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REAL ESTATE Investing in Townhomes

Connor

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Alright, Fastlane Forum. Quick introduction here, and then we'll get to the fun part. First read TMF back in 2012, and I realized that I wouldn't achieve my goals by slowly climbing up the corporate ladder. Action faked for a while, and then I fell into the corporate trap for a few years, as I started to get comfortable with the regular raises, nice dinners I could expense, and the relief of the weekends. Finally realized in late 2016 that I was not going where I wanted to at all, and I decided that it was better to start slowly than continue to not start and wait for some inspiration to strike. I decided to start investing in real estate with my brother, as there will always be a need for places for people to live, and we have some past experience in it.

We bought our first townhouse in March of last year, and we've recently acquired another two of them. We are working to find value-ad properties that we can improve with cosmetic upgrades and then lease out- focusing on cash flow with any appreciation/equity as a happy byproduct. While townhomes come with HOAs, we've found some well-run developments with relatively low monthly costs, and it reduces volatility by not having to worry about landscaping, unkempt yards next door, etc. We also try to put in materials that will last longer than the lower-end materials used by other townhomes for rent in those developments, which allows us to not only rent our properties for more, but it will also help reduce turn costs, since they should last longer.

I'll keep track of my progress on this thread, and I'm happy to answer any questions anyone might have. Hopefully can provide some value here after years of (mostly) lurking. Thanks!
 

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Dunkafelics

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Welcome to the forum @Connor, thanks for the great introduction and an inside look into some great strategies for investing into townhouse investment properties.

Can you give any more insight into the amount of money that you had to put down for these townhouses and what your long-term vision is?

I ask as my family is looking to buy a property this year and am interested to hear more about your mindset in comparison.
 
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Connor

Connor

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Can you give any more insight into the amount of money that you had to put down for these townhouses and what your long-term vision is?

.
Thanks @Dunkafelics - hopefully people will find this to be of value, whether investing in RE or not. I'll answer your question with a question- what are you looking to accomplish with the property? And what is your risk tolerance? If you're investing for pure cash on cash return, it may make sense to lever up a bit more, thought that cranks up the risk. But if you want to make sure you have a good bit of equity and may not want to take on the risk, makes sense to put down a good bit of down payment.

Right now, we're using private money, so we've got a lot more flexibility than a standard bank would give you. We put more than 20% down on our first two properties, but we then took out the whole purchase price on the 3rd, as we knew the LTV would be great once we rehab it and cash flow well. The goal for us would be to keep iterating this and scale considerably. Once we get to high single-digits or low double-digits, we plan on getting a portfolio loan to pay back the private money and then do it again.

Hope that makes sense- if not, let me know!
 
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Connor

Connor

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Happy 4th of July everyone! Thought I would give you guys a quick update- 3rd townhome is about to be listed for rent, after taking too long to fix it. While it's easy to make excuses, weeks matter especially when you start to scale. Fortunately, it looks like we should be able to rent it for a bit more than initially expected, so that will help. Always good to learn lessons like this earlier than later, but you really have to fight for every dollar if you want to be a serious investor.

We also executed our first turn (renters moved out, fixed up the unit, and re-rented) on our first townhouse. Due to some issues with our property manager, we ended up withholding less of the security deposit than we should have and spent more on the rehab than initially expected. While a difference of $600 might not seem like much, again, that matters when you want to scale to hundreds of units one day. Probably will end up costing us a bit more on our turns due to increasing labor costs, but we did iron things out with property management, so the net cost shouldn't be as high next time.

Acquisitions right now are hard to come by, as most people can attest to. Units in the desirable areas are being bid up by owner occupants to levels that don't make them attractive, so we're having to expand what we would consider. Will be interesting to see at what level interest rates have to get to in order to cool off the owner-occupants' bidding.
 
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Connor

Connor

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Well, first fun issue for us, naturally while I was on vacation. Pipe burst in our newest rental and caused part of the ceiling to fall in. Fortunately, the damage is probably less than $2k worth, but that will take care of most of our profit on this unit for the first lease term.

