Should I Buy a Rental Property with Great Cash Flow in a Bad Location?

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Today I’d like to get your opinion.

Is price everything? Also, how much of a role does location play for a real estate investor?

Let me explain.

This week I was presented with an interesting deal that I am considering.

The property’s numbers are great – $97,000 for six units, average rent at $475 per month, which following the 50% rule leaves $1400 for a mortgage payment – plenty to cover the loan payment and provide substantial cashflow. The property is in need of some cosmetic renovations (paint, landscaping) to make it look less “scary,” but I’m not worried about getting them done. Additionally, the county assesses the property at more than double what is being asked.

However, the property had one problem: B street.

If you ask anyone in my area where the “slums” are – 99% of people will say the same answer: “B Street”. B Street is a small neighborhood where homes are generally the cheapest and primarily used as rentals. The six-plex, while not located at the worst place in this neighborhood, is still located in one of the most well known “bad” parts of my county, on a busy street near some warehouses.

At this point I don’t know what I’ll do about the property. I have never bought in that neighborhood – but the numbers make perfect sense and it fits my standards from a math perspective perfectly.

But is that enough?

Location, Location, Location, Price?

I’ve often heard investors say, “never buy a property in a location you wouldn’t yourself live in.”

I don’t agree.

I think there are a lot of places that I wouldn’t want to live but would be fine for most. I would never again want to move into an apartment (I don’t think they’d appreciate my cats…) but it doesn’t mean I would not buy one. I also wouldn’t want to live in certain areas of my county – such as B Street – but I don’t think that should be the primary reason for avoiding a purchase.

And then there is the issue of safety.

Do I feel safe in this neighborhood? Would I feel safe talking to tenants, showing units, or performing maintenance?

In fact, I probably would. While I wouldn’t leave my truck tool box unlocked and parked overnight, I don’t feel like I’m going to get mugged by simply being there.

And Then There Is The Issue of Tenants…

However, the major reason I am hesitant of purchasing in this location is not because of the location itself. I’m concerned about the quality of tenants I would be dealing with. With the risk of offending the politically correct in our society, (well, here I go) I believe the lower income tenants often come with significant more hassle than that of higher income.

Now, I’m not saying lower income people are worse. I’m simply saying that they bring with them certain problems not often seen in higher income properties.

Let me clarify what I mean. A good friend of mine owns a small rental property near this one and he often hires me to answer phones and show units when he is out of town. Because his units are cheap ($395), the location, and the unit mix (usually studios or one-bedroom) attract a certain type of tenant. The last time I helped him rent one of his units I took over fifty phone calls in thirty-six hours. With each call I explained the property and qualification standards over the phone (as to not waste anyone’s time).

Out of those fifty phone calls about twenty said they wanted to see the inside. I generally schedule as many showings within the same time-frame to eliminate hassles and hedge against no-shows.

Of the twenty who made appointments to see the property, only ten showed up.

Of those ten, only two qualified and one was interested.

Despite explaining the qualifications over the phone (including minimum income requirements), the other eight still showed up. The other ten were simply no-shows. At least half of those who showed up made less than $400 per month, and all of that income was entirely from government assistance.

I honestly don’t understand what they were hoping for. They don’t even make enough to pay the rent; some even had the nerve to ask if they could make payments on the first month’s rent and security deposit.

This is highly typical for his property, and probably a good indicator of the future of the six-plex currently under consideration.

Again, I’m not saying this doesn’t happen to higher income properties. In my experience, however, the wasted time and headache in dealing with tenants around “B Street” are vastly higher than other areas.

So What Would You Do?

This blog post was a bit different than the normal ones, but I think it’s an important issue for every real estate investor and one that we all will face time and time again. So I want to open up the floor to you all. What would you do?

Is price everything? Would you buy it? Why or Why Not?

Please leave a comment below and let’s have a conversation.

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About Author

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

116 Comments

  1. Brandon –
    I’ve been faced with this situation and did go forward with a purchase the property. I will tell you that I absolutely regret doing so. That’s not to say that it is a bad idea, but I quickly learned that I do NOT want to be in the business of focusing on low rent rentals in not great areas. As you already mentioned, tenant screening is a headache, and the sheer number of evictions is as well. Also, I found that tenants in my buildings – no matter how well screened – took VERY poor care of the property. This led to much higher maintenance costs.

    These kinds of properties can definitely make you a tired landlord . . .

    Then again, there’s a LOT of cash-flow potential.

    I wouldn’t do it again, but know many landlords who love these kinds of properties.

    I hope that helps.

    • Brandon Turner

      Hey Thanks Josh – it does.
      Just a thought – what do you think you would have done had you simply hired a property manager to watch over it? Would it have been any different for you?

      That’s one other aspect to this deal – what if I bought it, fixed it, hired property management, and just stuck to managing the manager? Thoughts?

      • I did. In fact, I went through 4 and none of them adequately managed the property. Despite setting standards for quality of tenant and other metrics, they let it slide . . . not one, but 4 of them. Certainly I could have done a better job managing the manager, but it is a challenge when you’ve got other things going on and the properties are not nearby. I don’t make excuses, but know the challenge. Finding a great manager is tough — finding a great one in a tough neighborhood is REALLY tough.

        • Brandon Turner

          Ah that’s so true. I’ve never hired an official property manager (just some resident managers) but I’ve heard horror stories. I think there is one in my area that has a good reputation – out of dozens of companies. It makes me want to become a PM because I’d (I think) do things right.

