to where we would not invest and purchase properties in. And fortunately, I have a neighborhood that was a D class neighborhood that I have some experience and stories to tell. But let’s talk about, first of all, why we wouldn’t buy in a D class neighborhood because there’s actually a lot of potential for cashflow, a low purchase price, and also a high rent to price ratio on these properties. You can sometimes demand a decent amount of rent, but buy them at such a low cost.
So to give you an example, I invested in an area, I had bought three properties there. And one property was $37,000 to give you an example, but each unit rented for $700. It was a duplex. So that was $1,400 and I paid $37,000 for it. And all I had to do was put an $800 fridge into the unit. So as you can see, this looks really, really enticing to be able to go after one of these deals like this, but there are some things that you should be aware of that I was not when I bought in this market. Okay, here’s some things that I experienced. First of all, declining population. People are actually trying to get out of that neighborhood. You don’t see people really moving into that area unless they have to. So a lot of turnover, a lot of people coming and going.
I had tenants that would lose their job and they would have to move because they couldn’t afford it or I would have to evict them. I even had to do cash for keys once. It was also a lot of crime. There was a lot of drug activity in the neighborhood at one of the properties. The house right next to it was known as a drug house where people were coming and going. And so we also didn’t have families that wanted to live there because it was literally right next to a house where people were buying and selling drugs. Then the other thing that I noticed, and this definitely took some time before I noticed this, was limited appreciation. These neighborhoods don’t see appreciation unless there’s all of a sudden huge gentrification and people are coming in and revitalizing it. But also this D class area was so far removed from any nicer area that it would be so long before it got any kind of overflow.
If you go into a city and you’re seeing an A-class neighborhood, a B class, and then C class and D class, eventually sometimes those areas spread out and people can’t afford to live in the B class anymore. So they start to take the D class, turn into a C class to a B class and see that. But where I’m investing in some of these rural areas, which we’ll touch on later, you don’t see a ton of appreciation in these properties. And then kind of lastly is these properties were definitely not high end taken care of, but I couldn’t go in and do a full gut rehab because the amount that it would cost me to go in and do that rehab, to be able to raise the rent to what I would need to make my return worth it, wasn’t going to happen. There is a cap in that market as to how much people would pay.
I could put granite countertops in. I could put in hardwood floors. People couldn’t afford to rent it. So it wasn’t worth it for me to go in and do these full gut rehabs. I mean, they were decent apartments, but it was continuous maintenance. What I realized was these were really just properties that were pigs with lipsticks slacked on them, as you would say. Oh, and then I guess the last thing too is higher insurance premiums are sometimes in those areas too, especially if the property is somewhat dilapidated and outdated because the insurance company often asks when was the roof updated? When was the electrical updated? When was the plumbing? And a lot of those properties hadn’t seen any of those repairs in a long time.

Tony:
So there’s a lot that makes it tempting, but to your point, Asher, things that people need to be aware of. And I go back, our friend Steve Rosenberg, he told me a story once, or maybe I heard him speaking about it on stage, where he bought up, he had, I don’t know, like 30 properties he had owned in a D-class neighborhood. And it was just like the bane of his existence. And he was a property manager by trade. And he’s like, “Man, I got to get rid of these properties.” Ends up finding an investor that buys up, I think all of these properties in this one neighborhood. And he’s like, “Thank you, Jesus, for taking this headache off of my shoulders.” And he bumps into the guy who bought them a few years later and he’s just like, “Hey, how are those properties doing?” And the new guy was like, “Oh man, those are my best properties ever.
I’m so glad. Thank you so much for selling those to me.” And Steve was like, “What the heck?” It’s like these were the worst properties in my portfolio, but they’re the best in his. And I think a lot of it does come down to how well can you, I guess, execute in that type of neighborhood? And different people maybe have different strengths in different types of neighborhood classes, but for whatever reason, the person who bought all of Steve’s rentals, they had the systems, the processes in place to actually do really well in that type of neighborhood. So Asha, I guess if someone is listening to this, because you’ve obviously got way more long-term rental experience than I do. If someone is listening to this and they see the deal, they can buy it for 30,000 bucks and rent it out for 1,400 bucks a month, but they see all of these same red flags, is there anything that they can do to make it easier for them if they do decide to move

