Whether you’re into stocks, funds, notes, crypto, gold, or Real Estate, you’ve probably read a disclaimer that looks something like this:
“Previous Performance Does Not Dictate Future Results”
Obviously, people selling these investments use this disclaimer as an eloquent way of reminding you that “Hey, this investment is currently performing great, HOWEVER….we cant guarantee it always will.”
But couldn’t it just as easily mean this: “Just because this investment is currently losing money, doesn’t mean it always will.” I’d like to answer that with an emphatic YES! In fact, the way we interpret that phrase could subconsciously influence the way we search for investment opportunities.
Typical Approach to Real Estate Investing
Is it your instinct to look for and accumulate investments that are already profitable and hope they’ll perform the same for you? If so, you’re not alone.
Most investors I know and those that I’ve assisted with the purchase of investment properties look for property with little or no work required, a tenant with a great payment history who wants to stay, and a solid lease already in place. Simply put, they want to take over the reins and collect easy rent. What’s wrong with that?
The Problem with Buying Good Performing Real Estate Investments
From my perspective there is one problem with that strategy and that one problem has the potential to snowball into lots of other problems…resulting in one giant mass of issues, none of which were accounted for when purchasing.
The problem with buying good performing investments is that you end up paying full price.
Good performing property does not sell at a discount. For the most part, investors who sell their good performing property are doing so because they need the money to get into a bigger, better deal. So when these types of properties DO hit the market, there is enough competition from all the investors who are programmed to accumulate good performing investments, which results in a sale at full market value.
Why does that matter? Because when buying investments at full market value, you take ownership with ZERO Equity and it’s in Equity where we achieve wealth.
And now for the snowball effect:
Paying full market value increases the assessed value. Higher assessed value means higher taxes. Higher taxes means you either raise the rent or reduce your cashflow. Speaking of lower cashflow – your cost to insure this high cost property also increases. Lower cashflow means the investment is already declining, but raising rent could cause a vacancy. Vacancy means spending money on updates and results in negative cashflow. And negative cashflow with high expenses and zero equity was not part of the plan – this great investment is now losing money and it’s just an awful place to be for a full time real estate investor….but hey, you were warned!
See how quickly the one little problem of paying full price can snowball into a devastating avalanche?
To avoid the above, I’ve found much success in building wealth by accumulating poor performing properties and it’s what I want to share with you today.
Building Wealth With Poor Performers
When you’re ready to purchase your next (or first) investment property, instead of paying market value or above for good performers, I encourage you to go out of your way to find the poor performers and YOU be the factor that turns the property around. Let me clarify: I’m NOT talking about the cheap and plentiful bad real estate investments you can find all over Buffalo, NY. I’m referring to the cheap, often overlooked, mismanaged, poor performers. How do you know the difference?
Bad Buy Vs. Poor Performing
If neighboring homes are abandoned, it’s a bad buy. Or, if the property is only being discounted by the cost of needed repairs, it might be a bad buy.
If, however, nearby homes are selling for much more, it could be a poor performer. If nearby homes are occupied and demonstrate a reasonable level of pride, it might be a current poor performer. If seemingly good tenants complain of poor maintenance, it may be a current poor performer.
In general, if you can assign the reason for poor performance directly to the owner, you might have found a property that’s overflowing with equity (i.e. wealth).
- Just because this seller cannot enforce his lease doesn’t mean YOU can’t
- Just because this landlord has negative cash flow doesn’t mean YOU can’t create a huge profit
- Just because this owner has problems with housing court doesn’t mean YOU will
- Just because this seller cannot evict her tenant doesn’t mean YOUR attorney can’t
As long as you can directly tie poor performance to the owner, assume YOU will be the investor that makes the correction.
Do Properties Like This Exist?
I assure you, poor performing properties with huge equity are out there. In fact, I’ve never purchased anything but these huge equity, poor performers. I’m going to show you 3 properties where I did not let the current owner’s performance dictate results I thought achievable.
Property 1 – My very first rental acquisition –
I purchased from a retiring landlord who had a strict, NO PETS policy and during the showing, a cute kitten followed us around. The hardwood floors were saturated with cat urine and his tenants never paid. I could absolutely assign this property’s poor performance to its owner. He was not willing to enforce his lease and had no interest in going through the process of doing repairs and finding new tenants.
All of my research and education told me that this house was worth at least twice, maybe 3x his asking price. I also believed that it would rent easily for 600-700 per month if I fenced in the backyard (backed up to train tracks) .
I bought the property for $18,000 and stipulated it had to be vacant at closing. After a light rehab my equity was about $35-40,000 and it rented for 675/month for the next 5 years with only 2 months of vacancy. Because of the sale price, I was reassessed lower which cut the taxes in half. After 5 years, I offered seller financing and sold to a great couple. The mortgage note is a high performing, practically zero maintenance, seasoned asset.
Property 2 – My first 3-Unit –
This property was bought and sold by investors multiple times over 3 years. I bought this off the MLS from out of town Investors who had paid $84,000 and owned it less than a year. They couldn’t get good contractors and faced multiple squatters who used bathrooms while there was no running water. The main water pipe burst and water was all over the basement. Once again, I could absolutely assign this property’s poor performance to its owners.
My low offer was accepted. I was able to get one apartment up and running within a short period of time which covered all expenses and provided a small profit. A second unit was completed shortly thereafter and once the 3rd unit is rented, it will cashflow about $1400/month. Instant equity at purchase was about $40,000 and over the past 2 years, the equity has nearly tripled
Property 3 –My 1st Auction Purchase –
Local owners inherited this property. They attempted renting it out but couldn’t get good tenants and didn’t keep up with maintenance. A tree branch fell through the roof and they left it vacant for years. Raccoons moved in. It was finally foreclosed after years of unpaid taxes.
My research pointed to a value between $65-75,000. I’m pretty sure the tree through the roof scared a lot of investors because I won the house for $11,000 at a packed auction. Upon receiving the deed, I had to wait for a redemption period to expire so I secured the property and waited. Once the redemption period expired, the property got it’s rehab and ultimately rented for $885/month with an equity of about $45,000. Today, the equity in this property is over $80,000.
Comparing the Results
Where would I be if I had paid market value for those 3 properties? Let’s assume these properties were in great condition with great tenants and let’s also assume I had the funds to pay full price. Back then, market value would have been about $220,000 for properties that are worth a total of 310,000 today creating a tidy $90,000 of equity. But because they were poor performers, I was able to spend less than half that amount (INCLUDING the cost for rehab) to make twice as much. With $93,000, I created $217,000 of equity. Not to mention receiving over $100,000 in cash flow from these properties over 5 years.
These are real life examples of what is possible when investing in Buffalo, NY. Equity creates wealth and it can catapult you into bigger deals. It is why I recommend that full-time investors search for mismanaged properties with built-in equity vs. paying full market value and hoping for the status quo.
So the next time you see a bad performing property, a house no one wants, a landlord losing the battle, a nightmare tenant during a showing, a frustrated FSBO. Etc., I want you find the root of the problem. If the problem is the owner, think of my properties and remember:
Past Performance Does Not Dictate Future Results!
To your investing,
Investors Edge of Buffalo
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