Trying to look at it as a positive that we are discovering these sorts of issues when we're still small so we don't encounter as many major issues further down the road. But it still sucks to have happen, especially when we just got the tenant in the place.

Finding deals continues to be a challenge- looked at another off-market deal right before they got on the MLS, but they wanted way too much for the area, especially since 1 of the units was rented out at a very low rate. Hoping things cool off as we enter the fall, but we'll keep hunting regardless.
 
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Connor

Connor

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Just closed on #4 today. We were able to get an off-market deal through a wholesaler we have connected with, and we paid a little more than I would have liked, given the condition. However, the tenant has been there for a while and plans to stay, which should help us on turn costs. This is also our first unit in the nicer county, which has a lot better schools, employment, etc. Also lower property taxes, which should help make up for it over the long haul. This wholesaler is new to us, but he seems eager to get after it and is willing to target townhomes. The MLS is just way too overpriced right now for what we are targeting, so trying to put more effort into finding off-market deals.

Now that we have 4 units, we are looking at portfolio loans. With interest rates creeping up, I'm not sure we'll be able to get a loan close to what we're getting with the private money. I was hoping to get to 7 or 8 units before refinancing, but, due to some circumstances I won't get into here, we're not able to access as much private money as we previously thought from that source, so we're trying to pay back what we've taken out and then repeat. Hopefully more to come!
 

WJK

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Congrats! Be sure and take the time & effort to stabilize what you have. Build a strong investment base with your income stream and an adequate emergency fund for rainy days. I'm big on paying debts down and building up equities. In my investing experience, everything goes wrong at the same moment, in the worst way. I assume those days will come, and I'm prepared for them. That preparation work makes those moments just another bump in the road, rather than a total disaster.
I've been slammed for being too conservative, but I'm still here in the real estate business 42+ years later. When real estate was really hot, others made fun of me for being picky about deals and too careful about using O.P.M. (other people's money). When the market fell on its face, I watched a lot of them go broke. Their portfolio assets failed like a line of dominos, falling one after another.
 
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Connor

Connor

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In my investing experience, everything goes wrong at the same moment, in the worst way. I assume those days will come, and I'm prepared for them.
Thanks @WJK! My background is in insurance, so I'm always thinking of the worst case scenario lol. Both my brother and I work full time jobs, so that helps us reduce the risk. Plus the refi will probably be on a 20 year am, so while that will reduce cash flow, it will help expedite our paying down debt. I want to be excited about the next recession, with all the properties going on sale, not wiped out by it!

Do you have a particular percentage that you allocate for emergencies? We've got maintenance and vacancy allowances built in, but I'm curious as to your approach.
 

WJK

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Thanks @WJK! My background is in insurance, so I'm always thinking of the worst case scenario lol. Both my brother and I work full time jobs, so that helps us reduce the risk. Plus the refi will probably be on a 20 year am, so while that will reduce cash flow, it will help expedite our paying down debt. I want to be excited about the next recession, with all the properties going on sale, not wiped out by it!

Do you have a particular percentage that you allocate for emergencies? We've got maintenance and vacancy allowances built in, but I'm curious as to your approach.
I don't have a percentage. Instead, I use a "sinking fund" system. It comes from years and years as a commercial real estate appraiser. All "short-lived" item has an expected usable life. By creating a saving system to replace those parts, you are always ready for issues that most people would consider to be emergencies. For me, these are expected events.
We do have true emergencies here in my mobile home park. Three years ago we had a 7.1 earthquake in January, the depth of our Alaskan winter. It damaged my small community water system. We had water running down my private streets from underground breaks. And we couldn't dig up the breaks and fix them. The ground was hard frozen, and the system is 10 feet deep. We had major pipe breaks in my Laundromat. We had to take up part of the floor since we couldn't get into the crawl space. We had several feet of snow on the ground. We had to close down for a few days. There was water everywhere. I own 40 mobile home rentals. Several were jarred from their supports. The doors and windows wouldn't close properly and it was -20 degrees.

