In short
The Real Estate Rookie Podcast episode warns against six types of rental properties they “would never buy,” even if deals look profitable on paper. It focuses on neighborhood risk, constrained business models, insurance/regulatory shocks, and deals that fail worst-case cash-flow tests.
Guests
Ashley Kerr and Tony J. Robinson (hosts). No other guests appear in the transcript, though they reference other investors (e.g., Steve Rosenberg; Avery and Luke Carl).
Key claims (with examples)
- D-class/dangerous neighborhoods: declining population, crime/drug activity, tenant job loss/evictions, limited appreciation, high insurance, and “pigs with lipstick.” Example: $37,000 duplex; $700/unit rent; needed only an $800 fridge, but later faced turnover and crime.
- Wrong neighbor: even in decent areas, nearby apartment complexes can cause theft/illegal activity.
- HOA properties: rules can change via majority vote; dues/special assessments can erase cash flow. Example: COVID HOA blocked short-term rentals/guests.
- One-exit-strategy properties: short-term rentals/financing with penalties can trap owners if the plan fails.
- Flood zones: FEMA-style map changes can 3–4x insurance; example: insurance tripled/quadrupled after rezoning.
- Very rural small multifamily: little/no appreciation; limited rehab margins; harder to find labor/maintenance. Example: $20,000 duplexes later sold for ~$60,000 only during a market correction.
- Negative cash-flow rentals: only acceptable if high-income can float; otherwise repairs/vacancy/evictions can force ongoing monthly injections.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOIdentifying Risky Rental Properties
0:56 to 1:40
Discussion on the types of rental properties that can be risky for investors, especially rookies.
“And with that, let's get into the first type of property.”
Understanding Neighborhood Classes
1:40 to 3:26
Explanation of neighborhood classifications (A, B, C, D) and their implications for investment.
“So like maybe we can walk through real quick kind of the differences as there's no set rule, but like A class, B class, C class and D class neighborhood.”
The Pitfalls of D-Class Neighborhoods
3:26 to 5:00
In-depth discussion on why investing in D-class neighborhoods can be detrimental, sharing personal experiences.
“And fortunately, I have a neighborhood that was a D-class neighborhood that I have some experience and stories to tell.”
Lessons from D-Class Investments
5:00 to 8:06
Further exploration of challenges faced in D-class neighborhoods, including crime and tenant turnover.
“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.”
Strategies for Managing Difficult Properties
8:11 to 10:51
Advice on strategies for dealing with problematic properties, including working with Section 8 tenants.
“how well can you, I guess, execute in that type of neighborhood.”
Neighborhood Considerations and Due Diligence
10:51 to 12:29
Discussion on the importance of understanding not just the neighborhood but also neighboring properties.
“And I feel like we've heard that, Ash, a few times from other investors that Section 8 tenants have kind of this stigma just like in the general population.”
Personal Experiences with Neighbors
12:29 to 14:00
Sharing personal anecdotes about neighbor interactions and how they can impact real estate investments.
“I mean, like, is it go and meet the neighbors while you're doing your due diligence, you think?”
Neighborhood Considerations for Rental Properties
14:00 to 21:17
Learn about the risks and considerations of purchasing properties in neighborhoods with HOAs and small lot sizes.
“So obviously that's going to be a big problem.”
Neighborhood Considerations for Rental Properties
21:22 to 22:28
Learn about the risks and considerations of purchasing properties in neighborhoods with HOAs and small lot sizes.
“I wouldn't just go looking for someone who checks a few boxes on a resume.”
Avoiding Problematic Properties
23:28 to 28:00
Discussion on the types of properties to avoid and the risks associated with them, such as having only one exit strategy and being in flood zones.
“Let's look at some of the other properties we would never buy.”
Show all 17 chapters
Understanding Flood Zones and Insurance Impact
28:00 to 32:21
Learn how flood zones can affect property insurance costs and investment decisions.
“So when you buy a property, I don't even know who actually maps out them.”
Understanding Flood Zones and Insurance Impact
33:40 to 34:23
Learn how flood zones can affect property insurance costs and investment decisions.
“More investors are thinking about where Bitcoin fits into a broader portfolio, not as a short-term trade, but as long-term exposure to an asset that behaves differently from traditional markets.”
Risks of Investing in Rural Properties
34:23 to 36:04
Explore the challenges and considerations of investing in rural real estate markets.
“A few weeks ago, I took a trip down to Pensacola, Florida with my dad and my kids.”
Risks of Investing in Rural Properties
36:08 to 42:09
Explore the challenges and considerations of investing in rural real estate markets.
“Number five is properties in very, very rural areas.”
Challenges of Investing in Rural Properties
42:09 to 46:54
Learn about the difficulties of finding reliable labor in rural areas and the importance of cash flow in real estate investments.