  2. We purchased our first investment property in a similar location. Sandwiched between one of the nicer streets in the area and just uphill from the absolute worst spot in town–gangs, stabbings, drugs. We lived in one of three units practically for free, made some repairs and enjoyed substantial appreciation. This property rarely experienced the problems associated with the rotten area, but on occassion the undesirables would float through our dead-end street looking for opportunity. Most of the other houses on this small dead-end street were rentals. We were forced to move once the house next door became a dangerous drug den with tenants living there with no power and a landlord and city officials turning a blind eye, We intended to keep it as a positive cash-flow rental, but the problems next door & failure of any neighbors to give a hoot about the problems in our neighborhood forced us to sell this lucrative property. We did make a substantial profit, but when I reflect on how much stress and anxiety we experienced as a result of the neighborhood this property was located in, I would never buy in such a place again.

    • Brandon Turner

      That sure is one of the toughest problems in landlording – not being able to control what the neighbor does. I once bought a home that shared a driveway – but after fixing the house up the neighbors began to dramatically let theirs go. It got so bad I had to just unload the home for what I had into it. That’s never fun.

      I’d like to ask you the same question I asked Josh – do you think it would have been different for you if you had hired a property manager instead of selling?

  3. Brandon-
    Those numbers are tempting. I would move forward if:
    1 – The City has redevelopment plans for the area
    2 – A large business plans to locate nearby
    3 – The property is on the edge of the “bad” part of town
    4 – Would you be interested in “clustering” or buying other rental near this 6plex?
    You might want to check out a BP articles I wrote:
    [url]http://www.biggerpockets.com/articles/3624-how-inner-city-landlords-can-profit-from-neighborhood-restoration[/url] that lays out a plan for success in a lower income neighborhood. You’ll set the plan is pre-emptive and a bit more time consuming.

    Finally, if you’re willing make a long term committment to B Street, then I think the deal is worthy of more consideration. Just my thoughts.

    • Brandon Turner

      Hey Al – not sure on the redevelopment plan. The city of Aberdeen seems pretty stuck in the past (as in “remember when Kurt Cobain lived here…”). Not a lot of good business prospects either. It is only on the edge of the bad area, so that’s okay. Finally, there actually are a few homes on the same block for sale. It’s not a bad idea – but they want way too much for those other homes. However, it’s an interesting idea. That whole block could be great if someone could do it all. And your article is excellent! I would love to be part of the revitalization of the “B Street” neighborhood. Now you have me thinking…

  4. Other comments sum it up. I never have, and never would put my self in that situation, for all the reasons mentioned. No amount of cash flow is worth sacrificing my quality of life. The first real estate lesson I learned from others and my own diligence was the one of Location, Location, Location. An improving up and coming neighborhood is one thing, but I have no desire to be a slumlord or work Section 8. Fewer, high quality properties, is better for me in the long run.

    • Brandon Turner

      Hey Steve, yeah that seems to be a pretty popular answer. I also don’t want to be a slumlord, which is why I made sure to include enough money in my calculations to at least make the place look nice. But yeah, I don’t think I’d call this area “up and coming” either.

      On the other hand, I do have a couple Section 8 tenants and I have had nothing but pleasure working with them. I guess it still comes down heavily to screening.

      Thanks for commenting Steve!

  5. I buy in lower income neighborhoods, however, it’s not drug or crime infested. The houses are maintained fairly well. I am not scared to go into any neighborhood, but I wouldn’t buy in ones where I couldn’t get a maintenance man to go.

  6. I have been in the business a long time, 1. Location ,location, that has always been the case. 2. The tenants will be just like the neighborhood!! 3. If you would not live there, pass on the transaction. This is my opinion.

    • Brandon Turner

      Thanks James. Yeah, i hear those points a lot and probably have even preached them :) I do like the idea, however, of perhaps even “flipping” this property (rather than buy-and-hold) because the holding costs would be zero (and actually cashflow while it sat on the market- but who knows how long that would take!)

      Thoughts?

    • Brandon Turner

      Hey Dewan – I really enjoyed that article :) I also really liked your use of Craigslist. I’ve honestly never used the service too much for finding cleaners,etc but I think I’ll start more of that. Thanks for the comment. By the way – things still okay thus far at that rental? I think you bought at the most perfect time and in one of the most perfect places in the country to invest. You’re golden.

  7. BT,Longevity is the key In all real estate investments. The better the neighborhood The better the investment. If you fix the house right, You will get the right tenant To take care of your house and pay their rent on time For a long time to Come. Good cash flow properties are not for sale Only the bad ones.

    Keith

    • Brandon Turner

      Hey Keith, I agree there is generally a strong correlation between higher quality homes and high quality tenants. However, I’ve also had the opposite true in both cases. And yeah, your last point about good cashflowing properites not being for sale has been on my mind too. This property is a short sale (through a Hard Money Lender I think) so it makes me wonder why the current owner can’t make their payments if the deal seems as good as it does. Hmmm.

      Oh, and what do you think of “flipping” the property instead of buy-n-hold? I love “flipping” multifamilys because they have no holding costs while it sits on the market. Do you think that in that case it might be worth it?

      Thanks for the comment!

      • Flipping would be a risk because ur asking someone else to take a chance with a questionable deal. Flipping to me means finding a GOOD deal buy
        it below wholesale and sell it at wholesale. There are plenty of deals like this all over the country. In Detroit you can be all in on a brick 3 bedroom house at 25k and sell it to a buyer for 45k. or rent for monthly cash flow.

        • Brandon Turner

          True, but I’d hope to make it no longer a questionable deal. I’d want to make it a good deal for someone. For example, buy for about $100,000, put $30,000 into it, and resell for $175k in nice shape. At that price, it should still be under-valued and provide good cashflow for someone. I don’t know , just kicking that idea around!

  8. Jeff Brown

    Hey Brandon — Ironically, it’s been my personal and professional experience that, though somewhat counterintuitive, Investors naturally shy away from truly terrible locations. But they tend to almost comically rationalize what they often term ‘gray’ areas. “Yeah, I wouldn’t live there, but the folks who do are fine. No, really, they are.”