It took a while and a lot of out-of-pocket money to get back to normal. No, none of the damages were covered by insurance.

But, we were lucky to not have more damage. 3 houses up the highway from us blew up and burned to the ground. They had natural gas leaks.
 
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Connor

Connor

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3 houses up the highway from us blew up and burned to the ground. They had natural gas leaks.
Yikes! That is one of my biggest fears, especially if I ever get into sizable multifamily. Thanks for the cautionary tale- will use that as a good reminder to never shirk on my allotment for repairs/things happening.
 

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WJK

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Yikes! That is one of my biggest fears, especially if I ever get into sizable multifamily. Thanks for the cautionary tale- will use that as a good reminder to never shirk on my allotment for repairs/things happening.
Also set up funds for seasonal/yearly expenses -- like insurance and property taxes. In my case it's winter utility bills. Most repairs and expenses can be easily forecasted. They are an extension of expected component life, vacancy rates, and scheduled maintenance events.

Also, inspect, inspect, inspect. I change the furnace filteres and checked the smoke/CO detetectors myself on a regular schedule. It's my stated reason for doing a regular inspection. I take my clip board and my flash light. Everyone knows that I am coming to inspect every squre inch. And they sign a paper saying that I was there and what I checked. I note what I find and schedule repairs right above their signature.

I've had people stand up in court when I'm evicting them and say that I don't do maintenance. Those signed inspection sheets, coupled with my maintenance records, put the brakes on their argument. I win the case, and they end up sitting out the curb burping and chirping.

This is a business. I make sure that I treat it as such.
 

Merging Left

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I'm looking at getting into condo/townhome investments as a way to get my feet wet with real estate. The prices are considerably lower, and the cash flow appears to be about the same, there' just less equity upside to the deals I'm looking at.

What price range are you looking at, and how much cash flow is ideal for each unit? On a similar vein, what kind of allowances are you giving yourself for capex/maintenance and vacancies?

I'm targeting condos ranging $20-30k, which will hopefully put out $200/mo in cash flow. Allocating 3% to maintenance and 10% to vacancy. I'm curious if your numbers are significantly different than mine.

Thanks!
 
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Connor

Connor

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I've had people stand up in court when I'm evicting them and say that I don't do maintenance. Those signed inspection sheets, coupled with my maintenance records, put the brakes on their argument. I win the case, and they end up sitting out the curb burping and chirping.
Yep we also segregate our funds for insurance and taxes from the rest of our operating expenses. And your comments about evictions is exactly why we don't PM them ourselves haha. I definitely don't want to get involved in eviction proceedings if I can help it!

@Merging Left Sounds like you're targeting the low end (potentially Section 8 or otherwise) with your going after townhomes that are only $20-30k. With that being the case, I think you're likely way under-reserving for maintenance with 3%, unless you're doing a full gut on everything. Also not sure if you're budgeting separately for turn costs or not.

You can certainly make arguments for going lower end, as the margins do look better on the front end. However, since we want to eventually scale this big time, we're aiming for more of the upper-middle end of things, where we get the biggest tenant pool with the least amount of risk. Our margins probably would look worse than yours on the front end, but we're going to have less volatility of tenants (and thus cash flow) over time. You're right about appreciation- when things are doing well in the economy, everyone wants to have their own yard and space. But I'm ok with that- cash flow is what I'm after, and you're not going to see (typically) a 50-60% swing to the downside in a recession in the space we are targeting.
 

WJK

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I'm looking at getting into condo/townhome investments as a way to get my feet wet with real estate. The prices are considerably lower, and the cash flow appears to be about the same, there' just less equity upside to the deals I'm looking at.

What price range are you looking at, and how much cash flow is ideal for each unit? On a similar vein, what kind of allowances are you giving yourself for capex/maintenance and vacancies?