“And again, I haven't purchased in a necessarily like rural area, but our hotel is in a smaller population center.”
Red Flags to Watch in Real Estate Investments
46:55 to 47:18
Identify potential red flags in property investments and the significance of due diligence.
“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.”
Red Flags to Watch in Real Estate Investments
47:35 to 47:57
Identify potential red flags in property investments and the significance of due diligence.
“Athletic Brewing Company crafts award-winning non-alcoholic beers for those who want to be part of every round.”
Transcript
Automatic transcript. May contain errors.0:00Ashley Kehr: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. 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.
0:33Ashley Kehr: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.
0:53Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kerr. 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. You know, generally just speaking, just, you know. Not a lot of job growth, just declining population in general, people trying to move out of that area.
1:32Generally speaking, just not the best place to invest into.
1:35Ashley Kehr:Tony, before we go forward, like 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 like maybe we can walk through real quick kind of the differences as there's no set rule, but like A class, B class, C class and D class neighborhood. It's a great point. And again, to your point, there's no like set definition. Everyone might define these differently, but I'll give you my take and I'm curious what yours is. And an A-class neighborhood would be like, think about a neighborhood where you can command like top of market rents.
2:09It's like where the, you know, at least where I'm at, like in California, there's like luxury apartments, right? With all of these really cool amenities and you've got the pool and the gym and the spa and, you know, it's like a thousand units in one place, right? Like these super luxury places, especially if you're in like downtown LA that, you know, it gets super, super expensive, right? So A class is just like 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, right?
2:42It'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.
3:00Ashley Kehr: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. 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.
3:40Ashley Kehr:Because there's actually a lot of potential for cash flow, 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.
4:32Ashley Kehr: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.
5:14Ashley Kehr: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, like eventually sometimes those areas spread out and people can't afford to live in the B class anymore.
6:00Ashley Kehr:So they start to take the D class, turn into a C class to a B class and kind of see that. But where I'm investing in some of these rural areas, which we'll touch on later, there is no, 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.
6:39Ashley Kehr: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 slapped 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?
7:17Ashley Kehr:When was the plumbing? And a lot of those properties hadn't seen any of those repairs in a long time. So there's a lot that makes it tempting, but to your point now, sure, things that people need to be aware of, right? 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 had bought up, he had like, I don't know, like 30 properties he had owned in like 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. He ends up finding an investor that buys up like, I think all of these properties in this one neighborhood.
7:48and he's like, thank you, Jesus, for taking this headache off of my shoulders. And he like bumps into the guy who bought them like 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. Like, I'm so glad, like, thank you so much for selling those to me. And Steve was like, what the heck, right? 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 and different types of neighborhood classes.
8:20But 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, Ash, I guess, you know, 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 forward?
8:49Ashley Kehr:Go, in my experience, I would say go after Section 8 tenants because I've had several Section 8 tenants, I guess more than three, but more than several. But they are, right now, at least in Buffalo in this market, there is like a three-year waiting list for Section 8 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.
9:38Ashley Kehr:And to get, you know, 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 8 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 8 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.
10:16Ashley Kehr:And it can take some time for all of this to happen too. So not that you can deny someone for having Section 8, but I would say I do know there are landlords out there that avoid taking on Section 8 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 people who are extended and things like that. But that is what I would do is go after Section 8 tenants and hopefully you'll reduce the turnover at least and get payment for rents, reduce that non-payment. And I feel like we've heard that, Ash, a few times from other investors that Section 8 tenants have kind of this stigma just like in the general population.
10:59Generally, people think, you know, sometimes negative things about Section 8 tenants. But from the investors that we've actually spoken with who invests in Section 8, a lot of times they're like, yeah, those are like some of my best rentals. Right. So it is a it is a good perspective. Last thing I'll add before we move on from the, you know, the neighborhood piece is that sometimes you might be in the right neighborhood, but you might have the wrong neighbor. And like, I'll give you an example. The second rental that I ever bought, it was like in a solid like C plus ish class neighborhood, you know, solid working class families, you know, decent, like all the houses were very well kept, like, you know, blue collar neighborhood, everything was solid.
11:36But 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 like, as we were going through our renovations, they like sold our HVAC unit, some other things like that, right? So sometimes just being maybe next to the wrong neighbor can, can, even if you're in a decent neighborhood, can be a bad sign for you. And our friends, Avery and Luke Carl, they share with me a story where they bought this apartment complex, really nice apartment complex, but the unit or the apartment complex directly across street from them.
12:10Some lower 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 couldn't be a headache for you as well.