Ashley:
Forward? In my experience, I would say go after section eight tenants because I’ve had several section eight tenants, I guess more than three, but more than several. But they are right now, at least in Buffalo in this market, there is a three-year waiting list for section eight vouchers. So people are coming in, they have an inspection once a year where an inspector from the housing organization comes in and inspects the apartment. They’re having the vouchers pay for a large portion of their rent and they’re paid for a smaller part. So keeping the apartment taken care of because they get that inspection once a year. If they don’t pay their portion of the rent, they’ll lose their voucher. And they probably waited years and years to actually get this. So you’re more likely, I would say, to get payment on time. I’ve never ever had to evict a Section eight tenant.
So if I was going to do it again and invest in these areas, I would go after people who have those vouchers because they’re more likely to stay because they already have a place that they’re put in where their voucher is approved for. Because to become a Section eight landlord, you have to go through an approval. You have to have an inspection done before you even get to know if they’re going to pay for the person to come in. And it can take some time for all of this to happen too. So not that you can deny someone for having a Section eight, but I would say I do know there are landlords out there that avoid taking on Section eight tenants. So it can be more difficult for people to find landlords that will get approved for the process because they still have to fill out information, fill out the paperwork extended and things like that.
But that is what I would do is go after Section eight tenants and hopefully you’ll reduce the turnover at least and get payment for rents, reduce that nonpayment.

Tony:
And I feel like we’ve heard that, Ash, a few times from other investors, that Section eight tenants have kind of this stigma just like in the general population. Generally people think sometimes negative things about Section eight tenants. But from the investors that we’ve actually spoken with who invest in Section eight, a lot of times they’re like, yeah, those are some of my best rentals. So it is a good perspective. Last thing I’ll add before we move on from the neighborhood piece is that sometimes you might be in the right neighborhood, but you might have the wrong neighbor. And I’ll give you an example. The second rental that I ever bought, it was in a solid C+-ish class neighborhood, solid working class families, decent. All the houses were very well kept, blue collar neighborhood. Everything was solid. But my house was at the very kind of end of this last street.
And right next to me, there was this kind of maybe like a 30-unit apartment complex, but there just happened to be a lot of riffraff in that apartment complex next door. And as we were going through our renovations, they sold our HVAC unit, some other things like that. So sometimes just being maybe next to the wrong neighbor can, even if you’re in a decent neighborhood, can be a bad sign for you. And our friends, Avery and Luke Caro, they shared with me a story where they bought this apartment complex, really nice apartment complex, but the unit or the apartment complex directly across the street from them. Some lord type owner didn’t really take good care of the place. And it just became like this cesspool for illicit and illegal activity, which made their lives really hard managing property across the street. So even if the neighborhood is solid, you might also want to just do a double check for the folks around to see if they might cause issues for you as well because that could end up being a headache for you as well.

Ashley:
Oh, what’s the best way to do that? I mean, is it go and meet the neighbors while you’re doing your due diligence, you think? It is so hard.

Tony:
It is hard, but it’s like if you drive around different times of day, if you go in the morning, try and go again in the afternoon, try and go again in the evening, just to see, hey, how is it there? And it’s funny because we’re actually doing this right now. So we’re in the process of buying a new primary residence and it’s in the same neighborhood as ours. We’re not worried about the neighborhood, but we are somewhat worried about the neighbors. You never know. All of our neighbors are super cool where we live right now, so no issues. And me and Sarah were just thinking like, well, man, what if the neighbors like the neighbors from nightmare neighbors? So because it’s in our neighborhood, we’ve just been able to walk through on our evening walks or our morning walks at different times of the day just to kind of scope it out and see.
And so far we haven’t seen anything. So obviously it’s hard until you’re in it, but at least maybe just getting around and seeing what’s happening might be an easy way to check it out.