I'm targeting condos ranging $20-30k, which will hopefully put out $200/mo in cash flow. Allocating 3% to maintenance and 10% to vacancy. I'm curious if your numbers are significantly different than mine.

Thanks!
My vacancy rate and maintenance rates are about the reverse of yours. And my net cash flow is higher. I've been rehabbing for almost 20 years now, one after another. I'm just about at the end of that program. I'm on my last two rehabs, and then I won't be adding to my rental inventory. It's enough to manage and I want to spend more time on my trust deed business. Becasue it's mobile homes, I can't expect the appreciation. I'm just happy with the income stream. My next goal is be debt free, and that's coming along. The rehabs were soaking up the cash flow. I sure be happy when they are all done.
Keep going. I like condos too. The normal danger in those is the association dues and being subject to the boards management decisions. Condos make a lot more investment sense than many SFRs and small units. The price of multi-families has also gone bananas in some markets. The good part about your cheap condos is the accessible resale market. The problem with the low end of that market is getting too many low income people into the building -- which can bring crime and a high vacancy factor.
 
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Connor

Connor

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Well, I guess I should have expected this, since I see these types of claims all the time in my insurance job. After having a water damage situation from a water heater in one of our units, we just had a backup in the sewer line in another. Shouldn't be too costly to fix, but, when you only have 4 units, your profit margin gets quickly eroded.

While our water heater situation was a miss on the initial rehab, not sure how we could have seen this coming. But the contractor we hired mentioned that sewer backup issues are very common in the area of that unit (and one of our others), so we are going to add it to our checklist of things when doing a rehab. Trying to look at this as a good learning experience, as I would rather have it happen at the 4 unit level with one unit than have it happen at 25 units when we have 100.

Just glad we contract out the property management so I didn't have to go down and see the mess from that situation!
 

WJK

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Well, I guess I should have expected this, since I see these types of claims all the time in my insurance job. After having a water damage situation from a water heater in one of our units, we just had a backup in the sewer line in another. Shouldn't be too costly to fix, but, when you only have 4 units, your profit margin gets quickly eroded.

While our water heater situation was a miss on the initial rehab, not sure how we could have seen this coming. But the contractor we hired mentioned that sewer backup issues are very common in the area of that unit (and one of our others), so we are going to add it to our checklist of things when doing a rehab. Trying to look at this as a good learning experience, as I would rather have it happen at the 4 unit level with one unit than have it happen at 25 units when we have 100.

Just glad we contract out the property management so I didn't have to go down and see the mess from that situation!
You must have pepper with your salt. It's all the cost of doing business and part of the learning curve. Yes, profits can be fleeting. BUT, you've learned a couple of common problems. Create a protocol for handling these common problems. It's a knee-jerk response, and you can give written instructions to you property managers. And try to figure out a prevention program for the future. Keep going. You're doing good.

TIP -- When I replace water heaters, I LOVE on-demand units. They are worth the extra dollars. We do have to service them, but they are a wonderful invention. You don't have all that hot water sitting there, waiting to flood your rental unit.
 
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Connor

Connor

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Hey everyone- hope people are having a good start to 2019. Sorry for not posting in a while, as my day job has been in its busy season. We just got under contract yesterday on unit #5- actually backs up diagonally to unit #3, so we feel good about our ARV and what kind of rent we can get.

Speaking of unit #3, actually had an unfortunate thing happen there- the tenant died! It was natural causes, so no crazy story there, and it actually took her kids about a month to get in touch with us, so we found out well after it happened. I heard somewhere that you aren't a serious real estate investor until you've had someone die, been sued, and had a fire, so I'm hoping I'm now 1/3rd of the way there haha.

Targeting getting to 10 units by the end of the year, so this definitely would be a good start if this deal closes. We're also looking at some other ways to improve margins, including revisiting our insurance program structure and seeing if we can knock down the property tax assessments on a few of our units, as we've acquired them for well under their assessed value.
 