    I can make fun of these folks cuz I was one of ‘em, long ago. I learned the hard way. Over time it became clear to me that insisting on blue ribbon locations — as my mentors told me ad nauseum — should be a no exception policy when it comes to long term investing. On the other hand, flipping can be done anywhere you can survive the process ’til sold. The flipper is in ‘n out pretty quickly, usually 1-6 months, give or take. Location often has far less impact on their profits.

    But for long term investors? My personal bar for what constitutes an acceptable location is this: Would I put my 81 year old Mom in it to live alone? If I even hesitate a split second? I pass. It’s not failed me yet.

    Good stuff, Brandon.

    • Brandon Turner

      Yeah, I’m kinda thinking IF I were to pursue this – it would be a better candidate for a long term (2-4 year) flip, rather than a long term investment. The only reason I say 2-4 years is because multifamily properties don’t sell too quick in my quirky town. Besides, with a cashflowing property and fixed rate mortgage – I wouldn’t need to be in a hurry. Do you do any flipping of this nature (the less gambling kind!) ?

      Anyways, it’s nice to hear your thoughts! Oh, and I like your personal bar :)

    • I find this interesting since I don’t know anyone (other than myself) that would seriously consider flpping in the less desirerable locations around me, but know lots of people that would hold places as rentals.

      When flipping in a worse area your upside is capped pretty low and your pool of buyers is smaller. And then lets see if they can get a loan!!!!!

      In contrast as even the “Don’t do it!” people generally are saying, the returns in these areas for rentals can be great but they don’t see the extra hassle as being worth it.

      By the numbers in my area maybe you can buy a total junker 3BR house in a rough working class neighborhood right on the border of the really bad part of town for like $60K then put $40K into it (To get something that cheap it will usually be pretty bad) with a resale at maybe $150K. So once you add in say 4 points and 6 months interest at 15% for hard money and a commission on the resale and taxs/insurance/utililities for that 6 months too, you are probably all in for a litte over $125K. $25K profit is not bad but if you have to sell at $140K or god forbid $130K then there is a lot of risk.

      In contrast same purchase price of $60K and do an apartment level rehab more like $15K (Again if that cheap issues are unlikely to be just cosmetic so a super cheap rehad is improbable). Then you will still probably need the HML to start but the work is done faster and it is much easier to get a tenant in there than an end buyer and you will refi into a regular loan after the work so say that hold is more like 3 months. All in now at more like a little under $85K. It will easily appraise for a 70% LTV to get all the hard money out and you are only into it for your financing and holding costs (Or less if you got a budget to finance some of those too). Then you rent it for $1000-1200 a month. Even if you refi over 5% and throw in reserves of 10% for repairs and CapEx from the start and 10% for management looking at $200-450 of cashflow a month easy. Being pretty conservative in the analysis since I would expect his place to cashflow at least $400.

      As someone that does both types of investing that flip scares me and that rental excites me.

  9. If the numbers work – take it and then turn around the quality of tenants in your property. For the C market areas – prescreen – prescreen – prescreen is your mantra. We started with single family homes and then moved into apartments. Bought a 27-unit all 2-bedrooms and using the seller’s numbers calculated zero income after bills got paid. We decided to take it anyway and make the money when we sold it. People said “You bought an apartment in that area? That is a rough area!”
    The manager quit as we were watching every cent in and every cent out. He could not deduct his groceries, long distance calls to family and gas for his vehicles like he did with an out of state owner. After he quit – suddenly we were paying all of our personal bills and business bills and had from $3K to $7K left over each month. Two years later we bought another apartment 43-units and for a year and a half had both properties operating. When we bought the second apartment people said “That is a rough area, they have gangs and shootings there”. We never had any problems in either area. Our dream at the time was to someday own a free & clear new class A apartment filled with seniors only as they do not tear up stuff. We have given up on that dream and are happy to be where we are. Our first MHP in NC we lived on-site and did more business from 6-9 PM as other places were closed and no onsite manager. Hours at the neighboring MHP was Tuesday & Thursday from 10 AM to 3 PM. They lost a lot of business as no one was there even on posted open hours. You get the properties cheap – do cosmetic repairs and pre-screen tenants as each unit goes vacant and you should have no problems. If you buy a class A building – you will pay a lot for it and need to make more expensive repairs and when you sell the profit margin is less. We rented the 1 bedrooms for 425 and the neighbor rented their 1 bedrooms for 350 as it was a free and clear building. He had 10 vacancies – we were full with a waiting list. When the 87-unit building was for sale we went to look at it. We saw several vacant units that were “rent ready” and we would not have put an animal in any of them. He was paying tenants to clean up and do repairs. He also rented them as-is without any clean up or repairs between tenants. It was too much of a mess so passed on it.

    Listen to what the numbers tell you not what friends, family and business associates try to tell you. What experience do they have to tell you it is a bad deal? Been there and done that so would be a very comfortable deal for us.

    By the way in that city, we also had a B-street neighborhood right outside the gate of a military installation. I had the opportunity to buy some 4-plexes there for $40K each, but passed. I continued to watch the area and the people who bought at 40 sold at 60, those who bought at 60 sold at 80, etc on up to a price peak at abut $350K per building in 2004. All owners were slumlords and did not put any money back into their buildings. You cannot justify a price of $350K with rents for each unit at $425/month. Was back in the area in 2008 and the 4-plexes on B-Street were listed at $290K so prices eventually dropped.

    • Brandon Turner

      Hey Dale, thanks! That was the longest comment I’ve gotten to date! Kudos!

      Also, I know you’ve been to Aberdeen so you know what I’m talking about probably more than most. It’s not “Terrible” like with drugs and gangs (though, we do have a huge drug problem in my whole county) but it does take some special handling.

      I do know some landlords make a lot of money in these areas and are happy (I think!). And the numbers tell me the deal is good, but you are right- most family/friends would shoot it down in a heartbeat.