Ashley:
Yeah. I’m moving also into a new primary and it is the closest I’ve ever lived in my whole life next door to someone. We’re at the dead end of a dead end street, like a little cul-de-sac circle at the end and we’re at the end of the circle. And we have a vacant woods next to us on one side, but on the other side of us is another house that’s pretty close to us and the person’s garage faces our house. And the guy, he’s super nice, but he sits in his garage in his chair and it basically just stares right in our house right into the living room windows. And I just think it’s so funny, but thankfully he’s a super cool guy. And we so far have good neighbors except for three houses down my sister lives. So obviously that’s going to be a big problem.
We can already hear our kids screaming in their pool.

Tony:
It’s so funny, Ash, because you always talk about how big of a property you sit on. And I just looked it up. The house that we’re buying, the lot size is 0.12 acres. It’s like 5,000 square foot lot. So it’s crazy to me that you have a whole wooded area to the right of you and just everywhere in our subdivision, everyone’s so close to each

Ashley:
Other. Yeah, this one is actually less than an acre. It’s also the smallest acreage I’ve ever lived on before. And to me, it’s super small, but that’s just normal. Being out in the country, there is just –

Tony:
And we’ll talk about rural investing here in a bit, but just always my thought when we talk about lot sizes.

Ashley:
Okay. So the next thing that I want to touch on as far as neighborhoods and areas is an area with an HOA. Tony, have you ever invested in an HOA? And does your primary residence, do they have an HOA right now?

Tony:
Yeah, primary is in an HOA. And then a few of our short-term rentals have also been in HOAs, but it’s slightly different because they were short-term rental built HOAs. All of the homes inside of that HOA were built to be short-term rentals. So I’ve never purchased in a residential HOA and then tried to turn it into an investment property.

Ashley:
Yeah, I’ve never purchased in an HOA either. I’ve just heard horror stories. I guess the closest thing to an HOA is my lake house. It’s on a private road with nine other houses. So it’s a private road. There’s no HOA, but we do share. We had new pavement put down, so we shared the cost of that. We share the cost of snowplowing. So there is some kind of community, I guess, their organization, but no bylaws or anything like that. So I think it’s very different. But I have heard horror stories and it has put a stigma in my mind and given me this limited mindset that I would never invest in an HOA because of certain things. And I’m sure very successful people that have invested in HOAs, but here are some of the red flags that I see. As an HOA is controlled by the homeowners association, the people that live in that neighborhood.
And at any time, there could be a majority vote that changes the rules and the laws of that community. So even if you moved into the property and this is what the rule was, at any time, it can go through whatever process it goes through and be changed and affect you. Remember growing up, there was this neighborhood with an HOA. I was the only one near us. And I remember my parents’ friends were in a huge fight with the HOA because they could only paint their house certain colors, to go with the aesthetic of the community. And they ended up going and doing it different or whatever and just went into this big legal battle with the HOA and I don’t know, whatever happened. But for me as an investor, I look back to COVID where it was actually a previous guest we had on the podcast, and he shared this later on, that he had a condo in Florida.
And during COVID they said, “As of today, we’re not doing any short-term rentals because of COVID and what’s going on. If it’s your primary residence, you can come in and out, but we’re not allowing any guest visitors into the HOA.” And they locked the gates per se, and he could not rent out his property as a short-term rental, even though it had been allowed just one day all of a sudden, “Nope, this is your notice. We’re not allowing guests because of COVID.” And I think he ended up trying to sue the HOA too. And I don’t know what happened, but that is always something that I have been fearful of. But also there’s tons of worst case scenarios and there’s probably always ways around it. But I think that’s what I see as a red flag is that you don’t completely control your property. Now, Tony, what about the monetary side of it?
Because there are dues and fees you have to pay. How much do those change and have they changed at any of your properties?

