BiggerPockets

It's seem like a lot of people that I've talked to aren't really interested in purchasing rentals in rough neighborhoods. My question is why not?

I was just looking at property that was in good condition listed for $35k with a 71k ARV. It's will probably need about 5k to get in in rental shape. If I was to purchase this I would take out a hard money loan for 35k and put my own money 5k in it for repairs. After 12moths I would do a cash out refinance. The total rents for this property is $1200 a month, this is a duplex.

What do you guys think?

My education in war zones is that theres a difference between "rough" neighbohoods that many investors happily deal in, and neighborhoods that are filled with gangs and drugs, where investors will never actually see a profit because of vandalism, tenant, gang and drug problems etc.

One of the main problems I see in this topic is when a neighborhood looks fine to invest in, only to find that there are many vacant properties due to people not wanting to live there, and is much less safe to invest in than had originally thought.
The two best pieces of advice I have recieved are check out past police reports on the property, and check properties around the potential investment to see if they are actually occupied or not. Minneapolis, like many cities, has many different neighborhoods, S. Minneapolis differentiates block by block. One Lawyer that I know who happily invests in areas that other investors wouldn't usually touch had the problem of gangs expanding in the neighborhood. The vandalism was moving towards his block and eventually hitting his properites...he sold right away and was able to recoup his money through taxes...

Not to sound doom and gloom however....Many people invest in "rough" neighborhoods and life becomes much easier when you can figure between 5 and 8 percent of NOI for a solid property management company Who has experience managing in these areas, and very knowledgeable on current tenant landlord laws.

Some downsides I've experienced investing in warzones:

- Quality of tenant - Finding great tenant to rent a warzone property is not easy. Evictions and problem tenants are typically the norm. Dealing with police, angry neighbors, drug issues are common occurrences.

- Theft - I've had to cage my A/C units on properties in tough neighborhoods because I've had more than one stolen before. I've also had vacant units broken into and copper stolen from inside the walls.

- Safety - If you don't feel safe walking around somewhere at night, do you think it is a good place to own property? If you don't feel safe, what about your tenants?

- Make ready / repairs - Often times you're going to deal with tenants who do not take good care of the property. This will lead to higher costs during make-ready periods.

I've learned through personal experience that I'm not interested in the headaches that come with these kinds of properties. They can certainly bring good returns if everything goes right, but that rarely happens.

This is the biggest deterrent of the "semi war zones" for me. Being forced to take people with horrible credit or who own certain dog breeds that I don't want is a big turn off for me.

Yeah Mike I usually refer to those as "transitional neighborhoods". The areas that transition into better neighborhoods but aren't actually the better neighborhoods.

If you haven't yet, you probably need to actually landlord in one of these areas to truly understand. Once you've been a landlord in a nice neighborhood vs. a rough one you'll never go back. Read Josh' post above. It speaks volumues.

Thanks Josh, I guess you have a point. I'll stay away from these properties and look for better areas.

Josh - the only reason why I was thinking about investing in theses area would be because the initial investment. Let's say if I didn't use hard money and I would like to put 20% down for a 35k property, that's a big difference from 20% on a 150k property.

Can you find something in a better area that needs work for maybe 40K -50K? Those could potentially still cash flow.

With risk comes reward. However, sometimes the risk is too high and the reward is too low.

I cut my rental teeth working for my cousins with their Class D properties. Nearly all (all but two) were in war zones. One was in a semi-warzone / "transitional neighborhood."

Sure, the numbers look good. But I like to call the return a "theoretical return." Here are examples of what I encountered:

1. Stolen garage door. Yup, the tenants stole and scrapped out the overhead garage door.

2. Broken windows and doors. Okay, I see you yawning. But we replaced at least 1/4 of the windows in EVERY dwelling unit yearly due to ill-behaved children, rocks, bricks, gun fire, etc. That adds up. Doors get kicked in, locks get ruined, and entire door frames get splintered. FYI, screen doors are nothing but a waste and WILL get trashed in VERY short order.

3. Bad applicants. I'm not just talking bad credit. I'm talking horrible credit with multiple evictions, no to grossly unstable work history, long and violent rap sheets, sex offenders, drug abusers/manufacturers/dealers.....

4. Stupidity. So one of our tenant's stoves dies. They call at 5:00 pm when the maintenance guy is eating supper. The next call at 6:15 pm was from the fire department. The tenant dragged a Weber charcoal grill into the LIVING ROOM and decided to cook "out"... Indoors. Unfortunately, the were stoned out of their mind, passed out, and the building caught fire.

5. Property used for illegal purposes. I'm not talking about someone quietly fixing neighborhood cars for cash in the garage in violation of zoning ordinances. I'm talking discovering that tear gas from SWAT gas grenades is IMPOSSIBLE to clean out of drywall.

6. Disgusting. Ever come upon the remains of a dog that was cooked in your tub by a bunch of squatters? Or people using the shower as a toilet?

7. Trashed places. How many dumpsters will you need when you need to do a complete clean-out including ALL flooring, carpeting, cabinets, counter tops, and trash? You might be surprised...

8. Copper and aluminum siding theft. As Josh said and as our garage door proves, scrap's worth money. We eventually cut out the copper ourselves and replaced it with that new poly-whatever hosing. It's not as nice but now the tenants don't take a stolen sawzall to our plumbing. (We show EVERY new tenant how we "upgraded the plumbing" by getting rid of that "old cruddy copper" and replacing it with "better plastic." You should see the long faces when they realize what we did!) Aluminum siding is another one. We're switching over to vinyl whenever our aluminum gets stolen.

9. Do-gooders. Bless their hearts, they have NO clue as to what REALLY goes on. Worse yet, they try to "fix" things based upon a worldview that doesn't exist. While their hearts are in the right place, they took leave of their brains in their first sociology class. These types generally find ways to be troublesome and are best avoided. (Ever have a tenant advocate show up in eviction court to argue that it was okay for the tenant not to pay rent because they were trying to give their children "a good Christmas?" Or have them file a complaint with building services that your building doesn't have siding - when the TENANT was later found to be the one stealing and scrapping out your aluminum siding?)

10. Safety. This covers everything from very aggressive panhandlers to prostitution to drug dealing to robbery to poor race relations to rape to murder. You're going to have to collect rent, and your tenants may not qualify for a checking account. Expect to be paid in cash and weird money orders from the corner bodega. And expect that people will know when you leave with lots of rent money in your pockets. And you'll be collecting after dark because that's when the tenants are awake (or less commonly, around because they're home from work). I advise taking a firearms training course that covers your state's laws and toting a quality RELIABLE firearm.

FYI, I now refuse to handle anything worse than a Class B property.

You've got the possibility to earn a solid amount of money with Class D properties. But man, you're going to earn EVERY CENT.

Mike

@Mike - Thanks for sharing your experiences. I could write a short book with mine . . .