      You should come buy this thing Dale! :)

  10. I have a theory, but I will preface this with a warning that I have yet to try this theory :)

    Buy the property, fix it up and make it a nice place to live.

    Require all prospective tenets to fill out an online application- if they call, refer them to your website. Now you don’t have to spend 10 minutes on the phone with each of 50 or more callers explaining everything to them- and you get their application before you even show the property (I would make the pre-application shorter than the full one, and have them fill out the full app if they are interested- again online). You will know from the pre-application if they make enough money to pay the rent- so you won’t be showing it to people who can’t do basic arithmetic. They are also more likely to pay the rent online, another time and cost saver (Because they are at least computer-literate enough to fill out your online application).

    Offer a good quality Internet connection with the rent- you do this for 2 reasons- to encourage tenants to pay their rent online, and to attract more intelligent tenets who are less likely to cause trouble.

    If you have to, lower the rent a bit below market to get more applicants- you are automatically screening out the worst of them anyway with your automated screening tools!

    Advertise carefully so as to target a more desirable audience. Facebook may be an interesting choice for targeted ads by demographic. Offer referral fee to your best tenets- if they are good tenant- chances are their friends would be good, too!

    Once you have a potential tenet who passes the prescreen, sees the property and wants to apply, have them complete the application and screen carefully!

    Not able to control what the neighbors do is always a wildcard, no matter how careful you are- plan as best as you can for this- and do what you can to mitigate the risk (Buy where there is some land buffer between neighbors, put up privacy fences, whatever you need to do to set your property apart).

    Again, I have yet to test my theory (I am in the process of closing on my first house right now, I hope to get into MFR one day), but I think my plan will work- I would love to hear from others what they think.

    • I’ve used the cforms plugin for WordPress to create such a form. Use required fields, and then a click-through to the electronic signature page. Minimizing your time spent on unqualified tenants will definitely help preserve your time for more valuable endeavors. It all comes down to your personal investment preferences, and how you want to spend your time.

      • Web development is my day job, so creating a nice web app to handle this would be pretty easy for me. Personally, I prefer Drupal to WP, but CForms with WP should get the job done. Eventually, I’d like to have a lot of the work filtering through the applications automated. I’d even tie it into background/CR providers so once they fill out the full application, it could automatically pull all that and present it to me for review. I’d also tie in accounting to keep track of rent rolls and collect rent, and also track expenses per property/unit.

        The more automated everything is, the less time I spend on it!

    • Brandon Turner

      Hey James – I actually think its a great theory.

      I’ve always avoided online applications because in my area a lot of people don’t even have basic internet or computer skills. However – maybe that’s the key. Make that step one of the “filter.” Most “good” tenants probably can use the internet, so really it just saves a headache. I’m going to think more on that, but I think you might have something there!

      Additionally, I like the idea of offering internet with the rent. My friend who owns the multifamily nearby does that (and offers a massive Direct TV package as well) and it’s one of the biggest selling points to that place.

      Good luck on your new deal and keep me updated how it goes!

      • Thanks- my first deal will actually be my residence for the next few years :) I have been renting myself up until now- been at my resent place for 6 years. My sister owns my grandfathers old place, and tearing down the house and building a duplex is my first planned cash flow project. That will probably begin in the late winter/early spring.

        Regarding Internet- I personally feel that the lack of affordable, quality Internet access in many neighborhoods is one of the greatest social injustices of our time. Like most social problems, such challenges are best dealt with by private citizens and society, not massive government programs. I feel that this is somewhere where landlords can make a massive difference with little investment- especially with multi-family properties where the cost per unit would be extremely low in most cases. Perhaps you and your friend could work together on this if you’re properties are close enough together to link them wirelessly? (That is, if you end up buying it.)

        Most public libraries have free Internet access- in Springfield MO, there are many library branches all over the city, so getting online to fill out an application should not be a problem if they are motivated enough to do it! (I still think people need access in their homes, but if they aren’t that fortunate yet, the library is a terrific option.)

        • James,

          You are a romantic imagining low income tenants browsing the web seeking an education or some thing other then pure entertainment. Maybe your part of the hood is different, in mine killing time and wasting ones life away is what is happening.
          One of my tenants a 580 pound lady who is on SSI disability for her weight problem was gifted with an I pad by a local misguided church group. She whiles away her time playing a game called temple raider and solitaire. Her son wrestles it away to relax watching porno.

          Unless the government takes down the bird feeder there really is no reason to go to work, its not their fault this is human nature. The real crime is constantly putting seed in the bird feeder, with no plan on what will happen one day when their is no money to buy feed.

        • @Dennis (Can’t reply more than 3 deep?)

          I am not so naive to think that everyone will use the Internet to seek knowledge- but if the opportunity is there, some will take it. Even if it is only 1 out of 100. I know many who are and have. I also know many who are like you describe.

          Purchasing an Ipad was indeed extremely misguided- just like the idiot schools who complain all the time that they don’t have enough money, and they go and waste several gand buying Ipads. Or Mac Pros for students.

          They would have been much better off getting something like the Raspberry Pi or better yet for your tenant- a donated refurbished system.

  11. Brandon, I too own rentals in Aberdeen/Hoquiam since 2000, sold my 8 plex in Elma. I’ve investigated B st, and surounding properties and because of the crime not to mention flooding, haven’t found one I would buy. If that’s the same property I’ve looked at, it needs a lot of work, especially in the back and the roof. I’m not sure but I think the floor needs a lot of work too. Nowadays I only buy SFR (REO’s) as they are pretty inexpensive in Aberdeen. I’ve found numerous properties for 50 cents on the dollar in great shape in good areas. If we can get more companies to come in with jobs, the values of properties will go way up:) If you really want to know about an area talk to Jim Kite at Prudential, he’s well inform and knows a lot of history on any given area/property. You have too much experiance to buy in slum areas when thier are so many good areas to make money in! I think your gut feeling is telling you NOT to buy, you just want someone to say yes.