Tony:
Yeah. For our properties, they’re all pretty reasonable. Our primary, I want to say it’s like 200 bucks a month. It’s a pretty reasonable HOA. Even for our short-term rentals, I think a lot of them are actually paid quarterly. I don’t recall the exact quarterly amount, but it’s a pretty reasonable fee that we pay. But I’ve seen in other markets where we’ve looked at, especially at short-term rentals, where it could be upwards of 700 bucks a month. Or sometimes there are these special assessments and it’s like a thousand bucks a month for the HOA dues, which is just insane to me.
Especially if you’re doing just a traditional long-term rental, I couldn’t imagine many of those deals working if your HOA dues alone are in the low four figures. I can’t imagine any long-term rental deal doing it. So it would force you into midterm, short-term room rental, something to that effect. So yeah, I think if you’re doing a traditional long-term rental, unless there’s a lot of cushion on that cashflow, I would be somewhat hesitant going into an HOA with the traditional rental because to your point, Ash, things could shift. There could be a special assessment and that 200 bucks a month that you’re making in cashflow that could potentially get eaten up if the HOA decides to change something in their bylaws or, “Hey, we need to repave all the roads inside and the HOA is going to pay for it.” So to your point, just a little less control over the actual property.
The HOA can dictate how you use it. Like you mentioned, the paint colors, it’s actually true inside of our HOA where we live. There’s a very specific pallet of colors that we can ever paint our home, which may or may not be a good thing. I’m happy that I don’t have to live next to a yellow banana colored house, but maybe as a long-term rental tenant or landlord, you want to paint a different color. So yeah, HOAs, I think, have their time and place. If you buy how we buy where it’s purpose built for investment use, I think in that scenario it makes a little bit more sense. But if there’s just a bunch of people who own their primary residences, I think it gets a little trickier going the HOA route.

Ashley:
Okay. So you know now how to avoid bad neighborhoods and outrageous HOA fees, but there are other problem properties that many rookies overlook. And one that actually has Tony a bit traumatized. We’ll share what they are right after a quick word from our show sponsors. Okay. Welcome back. Let’s look at some of the other properties we would never buy. So the next one is a property with only one exit strategy. So this means you can only maybe sell the property. You can only refinance the property and you can’t even sell it. So let’s go over a couple example of these. But first, these are properties that don’t work unless your original plan for them or your original strategy works. So for example, if Tony purchased a short-term rental and it was a very specific to a short-term rental, it wasn’t set up like a normal house would be so that you could sell it as a single family home or even just a vacation home for a family.
But also maybe he locked himself into a prepayment penalty on his loan where if he does decide to exit that financing, then he now pays this 5% fee because he needs to sell the property in one year or refinance with another bank to bring that down. So properties that only work with one specific strategy where you don’t have any room to pivot. And that could be pivot to a different strategy. Pivot into refinancing into a different loan. There’s many different ways that you can actually piece that together to change your exit strategy or to kind of strategize how to move forward if the deal isn’t working out with what you originally planned.

Tony:
I think the only caveat I’d add to that, Ash, is that I think it actually is okay if you buy a property that only has one exit strategy, but you should know that going in. I think where investors get in trouble is where they just assume, okay, cool. If I can’t do this, then I’m just going to do this other thing. But they never actually did the requisite homework to validate that the other strategies actually made sense. And it’s like I think about the first short-term rental that I ever purchased. There was no way that it would work as a traditional long-term rental. In fact, most of my short-term rentals would not work as traditional long-term rentals because we’ve purchased in markets where the demand is short-term and there is very little demand for long-term in those markets and the rents are significantly lower. But at least we knew that going into it and it was the level of risk that we were willing to accept.
I think where folks get into trouble is they’re like, “Oh, I’ll buy this as a midterm rental. And if it doesn’t work, then I’ll just long-term rent it.” And it’s like, “Well, maybe there isn’t a market at the price point you paid for where it actually makes sense to do that. Or hey, I’m just going to buy this as a flip. And if this flip doesn’t work, then I’m going to long-term rent it.” Well, same thing. Maybe the deal did make sense as a flip, but after you try and refinance and get everything out, maybe you’re losing 500 bucks a month as a long-term rental. So I think it’s okay if you have one exit strategy, but just make sure that you go into it knowing what the actual numbers are both for your primary strategy and the secondary strategy. Because sometimes you get really good returns if there’s only one exit strategy.