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Connor

Connor

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Quick update- closed on unit #5 on Friday, and we're about to do a re-finance on our first 3 units to get that money back to our private money lenders. Hoping to pick up another 3-4 units here shortly with that money.

Obviously, with interest rates creeping up, it makes it a little tougher to make the numbers work, but I'm starting to see units sit on the market a bit longer. So I'm hopeful pricing will drop a bit to make up for that.
 
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Hope everyone here is doing well. Closed on unit #6 in March- in a decent location but the square footage is a little smaller, so it will be interesting to see what kind of rent level we can achieve. With the two recent acquisitions and a move out, we were at 50% vacancy for a bit, which was really hurting our cash flow, but we've been able to rent out two of our units fairly quickly for higher rents than I thought we would get. So our cash flow should stabilize here shortly.

We were trying to pick up another 4 units from a guy who was having some debt issues, but he ended up selling off the two better properties to someone on their own, so we don't have much going on with the acquisition front right now. Not the worst thing, given the issues I mentioned above. Our insurance costs have also increased significantly percentage wise, after all the hurricanes last year, but the alternatives were still nowhere near what we are paying with USAA. Once we get to 10 units, I think we'll be able to consider more commercial options.

Have some interest from friends to invest with us, but I think we're going to hold off for now until we get bigger. Maybe on the debt side, but, unfortunately, the administrative costs of multiple investors would be too much of our income with so few units to make sense.
 

WJK

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Hope everyone here is doing well. Closed on unit #6 in March- in a decent location but the square footage is a little smaller, so it will be interesting to see what kind of rent level we can achieve. With the two recent acquisitions and a move out, we were at 50% vacancy for a bit, which was really hurting our cash flow, but we've been able to rent out two of our units fairly quickly for higher rents than I thought we would get. So our cash flow should stabilize here shortly.

We were trying to pick up another 4 units from a guy who was having some debt issues, but he ended up selling off the two better properties to someone on their own, so we don't have much going on with the acquisition front right now. Not the worst thing, given the issues I mentioned above. Our insurance costs have also increased significantly percentage wise, after all the hurricanes last year, but the alternatives were still nowhere near what we are paying with USAA. Once we get to 10 units, I think we'll be able to consider more commercial options.

Have some interest from friends to invest with us, but I think we're going to hold off for now until we get bigger. Maybe on the debt side, but, unfortunately, the administrative costs of multiple investors would be too much of our income with so few units to make sense.
I stay away from investing with other investors. I find that it is like wearing a straight jacket. Part of being successful is being nimble and ready for the next deal. I'd rather go slower in my investment plan than have to drag a bunch of people along with me.

Let me give my reasons:
1. Everyone has an opinion -- especially when they have money on the line. BUT, its like listening to parenting advice, on raising your kids, from people who don't have kids. They are the investors -- not the front line guy. They aren't out there fighting the fight every day. But, they sure know how it should be done. Good for them. Let them go try it without me to buffer them from the stones and sticks of reality. Life feels totally different when you're at the front of the pack.
2. Things go wrong. You can't have salt without pepper. When you are right, you are a hero. Then the next minute, you are the worst project manager in the world. I can deal with normal problems as they come. I don't want to deal with people who are sitting in their armchairs judging me while they are trying to call the shots.
3. I make split-moment decisions all day long. Many are intuitive and based on 43 years of experience. It many times takes me longer to explain the "why" than to fix the problem. Most people are afraid to make a bad decision, so they just sit on it. Doing nothing is making a decision, and it usually doesn't go well. I just want the people around me to get out of my way and let me do my thing without a bunch of lip.
4. Why should I share my expertise and the profits with someone who hasn't paid the price of putting in the years, blood, sweat and tears? I'd rather just do myself, by myself. When I split the profits, I have do that many more deals to have the same money in my pocket. I'm the tortoise -- not the hare.

I guess I'm just old and cranky. I just can't be bothered with other people's baggage. I hold MY control of my deals close to my heart rather than sharing. Their money isn't worth my peace of mind.
 