    • Brandon Turner

      Hey Jim – Great to know! I didn’t know there were any other Aberdeen guys on BiggerPockets! I also like the sfh REOs in Aberdeen, but have been focusing more on Monte lately.

      And yeah, you bring up a great point – Flood insurance. I don’t think I included that in my original numbers but I bet that area is included. Thanks Jim and keep in touch!

  12. James:
    I wouldn’t count on these tenants having a computer, being computer literate, or having a bank account that enables them to pay online. But, you never know!

    Brandon, you asked if we’d do this deal and why or why not.

    No. I wouldn’t.

    There are PLENTY of deals out there that cashflow well in good areas where they will also appreciate. Chances of appreciation on the property you describe are low. Low.

    I prefer good properties in good areas that attract good tenants who keep up the properties I’ve put time and money into. I’ve done low end. I’ve done Section 8. Better properties perform better.

    Keep us posted!

      • I don’t understand! Why am I not finding all this surplus of deals that everyone is talking about?

        I’m in LA and have had to resort to searching in East LA (Think Watts) in order to get a decent return. There is no way you can get anything over 6, or max 8, percent cap within the good or decent areas.

        I’m looking at a deal right now in a war zone where I can expect a 15% cap… (assuming I don’t have to worry too much about vacancies due to crime scene investigations)…

        Anyone from LA on this thread? Are you facing the same shortage issue?

        • Daniel:
          I’m so sorry. I lived in Pasadena for 10 years and I’m always aware that, to do the same deals there I’m doing here, I’d have to add a zero to the end of all my numbers. Costs have come down there considerably in the past 5 years, but I guess it’s still much harder to find deals simply because of the population – way more people looking at not enough properties.

          Move out here! North Carolina is an investor’s paradise.

          :)

        • Hey Daniel,
          I live in Los Angeles, and I do all of my deals out of state. For the reason you mention (can’t find anything that cash flows), plus, California is extremely tenant friendly. If you were to end up with a bad tenant, good luck getting them out in any timely fashion. As much as I would love to invest in LA, the only thing I see (well maybe not the only thing, but at least the big thing) that could bode well for investing there is flipping…as long as you have really deep pockets to start out. I’ve seen some great cash-only buys available, but we are talking major cash, not pennies. I searched around even in the OC at foreclosures, and the cash flow just isn’t there. If you are ever interested in out-of-state investing, I can help out since I’m a Los Angeles-er doing it myself.

  13. Brandon,

    If the numbers work and your ready for whats in store I’d say do it. If the numbers match up then I buy. I have several properties in the slums. I don’t mean slums like the 3rd world county of Detroit but I live in Atlanta so you get the point. If your looking at cash-flow and not trying to make money on appreciation then why not.

    Let me tell you why I like the slums:
    1) Easy to rent.
    2) They don’t ask for much cause their not use to a super nice place
    3) They stay longer if treated right cause they have no plan of saving for a home
    4) The good ones are very appreciative

    Why I don’t like the slums:
    1) 10 bad tenants for every 1 good one
    2) Tear your house up by trying to fix things themselves
    3) They live paycheck to paycheck so if one thing goes bad your in trouble
    4) Can’t let the house be vacant in between rentals or it will be vandalized

    It’s a different lifestyle but can be profitable. For a first rental I would say not but if you have experience then yes.

    • Brandon Turner

      Watson, I’ve noticed also that you don’t need to have the very best to get things rented on these lower income properties. I’m not saying I’m going to leave massive holes in the walls and smelly carpet – but almond 1980’s era fridges and orange laminate counters are acceptable.

      Also, I think you touched on something huge – what’s the end goal? If it’s appreciation – obviously it’s a bad bet. But if it’s just cashflow – and I have the experience to handle the tenants (which I do) – why not?

      Great comment. Thanks! Keep in touch!

  14. This reminds me of Groucho Marx’s comment.. “I wouldn’t be a member of any club that would have me as a member.” Except in this case it’s: “I wouldn’t rent to any tenant who would consider renting a property like mine.” This deal sounds like a management nightmare to me… tough to get a qualified tenant in, high turnover, vacancies, tenant to tenant disputes, etc.

  15. Brandon,
    Thanks for the post – great comments here from everyone.
    I buy and hold in lower income areas, and I have not regretted one purchase. I would recommend that one should be a fairly seasoned landlord as to not get too discouraged when issues arise that are common with these types of properties. It is also very important to have cash reserves before taking on these types of properties. If you continue to purchase the higher cashflow properties and manage them properly, the financial reward will come.

    One comment that I’d like to share is, that when cashflow is very good, there is less stress from a financial aspect when it is time for evictions, unit turnover, vacancies, etc.
    I manage my own properties and, over time, as cashflow becomes higher, I find myself less tolerant of problem tenants, cutting my losses sooner rather than later (this significantly cuts down on the stress!), turning over the unit and starting over again. I have also become more patient when filling units and continually trying to improve my screening process.

    I have focused on one particular neighborhood in Baltimore City MD and, one by one, as deals came up in the neighborhood (mostly distressed foreclosures priced from $6k-$20K), I purchased, renovated and rented them. I am typically into these properties for less than $45K total, and rents range from $1,000 – $1850/mo (80% Section 8 or other voucher programs/20% market). Another factor to note is property taxes. The property tax in this particular neighborhood is at least ~50% less than in other better-quality neighborhoods which really helps out the cashflow in the less-desirable areas.
    I have renovated 14 houses in this particular neighborhood, and I am finally seeing the ‘change in quality’ of the neighborhood. A few investor friends, after realizing the cashflow potential, have also started rehabbing in the same neighborhood. I believe, to date, we have renovated over 24 properties that were distressed vacants. We still have more work to do, but we can all clearly see the transition. Over time, it is getting easier to fill vacancies and toget better tenants because of the improvements in the neighborhood.