Ashley:
And I think too, you have to really plan ahead for what some of those pivots could be such as market conditions change. All of a sudden people no longer want to stay in Airbnbs in that area because there’s all these hotels going up or something like that. And maybe there’s new regulations that your property doesn’t qualify anymore as a short-term rental. If it becomes that just the real estate market in general is really awful and you can’t sell your property or maybe you get trapped. You had planned to refinance this property and now you can’t refinance because interest rates has skyrocketed and you’re stuck holding onto the property. So if you are going to go after one strategy and your property will only work with one strategy, make sure that you have a lot of reserves and maybe you do have another financing option to float this.
As much as I would not want you to have to do this, do you have enough equity in the property where you could tap into a line of credit if you needed additional funds to float this property over a bad market period or something like that? So I say with caution, as Tony said, make sure you know that going into it, that it’s one strategy, but also you have some kind of other safety net besides pivoting to another exit strategy. All

Tony:
Right. And number four, the one that brings back a little PTSD for me is buying properties in a flood zone. So let’s just first define what this means. So when you buy a property, I don’t even know who actually maps out them. I don’t know if it’s the insurance agencies or if it’s FEMA. I can’t remember who maps out these flood zones. Do you know, Ash, if it’s insurance companies or FEMA? I feel like it might be a FEMA map that dictates –

Ashley:
I think it is FEMA or some other organization, but I don’t think it would be the insurance companies because they’d probably just say everyone was to make the Bay flood insurance.

Tony:
But basically some agency gets together and says, hey, here’s where we think the kind of highest risks of floods are. And it could be from rivers, lakes, storm surges, whatever. But basically if your property lands in one of these flood zones and there’s different tiers, I’ve looked at the map and there’s very low risk, medium risk, high risk, severe risk. So it kind of measures it that way. And typically if you land in one of these higher risk zones, your insurance premiums can change pretty dramatically. And that happened to me. We bought a property. It’s the second rental I ever owned. And the year that we bought it, there was no issue with the flood insurance. And for whatever reason, I think it was in the second year that we owned it, the area that it was in, the designation changed. Even though there was no flood, nothing happened.
For whatever reason, whoever these map makers were thought that, “Hey, this Parkway street in Shreveport, we think this actually might be a higher flood risk area now.” And gosh, it’s been a few years now guys, so I can’t remember the exact numbers, but our insurance, I want to say tripled maybe, maybe even 4X. It was an insane increase on our insurance costs. And it was strictly tied to the fact that it was now in a flood zone. And we shopped it around as many different carriers as we could find. And one of the only options ended up being, I think it was a state-funded flood option or flood insurance policy. But once we added that cost on, this is a unit that was cash on 200 bucks a month, that was gone once we had that increased insurance premium. So we ended up selling that property to someone who bought it as a primary.
So it’s tricky because when we bought it, that wasn’t the case. It wasn’t in a high risk flood zone and it actually changed. So now for me, it’s just like, man, if I’m buying anywhere even near that could be potentially rezoned, I want everything to just be super low risk for flood. Or we need to really, really underwrite very conservatively to say, if these things do 3X or 4X over the course of us owning this, does a deal still make sense? But that was a big lesson for me and an educational experience and what a flood zone is and how they can change from one year to the next.

Ashley:
Yeah. I’ve had two properties in flood zones. One was a rental that I mentioned before, $37,000 that I had bought it for in a D-class neighborhood. And the yearly insurance was like $1,700 a year on it just for the flood insurance. And we ended up paying on that property because it was such a low dollar amount for our property. So we didn’t have to carry the flood insurance anymore. And now on our lake house, we have flood insurance. So that’s something I’m trying to rapidly pay off to get rid of that flood insurance because our house already is up. There’s no basement on it. It’s like an old cottage that’s on cement blocks to lift it up. So if anything, our house will flood underneath it and will float away before it actually comes into the