12:29Ashley Kehr:Oh, what's the best way to do that? I mean, like, is it go and meet the neighbors while you're doing your due diligence, you think? Or, you know, it is so hard. It is hard. But it's like if you drive around like different times of day, like if you go in the morning, try and go again in the afternoon, try and go again in the evening, just to kind of see like, hey, how is it there? And it's funny because we're actually doing this right now. So like 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.
12:57Like you never know. Like we, all of our neighbors are super cool that where we live right now. So like no issues. And me and Sarah were just thinking like, well, man, what if the neighbors like the neighbors from, you know, like nightmare neighbors? So because it's in our neighborhood, we've just been able to kind of walk through, you know, like 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 kind of getting around and seeing what's happening might be an easy way to check it out.
13:19Ashley Kehr:Yeah, I'm moving also into a new primary. And it is like 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 at our house, like right into the living room windows. And like, I just think it's like so funny, but like, thankfully is a super cool guy.
13:59Ashley Kehr:And, you know, we so far have, have good neighbors, except for like three houses down my sister lives. So obviously that's going to be a big problem. We can already hear kids screaming in their pool, you know. It's so funny, Ash, because like you always talk about like 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, you know. So it's crazy to me that you have, you know, a whole wooded area to the right of you and all of like just everywhere in our subdivision. Everyone's like so close to each other.
14:35Ashley Kehr:Yeah, this one is actually less than an acre. It's also the smallest acreage I've ever lived on before. But yeah, and to me, it's like super small, but that's just normal, you know, being out in the country like there is just. And we'll talk about rural investing here in a bit, but just always my thought when we talk about lot sizes. 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? Yeah. Primaries in an HOA. And then a few of our short-term rentals have also been in HOAs.
15:14But it's slightly different because they were like short-term rental built HOAs. Like all of the homes inside of that HOA were built to be short-term rentals. So I've never purchased like in a residential HOA and then tried to turn it into an investment property.
15:29Ashley Kehr:Yeah. I've never purchased in an HOA either. I've just heard horror stories. I guess like the closest thing to an HOA is my lake house. It's on a private road with like nine other houses. So it's a private road. There's no HOA, but we do share like we had new pavement put down. So we shared the cost of that. We share the cost of snow plowing. So there is like some kind of, you know, community, I guess their organization, but no like bylaws or anything like that. So I think it's very different, but I have heard horror stories and it has put like a stigma in my mind and given me this limited mindset that I would never invest in an HOA because of certain things.
16:16Ashley Kehr: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 like the only one near us. And 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.
17:09Ashley Kehr: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, like 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.
17:55Ashley Kehr:We're not allowing guests because of COVID. And that, like, 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. And, 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? Yeah. For our properties, they're all pretty reasonable.
18:34Our primary, I want to say it's like 200 bucks a month. It's like 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 like 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 like 700 bucks a month. Or sometimes there are these like special assessments and it's like a thousand bucks a month for the HOA dues, which is just like insane to me. It's like there's, especially if you're doing just like 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.
19:17Like 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, I would, unless there was a lot of cushion on that cash flow, I would be somewhat hesitant going into an HOA with a traditional rental. Because like to your point, Ash, things could shift. There could be a special assessment. And that$200 a month that you're making in cash flow, 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, right?
19:51So to your point, just a little less control over the actual property. And then there are, the HOA can dictate how you use it. Like you mentioned, like the paint colors. It's actually true inside of our HOA where we live. There's a very specific palette of colors that we can ever paint our home, which may or may not be a good thing, right? 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.
20:26But if there's just a bunch of people who own their primary residences, I think it gets a little trickier going the HOA route.
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23:27Ashley Kehr: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 property and you can't even sell it. So let's go over a couple examples 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 very specific to a short-term rental, like 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.
24:15Ashley Kehr:But also maybe he locked himself into, you know, a prepayment penalty on his loan where if he does decide to exit that financing, then he now pays this, you know, 5 % fee because he needs to sell the property in one year or refinance with another bank to bring that down. But so properties that only work with one specific strategy where you don't have any room to pivot. And that could be pivot into 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.
25:00I 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 thing, 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.
25:38And 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 mid-term rental. And if it doesn't work, then I'll just long-term rent it. Right? 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.
26:06Maybe the deal did make sense as a flip. But after you try and refinance and get everything out, maybe you're losing$500 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.
26:26Ashley Kehr: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 on to 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.
27:20Ashley Kehr: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, And as Tony said, like, 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 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 like what this means.
28:01So 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.
28:16Ashley Kehr: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 them pay flood insurance. But basically some agency gets together and says, hey, here's where we think the kind of highest risks of floods are. and you know it could be from rivers lakes storm surges whatever but basically if your property lands in one of these flood zones and there's like different tiers like I've looked at the map and there's like very low risk medium risk high risk severe risk right so like 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.