    Here is an example to sum up the typical cashflow:

    Purchase+Renovation+holding cost = $40,000
    Income – $1565/mo
    Expenses:
    Taxes – $50/mo ($600/yr)
    Insurance – $42/mo ($500/yr)
    Mortgage pmt – $266/mo (7%/30yr)
    Utilities – 0 – tenants pay gas, electric and water
    5% vacancy rate – $78/mo ($939/yr)
    Maintenance – $50/mo (note that these properties are newly renovated, so maintenance costs are typically low)
    I didn’t include a management fee because I don’t have a PM

    Positive Cashflow/mo = $1,078

    So, over $1K positive cashflow/month per property. This kind of cashflow is pretty much impossible to obtain in more/very desirable neighborhoods in Baltimore. I started investing in 2005, so the deals/cashflow back then was not as great as it is now (i.e. several years ago, $300/mo was considered ‘good’ positive cashflow). The foreclosure wave over the past few years has definitely been a goldmine in our city for buy & hold investors.

    Every investor has his/her own strategy. I am buy-and-hold and more interested in cashflow than equity. I do agree that there are more challenges and lower quality tenants to deal with and understand those investors that prefer to buy in better quality neighborhoods and are more interested in equity. I can say that I have become more comfortable and more successful dealing with the tenant issues as I continue to gain more experience.
    I can honestly say I love what I do… I also have a real estate brokerage and just encorporated property management with that business.
    Happy Investing!!!

    • Denise, we must talk! I am doing the same in John Hopkins area, and I just rented it out for 975/mo on Sept 15th. I am in it for 40k.

      I have a great property manager (so far), and I have another property I am starting to work on too I bought for 11k. I tell people, dont let fear stop you, and just research safety matters…Not going to lie, just found a vagrant in the 2nd home, and had to call the police to get him out, but he was one of the nicest cleanest b&e’s ever, so i just chalk it up to he kept the really crazy people out while it was vacant. More to the story, but I am at work, will post later.

  16. I owned property ( 3 flat) in a pretty dicey area near University of Illinois in Chicago where the housing projects were coming down and construction was booming..rented mostly to college kids because it was alot of space for the money and condos closer to university were pricy( this was about 2 miles away) there was always crime but if you kept to yourself you were ok..I even lived there for 2 years..but then it got worst when the economy crashed..3 burglaries in 2 of my units within weeks apart and a neighbors tenant got held up at gunpoint..that was it for me…it was a cash cow and I hated to get rid of it for that reason. plus I was moving to AZ so then I would have to deal with a mangement company ( like someone said above, then you are managing the management co)but the stress wasn’t worth it. I was concerned for the safety of my tenants..I .finally sold it. I personally would never buy in a distressed area again.

  17. Hot topic, some advice if you need cash flow go for it. This is how I allowed my tenants to put my daughter through college coming out with a Masters degree, all with no debt.
    Did I mention my 15 units also paid for a nice wedding, along with a wholesale flip of what I wanted to be my 16th low income rental.

    Some advice along the way, don’t think for one moment you will get your rent on time, that is not how these dysfunctional people live. Yes I know you have to put down the hammer, have to train them up right from the beginning, well in the real world of low income you will have regular turnover if you think you can enforce iron clad rules.

    What you need in low income is lots of gushing cash flow and as little as possible debt. The only way I will buy low income property is first with the understanding that no one is going to redevelop the area, the properties will probably not appreciate ever.

    That said you can see that you want as little of your own money in the deal, and I have none of mine in any of my properties all were bought for cash for peanuts and then quickly refi’ed for more then I bought them for. Yes you can do this still, especially with private investors. Never buy a low income property that goes into negative cash flow if a unit goes vacant because they always do.

    If I had to do over again, I would still have bought these units but would have sold them to a sucker in 2006. I actually did just this with two of my 3 unit buildings, later buying one back for half price in a foreclosure sale. The other sold for twice what I paid, so refinancing was easy with a double price sale right next door.

    I will assume the seller in your case is tired landlord as am I, dysfunctional folks wear you out over time no matter how tough you might think you are.Today I no longer install tenants leaving this to a realtor who charges one month rent.

    As for repairs, don’t get crazy and by all means do not clean units after tenants leave, the new tenants expect the place to be a hole.
    Don’t do something dumb like replace the kitchen low income people do not need cabinets, all their dishes lay piled up in the sink. They never think of anything past a day or two so storage is just a place to expand their junk into.
    Never allow access to basements or you will be providing a room for short term lovers at your expense, cut off all outside hose connections or your tenants will start a local car wash and fill and dump those huge donut rimmed pools. At all possible shift as many utilities onto the tenants. If you pay for heat the windows will be open for fresh air if they pay the windows will be nailed shut.
    Carpet is a bad investment, tenants do not buy vacuums do not provide one or it will be sold for drugs or beer. No need for big kitchens the dining room is always in front of the tv, and remember the carpet if you insist on wasting money buying, must be pizza colored or it will be pizza colored very quickly.

    Oh, everyone is on drugs and most will sell drugs out of their units. Do not spend money on landscaping or try to make the place nicer, cheap rent will be the attractant. Low income tenants if given an opportunity would paint the place black and orange and think that was nice.

    I would suggest testing the waters by tending a low ball offer, lower then you would think the owner would accept. This is exactly how I bought all of my units, one such offer was so low I thought I might catch a bullet, but the guy hesitated and then said yes.
    This turned out to be my most troublesome building to date maybe ghosts or something.

    At this time in my life I am only interested in single family homes, and in selling stock options.