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Connor

Connor

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@WJK I definitely agree on a lot of those points. That's part of why I'm thinking debt instead of equity- no voting rights haha. Still, we're a bit early on to pull the trigger, but I want to make sure I explore all options that are out there before dismissing them.

Definitely don't want to be seduced by the adrenaline rush of raising capital, but we eventually want to get to several hundred units, so we'll probably have to raise some sort of funds at some point.
 

WJK

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@WJK I definitely agree on a lot of those points. That's part of why I'm thinking debt instead of equity- no voting rights haha. Still, we're a bit early on to pull the trigger, but I want to make sure I explore all options that are out there before dismissing them.

Definitely don't want to be seduced by the adrenaline rush of raising capital, but we eventually want to get to several hundred units, so we'll probably have to raise some sort of funds at some point.
Over the years, I have seen some take high-interest hard money loans rather than taking on partners. It was easier and cheaper for them in the long run. Personally, I try to run on cash as often as possible. Very low LTVs (loan to value ratios) is gold in our business. Another source is owner-will-carry type of deals. And I personally have taken out commercial loans -- although they are usually blanket incumbrances with a very short loan life. Another short-lived option is a credit line with a major bank.
After the 1990s recession, I'm very head shy of any commercial loans or credit lines -- which includes all loans on residential income and other commercial properties. I saw a bunch of them being called and my friends had to go BK. They lost everything in a heartbeat. That business cycle blues has stuck with me for all these years. It's about to happen again here in my area. No one in the apartment building business here believes me. Oh well.
 

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@WJK I definitely agree on a lot of those points. That's part of why I'm thinking debt instead of equity- no voting rights haha. Still, we're a bit early on to pull the trigger, but I want to make sure I explore all options that are out there before dismissing them.

Definitely don't want to be seduced by the adrenaline rush of raising capital, but we eventually want to get to several hundred units, so we'll probably have to raise some sort of funds at some point.
Just out of curiosity, what market are you in?
 

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I was in Southern California for 30 years. I have retired in Alaska.
I was actually curious where @Connor was. :)

I knew you were in Alaska and have been in real estate a long time. @Connor only has Southeastern US in his profile. Just curious how close he is to me.
 
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Connor

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I was actually curious where @Connor was. :)

I knew you were in Alaska and have been in real estate a long time. @Connor only has Southeastern US in his profile. Just curious how close he is to me.
I'm sneaky like that haha. I'm actually in the process of moving, so it works well. Living in the Carolinas, but I invest mostly in GA. So not too far off.

I have a friend who invests in Nashville, and he owns a few duplexes. Though he manages them himself, so his margins probably look better, but he also spends a lot more time on it then I do.
 

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I'm sneaky like that haha. I'm actually in the process of moving, so it works well. Living in the Carolinas, but I invest mostly in GA. So not too far off.

I have a friend who invests in Nashville, and he owns a few duplexes. Though he manages them himself, so his margins probably look better, but he also spends a lot more time on it then I do.
Yeah, I've lived all over the Southeast. I know just about every little nook and cranny. You name a small town in the Southeast and there's a good chance I've been there or heard of it.

Nashville is probably the most expensive real estate market in the SouthEast. It's good from a sales standpoint but not from an investing standpoint unless you are bringing big development dollars to the table. There is great opportunity for investment in other growing areas that are still relatively cheap such as Chattanooga, Knoxville, Lexington, Louisville, Montgomery, etc. Many Nashville investors in the last year have turned their attention toward Chattanooga.
 
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Connor

Connor

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There is great opportunity for investment in other growing areas that are still relatively cheap such as Chattanooga, Knoxville, Lexington, Louisville, Montgomery, etc. Many Nashville investors in the last year have turned their attention toward Chattanooga.
Yeah I agree - got to look at the secondary cities. Greenville-Spartanburg is too hot, so I've thought about Columbia or Florence, but we've got a ways to go before we start spreading to other cities.
 

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