29:02And 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, like 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 like an insane increase on our insurance costs.
29:38And 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 like a state-funded flood option or flood insurance policy. But once we added that cost on, this is a unit that was cashed on like 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, right? Like it wasn't in a high risk flood zone and it actually changed.
30:14So now for me, it's just like, man, if I'm buying anywhere even near that could be potentially rezoned, I want everything just be like super low risk for flood. Or we need to really, really underwrite very conservatively to say like, if these things do 3X or 4X over the course of us owning this, does the deal still make sense? But that was a big lesson for me and like an educational experience and what a flood zone is and how they can change from one year to the next.
30:38Ashley Kehr: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 off 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 like our house already is like up. There's no basement on it. It's like, you know, an old cottage that's, you know, on cement blocks lifted up.
31:23Ashley Kehr:So like if anything, our house will like flood underneath it and will float away before it actually comes into the house. And I think that's the interesting thing too, Ash, is that sometimes like these areas that are high risk in floods, they haven't seen floods in like 100 years, you know. 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. Most investors only think about insurance when something goes wrong.
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32:58Ashley Kehr:And when a customer is ready to buy, Shopify checkout keeps it simple. Their info is saved. They checked out in one click, and you get to hear that little cha-ching before you've even finished your coffee. If you're on the fence, here's my advice. Stop waiting for the perfect moment. It doesn't exist. So just start. All you need is the idea. Shopify handles the rest. If you're serious about hearing your first cha-ching, start your free trial at shopify.com slash rookie today. You heard that right. Start your free trial today at shopify.com slash rookie. That's shopify.com slash rookie. Quick note before we dive back in.
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35:58They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. 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. You know, we're talking like maybe a couple hundred people or less. I've actually never purchased in anything rural. You know, we're just talking earlier in the episode that, you know, where I live is like a very kind of suburban area.
36:36All of my properties are in like 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, like, what do you see as some of the reasons that maybe someone shouldn't buy in an exceptionally rural area? Yeah.
36:58Ashley Kehr:I mean, I thought I hit 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 maintenance coming up. And as I shared earlier, it wasn't cost effective for me to go in and do$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.
37:48Ashley Kehr:They were already some of the nicest units in the area, but they just, 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 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.
38:45Ashley Kehr: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.
39:32Ashley Kehr: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 ,000 and$150 ,000. 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.
40:17Ashley Kehr: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, you know, maybe more of a suburb that's more populated because there's just more rentals.
41:05Ashley Kehr:And when I first started managing properties in that same market, that's what it was like. You could, you still can't, you still can't like, um, 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 like 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, you know, 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.
41:57Ashley Kehr: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. And again, I haven't purchased in a necessarily like rural area, but our hotel is in a smaller population center. And that 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, you know, that like services all the pools. just finding consistent cleaners and folks to turn the rooms has been a challenge.
42:44So 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 something to consider. All right, guys, last property type, number six, is properties that don't cash flow, right? So we're talking about properties that have negative cash flow, where you're like 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, you know, W-2 person, and you're like, hey, this is purely a cash flow.
43:29I'm sorry. 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, right? 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.
44:04But 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, right? Like 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, right? Like 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.
44:46So cash flow is king. Get money in the door, I think, is one of the most important things at Rikki Investorship you're focused on. This also makes it difficult to scale.
44:55Ashley Kehr: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 like 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 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 ten $10 ,000 repair.
45:42Ashley Kehr: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?
46:22So 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 the property.
46:32Ashley Kehr: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, you know, 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.
47:09Ashley Kehr: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 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.
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From the publisher
The best real estate investing advice you'll ever hear is to just get started. But that advice comes with a catch: some rental properties can set you back many years. Today, we're sharing six red flags to watch out for, so you can know if you’re actually buying a good real estate deal—not a trap!
Welcome back to the Real Estate Rookie podcast! Some deals can be incredibly convincing when you run the numbers. They might look profitable. They may have less competition, a lower purchase price, and a story that makes you believe you've found a diamond in the rough. But beneath the surface, these properties come with all kinds of issues and risks. We're breaking down six types of properties we'd steer clear of—from D-class properties that see very little appreciation to properties trapped inside HOA neighborhoods.
If you're not careful, these properties can drain your time, eat through your cash reserves, and create unnecessary stress. We're telling you exactly what to watch for, and why, especially if you're a rookie investor!
In This Episode We Cover
The six “worst” types of rental properties we’d never invest in
Why D-class neighborhoods may look tempting but give you little appreciation
The HOA red flags that can quietly erode your rental cash flow
Why buying a property with only one exit strategy is (very) risky
Why investing in flood zones can cause your insurance costs to spiral
The dangers of buying a rental property with negative cash flow
And So Much More!
Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/rookie-759.
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