    Just look at low income rentals as I do, the money you get is like getting government welfare second hand. You are providing a valuable service providing voter storage areas for the Democratic party and your government will make sure you are continually rewarded for doing so.
    Sometimes the government will even send you the voter storage payment check directly in the form of the Section 8 voucher program.

    One last piece of advice make sure you buy a very good insurance policy, one that will pay to rebuild the entire place, and then maybe your dysfunctional tenants will do you a favor, if they do, for God’s sake pocket the loot the area could probably use some open space. I would also suggest placing the title in a trust, or an llc and remove your hard earned assets from the reach of lawyers, no money, no case.

    • I wish there were a “like” option for comments. THIS comment was an AWESOME READ filled with experience and insight! haha… I’ll definitely keep these things into consideration if I ever get into low income MF housing…

      Thanks for the insight Dennis! :)

  18. I analyzed a sixplex in Sacramento just like the one you described Same “schedule of rents”
    I believe your expense ratio is too low. – I estimated 17% off the schedule for delinquency and or vacancy. equal to only one of the units being unproductive per month, This dropped the projected income to 83% of scheduled cash flow.. This was an optimistic proforma. The historical income was only 60% of scheduled income. At 60% of scheduled income, the expense ratio was about 95% – with NO debt service. I told my buyer that the building was worth no more than $50,000 (it was listed at over $200,000) – Brandon. Go back and recalculate the income with realistic vacancy and delinquency rates. You underestimated them. Pad the expenses. You underestimated them.

    Now with your new numbers, isn’t your expense ratio way over 50%?. That is risky. Raise your required cap rate due to increased risk. 10 is good but 8 is okay since it is only the edge of the “slums”. Analyze your cap rate as if it was a cash purchase. You should not pay a huge premium because you are borrowing some of the money to buy it.

    10 Cap means if it throws off $5K per year in free cash flow to a cash buyer, then a $50K purchase price is justified. 8 Cap means you pay that $50K if it throws out only $4,000 per year net profit.

    • Brandon Turner

      Hey Jim,

      Thanks for the comment, I appreciate the advice! It’s true – the expenses may be more – but I don’t think it will be from vacancies. After looking more into this thing, I believe the owners pay for all heat – so that adds quite a bit. But for vacancy, here is my reasoning: My friend who owns the very similar property that I help out with gets less than 2% vacancy. It may be tough to rent these – but there are a never-ending supply of these people. It just takes a lot of sifting to get through. We are also very efficient in collecting rent and evicting very quickly (the attorney we use is superb). However- I think you are 100% right on the vacancy rate if I have a property manager deal with it – simply because they will never care like I care. So, again – it really comes down to how involved I want to be.

      In the Youtube video I made, I did forget to include flood insurance which is probably going to add several hundred per month to the bottom line. It also is going to be a bit more expensive due to the master-metered electrical that I think might exist. So, let’s walk through those numbers real quick together and let me know your thoughts:

      Vacancy/Delinquency: $280 (10%)
      Flood Insurance/Regular $250
      Taxes: $200.00
      Water/Sewer/Garbage: $400
      Electrical $210 (From their expense listing… not sure why so high – master metered?)
      Heating $100 (also from their expense listing- must be a boiler)
      Repairs/lawn care/etc $280 (10%)

      Total Expenses: $1720
      Total Income: $2775
      Expense to Income Ratio: 61%
      $1,055

      Total Annual Expense: 20,640
      Total Annual Income: $33,300

      Net Operating Income: 12,660 (33,300 – 20,640= the cash left to pay the mortgage)
      Value with 10% Cap: $126,000.00 (12,600 / .1)
      Value with 8% Cap: $158,200 (12,600 / .08)

      Loan amount: $80,000
      Monthly loan payment (5.5%, 25 years) : $500

      Monthly Cashflow: $555
      Annual Cashflow: $6,660
      Cash on Cash Return on Investment:(with no additional repair money put in) 33%
      Cash on Cash Return on Investment: (with additional $25,000 repair money) 14.8%

      Hope those numbers make sense. Now if we were to add in a property manager and increase the vacancy rate – it would push this way higher.
      At this point, it’s marginal. 33% is nice -but that’s putting no extra work into fixing it. I wouldn’t want that. 14.8% is okay – but probably worth it for a property in this shape. I can find better returns elsewhere.

      So now my new question is – if this property is “master metered” would it be possible to shift the heat/electric to the tenants?

      Anyways, this was good to get out on paper to look at. Thanks Jim for the comment and evaluation! Thoughts? Anyone?

      • Brandon, you know as well as I do, one can work the numbers that will fit thier needs/excuses. First talk to the building inspector on his views of the property/area. Then check the last 3 years rental history on that property. This is what I would base my figures on, not on what I assume it might be. Besides, since this is a high flood and crime area, run, don’t walk. As you noted, thier ARE better deals out thier.

      • Hi Brandon Turner

        “My friend who owns the very similar property that I help out with gets less than 2% vacancy.”

        Jim: That is about a month and a half per year out of all six units. : Or one week per unit. Optimistic.

        Brandon:
        Vacancy/Delinquency: $280 (10%)
        Flood Insurance/Regular $250
        Taxes: $200.00
        Water/Sewer/Garbage: $400
        Electrical $210 (From their expense listing… not sure why so high – master metered?)
        Heating $100 (also from their expense listing- must be a boiler)
        Repairs/lawn care/etc $280 (10%)

        Total Expenses: $1720
        Total Income: $2775
        Expense to Income Ratio: 61%
        $1,055″

        Jim: Accounting nitpick here: Vacancy and delinquency is not an expense. They are reductions to income. So, my edit is: Income $2495, expenses: $1440,
        Expense ratio 58% Income before management, debt service, and income taxes =1055

        Brandon: “So now my new question is – if this property is “master metered” would it be possible to shift the heat/electric to the tenants?”