Tony:
House. And I think that’s the interesting thing too, Ash, is that sometimes these areas that are high risk and floods, they haven’t seen floods in like a hundred years. But for whatever reason, the mapping says they’re still at risk. So just something to be aware of guys as you’re shopping for insurance. All right, we’ve still got two more rental property types to avoid, so don’t go anywhere. We’ll share them with you right after this quick break. All right guys, welcome back. Now for the last two types of rentals, number five is properties in very, very rural areas. So what these properties are, these are properties in low population towns, very low population density, very low property density. We’re talking maybe a couple hundred people or less. I’ve actually never purchased in anything rural. We were just talking earlier in the episode that where I live is a very kind of suburban area.
All of my properties are in suburban or vacation type settings. Nothing that’s quite rural. So I haven’t really had this experience a ton. But Ash, obviously you’ve purchased in kind of smaller communities like this. So I guess I’m just curious, what do you see as some of the reasons that Maybe someone shouldn’t buy in an exceptionally rural area.

Ashley:
Yeah. I mean, I though I had a gold mine scooping up these $20,000 duplexes. And as I share with you, I got really, really, really lucky with these. So I was buying $20,000 duplexes. They were properties that hadn’t had any kind of major renovation. So it was basically like as things broke, they were just repaired where the plumbing, the electric, nothing had had a full gut renovation to them. So there was always a maintenance coming up. And as I shared earlier, it wasn’t cost effective for me to go in and do a $100,000 renovation on this $20,000 property when I wouldn’t even be able to increase the rents past what they were because they were already commanding the highest rent. They were already some of the nicest units in the area, but they weren’t up to my standards as some of my other properties that I have now that are fully renovated.
So there was a lot of turnover. There was the no margins for rehabs, and then there was no equity. And I say that as in not from mortgage pay down or buying in cash. I say that as appreciation. These properties do not see any appreciation. If you looked at what this person that sold these $20,000 duplexes to me for what he paid for them, it was significantly less than what he paid for them or around the same. The way that I got really lucky was because of a huge market correction where I bought these between the time period of 2017 to about 2018. Then I offloaded them in 2021. And I sold some of them for three times what I paid, like $60,000 on a $20,000 duplex. That was great. Those were home run deals for me, but that can only happen if the market times out perfectly, which you should not be buying these properties to account for that.
So a lot of the same things as I touched on earlier as to the D-class neighborhoods, that’s what applied to my properties in the rural areas where they weren’t always as nice. Now, I do have other rural neighborhoods where there are better properties, better school districts, less crime, but I am seeing the same thing on small multifamily. On single family, I’ve seen a lot of appreciation since I started investing in 2013 on single family homes in these rural markets. On the small multifamily though, I am barely seeing any appreciation. So I’m actually getting ready to sell a duplex that I bought in 2014 for, I think it was $60,000. Nice little duplex. And I’m getting ready to list it. We’re going to list it maybe between 130 and 150. And I’m actually really curious to see what it ends up selling for. I had an investor reach out to me to sell his portfolio not too long ago in the same rural market.
And he was telling me what he would want for them. I ran comparables and really nothing has sold in that market on these small multifamily for what he was asking. It’s actually more comparable to what he bought them for 10 to 15 years ago. So my biggest thing about the small rural areas is make sure you are looking at the appreciation, but also rent. Rent has increased a lot over the years in these small rural areas. So I think really looking at demand for rentals in those areas, because sometimes you’ll hit a town that doesn’t have a lot available and people want to live there, but they have to go to maybe more of a suburb that’s more populated because there’s just more rentals. And when I first started managing properties in that same market, that’s what it was like. You still can’t like. Or let me rephrase that.
There’s still waiting lists in these markets from when I started investing and was a property manager over 10 years ago for apartments in this market. At one point there was maybe, I think it was probably 2013 when I just started, and we were doing your first month free to get people in, but that did not last for a long time. And since then, there’s been a huge demand for rentals. So there are some pros and cons, but I would say looking at the appreciation and then the turnover where people moving into that, just like you would do market research on any area, make sure you’re doing that in the world and make sure you’re very, very specific to that area and not just like in general, you’re looking at the city of Buffalo, but actually it’s a neighborhood that’s actually 20 minutes south of it.
So just do your due diligence.

