> But why would any investor do that?
The short answer is that they have good intentions but can’t follow through.
There’s an unsettling pattern I’ve personally seen at least twice over the past few decades: For some reason an area becomes “hot”. The first ones in are the seasoned investors. They buy for less than what they can resell for. Maybe they buy a dozen properties and reno-flip them. Prices go up because now more seasoned investors are coming in paying a bit more because they know there’s still profit to be made. Now two other demographics come in: less savvy investors and “small” investors (putting their life savings on the plan of getting a return or at least some ongoing rental income). Both of these are paying even more than round 2 because there are a lot of these types of investors and they’re racing to get a piece. In the 2008 era people were even (successfully!) flipping empty lots attached to contracts to start building in the next 5 years.
Let’s get down the specifics with an example: In “phase 3”, a smaller investor buys a 4-plex sight-unseen. They live in the Caribbean and the property is in a small town. They bought because the area was “hot” with rents of 1200 for a 1 bedroom.
What they don’t find out until later is that:
- The rents are way inflated due to a depressive housing crunch
- There is no major source of income in the area to sustain these rents
- The building was unliveable. Major issues such as large cracks in the foundation, mold, and rotted floors.
- The town had not taken action to condemn it simply because the old owner had wiggled through the system. (They went in to action within weeks of it changing hands.)
And here’s an unexpected killer: There are no contractors to hire to do the work required.
They didn’t plan for the funds needed to do those repairs even if they didn’t have to overspend to pull a company off another contract.
End result: They jumped for a property and lost their money. It thankfully went up on a tax sale a few years later and is being taken over by a local community group.