7 Out Of State Real Estate Investor Pitfalls
As a local property manager here in the midwest, and more specifically the Chicagoland area, we have been part of (or witnessed) thousands of investors buying in our local Chicago market while residing out of state. Investors from around the United States, and the world, find the midwest attractive because one can still purchase an investment property and exceed the 1% rule.
These 7 pitfalls can be avoided or negotiated before closing escrow, however, most times investors do not realize these are actual issues until it is too late.
- Section 8 Tenants — Many properties are sold with tenants already residing in the property, which is attractive to investors. Many of these tenants are part of the HUD Section 8 program. This is a federally administered program, managed by local housing authorities. One would think these local housing authorities would be run like a franchise, with each operating the same way. Unfortunately, that is far from the truth. In the Chicagoland metro area, there are more than seven different housing authorities, and they all have their own way of doing business. This is a process a buyer needs to learn to avoid such issues as tenants moving out, buying a property where section 8 is no longer paying a portion, or making sure there is a smooth transition of payments from the seller to the buyer for monthly rents. I have included a link below to a far more detailed blog regarding section 8 here in Chicago.
- City Violations — This information can be obtained via a local municipality website or by obtaining a report under the Freedom of Information Act (FOIA). When purchasing an investment property you, as the new owner, will inherit any property violations which can cost a buyer in excess of $20,000. I have seen some extreme cases where buyers have spent more than $50,000 to correct these violations. The truth is that many times a seller may not even realize their property has issues as they may not have received the notice due to mailing address issues, or they bought the property with the issues and were never forced to be compliant at any point during their ownership.
- Using An Attorney — The majority of items on this list can be avoided by hiring an attorney to represent you as the buyer. Illinois is a two-attorney state which means most transactions have one attorney representing the seller and another representing the buyer. Many times when a buyer does not have representation, they have no idea of the exposure they are opening themselves too. I have a full blog on the benefits of hiring an attorney and the risks that can be avoided and will link it at the bottom of this page.
- Buy cosmetic rehabs versus updated guts — An investor needs to realize that it doesn’t matter how nice the pictures of the inside look if the mechanicals and infrastructure of the property are not in good condition. Replacing cabinets in a kitchen can be done for under $1,500, but having to replace a sewer line to the street or old galvanized plumbing can cost an owner over $10,000.
- Not getting an inspection — Most inspections cost less than $500 per unit and can save you tens of thousands of dollars, or even stop you from buying a bad property. When we see people not obtain an inspection, we know they are putting themselves at huge risk for many issues in the upcoming years. A few years back we talked to an investor that waived her right to the inspection in lieu of a $1200 credit per unit off the purchase price. The owner did this on a purchase of a 22-unit portfolio. Since closing, the new owner has spent on average over $15,000 per unit on large maintenance items and huge capital improvement issues. Needless to say, cash flow has been exhausted for the next 10 years based on these expenses. Their purchase was from a turnkey provider!
- Sewer Line Inspection — One step further, especially in vacant homes, is to complete a camera scope of the sewer line between the house and the city sewer and any property catch basin. For an extra few hundred dollars, this can go a long way in preventing $7,000-$20,000 potential future costs.
- Flat Roof Inspections — Here in Chicago, a large part of our housing stock has flat roofs. Flat roofs can put financial strain on owners, especially with the inclement weather here in the midwest. Substandard flat roofs can lead to issues with the parapet, chimneys, skylights, and copings in addition to just having leaks that cause internal damage very quickly. For a couple hundred dollars, we encourage people to have a qualified roofer advise you on the condition of the roof, or any work needed on any of the roof areas noted above. Without visually inspecting the roof, sellers & buyers are not able to see the condition of the roof and are often misinformed about the actual condition. A seller may be under the impression that their roof is newer, or in good condition, because that is what their roofer told them, so it is wise to verify the condition for yourself.
All of these issues are alarming and I feel awful for investors when they fall victim to these types of issues because they are not educated or don’t have the proper local guidance. We can help provide some more detail on how to avoid these issues, along with share our resources, so you can build your trusted team.
You may also like to take a look at some of these other great resources.
Managing Hundreds of Tenants & Getting Uncle Sam To Pay the Rent With Mark Ainley — https://www.gcrealtyinc.com/blog/managing-hundreds-of-tenants--getting-uncle-sam-to-pay-the-rent-with-mark-ainley
Why an Out of State Investor Should Hire an Attorney — https://www.gcrealtyinc.com/blog/why-an-out-of-state-investor-should-hire-an-attorney
Chicago Housing Authority(CHA) for section 8 tenants — https://www.gcrealtyinc.com/blog/chicago-housing-authority-cha-for-section-8-tenants
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Originally published at https://www.gcrealtyinc.com.