Tony:
And again, I haven’t purchased in a necessarily rural area, but our hotel is in a smaller population center. And I think the biggest challenge we’ve had, Ash, is just finding consistent labor, cleaners, maintenance folks, tradespeople, things of that sort to service the property. There’s like one pool guy in town that services all the pools. Just finding consistent cleaners and folks to turn the rooms has been a challenge. So I think that’s the other maybe side of the coin is that if you do go into a rural or maybe more sparsely populated area, not only is the tenant pool maybe smaller, but also the people that you need to support that property, that could also be a challenge as well. So just something to consider. All right guys, last property type number six is properties that don’t cash flow. So we’re talking about properties that have negative cashflow where you’re actively putting money into the deal every single month.
Now the caveat here is that for some people, especially if you’re like a high income earning W-2 person and you’re like, “Hey, this is purely a cash flow.” I’m sorry, this is. Let me say that again. Now the caveat here guys is that say that you’re a high income earning W-2 employee and your entire play here is an appreciation play. Maybe you’re buying something in Southern California where I’m at, or some other high cost of living, high appreciation type market. And you’re like, “I make enough money where I’m fine floating two, 300 bucks a month on this property because even if I add in that additional 200 bucks per month, if I look up 10 years from now, the appreciation and the loan pay down and the potential rent growth is worth it for me, then by all means, go ahead and do that.” But if you’re not in that boat, if you’re not in that boat of super high income, strictly an appreciation play, you have no business buying a negative cash flowing asset on day one.
A big part of the reason that folks buy is because they want the cash flow. And even appreciation by itself is not always a given. Think about the person who bought in 2007 trying to make an appreciation play. They got clobbered in the next several years there while the market recovered. Now, if they were able to hold on long enough, they probably made out okay now almost 20 years later. But even appreciation is not a given, especially if we look at like a shorter term window. So cashflow is king. Getting money in the door I think is one of the most important things that Ricky investors should be focused on.

Ashley:
This also makes it difficult to scale. If you are putting money into a deal that you could actually be saving for your next property, or just like you’re continuously throwing money at something, why would it be appetizing to even purchase another deal when you’re still having to financially support another property? Especially if you’re just getting started. You may not have analyzed your deal property. You may have not accounted for repairs and maintenance that may come up. So even though you say like, “I can afford to put $300 out of my salary into this property every month. I’m going to pay that part of the mortgage. I can rent it out. I’ll get appreciation, mortgage pay down, all of that.” But what if a big repair comes up? What if all of a sudden the HVAC breaks and now all of a sudden you have a $10,000 repair?
Now you have that $10,000 repair plus the $300 you’re putting into that property every single month. So I think it makes it very difficult to plan and scale for the next deal and to be able to afford the next deal when you are financially supporting your first one. Now, the last thing I’ll add is kind of the vacancy on that. So yeah, you account for putting in $300, but what if you have to evict someone and they’re not paying rent until they’re evicted? What if you have somebody leave and you can’t get it rented and now you’re covering full mortgage payments and you had only expected to cover $300? So I think this is something that you need to really, really look at as far as what is the worst case scenario of how much money I’m putting into this property. But I think just starting out to give yourself some cushion because you might actually have to put money into the property anyways, is to actually make sure it’s a cash flowing property to give yourself that cushion.
Okay. So we wrapped up some of the red flag items or properties that we see as real estate investors so that you can also look out for these red flags. And just because a property is flood insurance doesn’t mean it’s a bad deal or don’t do it. These are just things you should prepare yourself and put more time and effort into the due diligence and verify your data and look at the worst case scenario. If you need help analyzing a deal, you can go over to biggerpockets.com and look at the BiggerPockets calculators. These are tools that help you analyze a deal and run the numbers. We also have a little question box located next to each item that you’re going to fill in the blank for the number. And it tells you exactly what this number is, where to find it or how to estimate it.
Super useful tool for rookie investors to practice analyzing deals. I’m Ashley. He’s Tony, and we’ll see you guys on the next episode of Real Estate Rookie.