        Jim: Is it worth the capital expense of changing it all out? I don’t know, offering internet, but not offering heat ?

        Brandon: “Anyways, this was good to get out on paper to look at. Thanks Jim for the comment and evaluation! Thoughts?”

        Jim: The 58% to 62% expense ratio and self management justifies a higher cap. You came with $126,000 at a 10 cap. You estimated $25,000 for repairs. That means you should not pay over $101,000 including all of your closing costs, and financing costs.
        He is asking $97,000 . Add in $4,000 in closing costs. You could buy it like that and (on paper) meet your minimum cap rate requirement of 10%.

        Agent Disclaimer: I shared my thoughts on a public forum, I have no knowledge of the property in question or of Brandon other than what is on this thread. My analysis, for these purposes is of a random or hypothetical property with similar numbers as Brandon gave. There is no agency relationship between me and the poster or any Bigger Pockets reader.

        .

  19. We have a couple of similar situation. A 2 plex we paid and renovated for 33k which literally gives us 5-6K a year in cash flow when you include our 8% mgmt fee we “pay” ourselves. It yeilds around 35% COC. It’s free and clear. If we refi’d our COC would be almost immeausurable. I have the same experience regarding manamgement: Whiel in our nicer buildings we can show an apartment 5 times and get a qualified renter, we need to show this 25 times to get a …. acceptable … sorta qualified renter!

    I’ve run the numbers and decided to keep the building and if it gets to the point that I can’t take the management necessary, I’ll either A.) hire a local mgmt firm and still earn 20% on my money or B.) use it to let a future “in house” manager get his feet wet with.

    • “If we refi’d our COC would be almost immeausurable.”

      Best quote ever! :)

      Aside from my sophmoric sense of humor love this model. More hassle but better returns. Even as a group that is willing to put up with a lot more stress and challenges than most people, lots of investors just don’t want to deal with the headaches these properties can cause.
      That breeds oppertunities for those that are willing to.

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  21. Lisa Herendeen on

    What an interesting dialogue. I think buy as long as your eyes are wide open. If you are making twice the money then it will be 3 x the work is a good formula. I may not be politically correct in this statement but the 80/20 rule will apply. 80% of your tenants will be on entitlements and entitlements = High maintenance. As far as hiring a manager – property managers are keenly aware of maximizing their income potential and they will not manage these units for the standard rate – if you can even find one to take it on then be prepared to pay double the fee. Personally, I think it also depends on if you are passive investor/landlord or someone who really works their business. Most landlords prefer to be passive.

  22. I am one of those brave souls who manages rentals for others. When talking with investors who are thinking of buying a property I give them my opinion along with tangible facts regarding the pluses and minuses of the property. I never recommend a property that I would not be willing to manage. The apartment building you are thinking about buying would be one of those I would not recommend. In our market you could spend the $97,000 on buying and rehabbing 4 houses that would rent for $625 or more per month. At that level of rent you would get a better grade of tenant then the apartment dweller. In a single family home you have accountability for roaches, bed bugs and damages. Also, you don’t have to pay somebody to cut the grass, rake the leaves or shovel the snow. You don’t get the phone calls complaining about the guy upstairs and you don’t have to play Social Worker every time the tenant has a problem. Single family tenants stay longer, cause fewer problems and refer potential tenants to you that will probably pass your screening. Why would anybody buy multi-family properties in risky neighborhoods when there is an abundence of good single family properties?

    • Brandon Turner

      The only reason I would buy multifamily properties over single family homes is because
      1.) One loan, one down payment, one deal = six properties.
      2.) We don’t have single families quite that cheap (getting close, though!)

      I see your point though. This would be a lot of work to manage!

      Thanks for the comment and advice Bob!

  23. Everyone has great comments. I think Al brings up a very notable thought- if you are going to invest in lower income areas, be very smart on how to invest in lower income areas. I absolutely agree with everyone who says a lot of cash can be made in these areas, but I think you have to be very smart on how best to handle the areas, and it also needs to be somewhat of a niche for you. If you resonate with investing in these areas, you are going to be smarter on them, more experienced, and have a lot more patience for the downfalls that come with it. If you don’t resonate with it, you may have a lot of headaches.

    Another consideration a lot of people either don’t think of or don’t even know of- is the state a tenant-friendly state or a landlord-friendly state? (I don’t know anything about this area, or what state it is in). Michigan, for example, is tenant-friendly. I know an investor that had a property in Detroit that ended up with a drug ring in his property and the tenants stopped paying rent altogether, and it took him 7 months to get them out. Those extra 7 months of being stuck with those tenants left him with $7,000 extra in damages. So 7 months of no rent paid, and $7,000 out of pocket for damages. California is tenant-friendly too. Tenants have so many rights, it’s hard as all get out to get rid of a bad tenant. Georgia is very landlord-friendly, so if you have a bad tenant, you can toss them within a month. So if you are going to take on ‘lower quality tenants’, will you be able to get rid of them easily if they start causing trouble and damage?

    Last thought- always have your exit strategies lined up. Buy it and hold it- what if your tenants are notoriously horrible and you just can’t get better ones (the good ones don’t usually stick to those areas). So holding may not be a smart option. For resale- it’s a multi-family, so most likely you will sell to another investor. If the bulk of investors are telling you now they wouldn’t buy it, they won’t buy it later either. And if the property is so bad that you, as an investor, don’t want to keep it, why would any other investor want to buy into it?

    I’ll leave it with- if it resonates with you and you would like to become experienced in this type of investing, go for it. If you are only thinking of using this property as a single addition to your portfolio, I’d say let this one pass by. There are plenty of other awesome investments out there.

    So awesome to ask the community!

    • Point taken! Although I like what Ive done with my first property, I am starting on my second. this will be my last property, MOSTLY because I HATE dealing with baltimore city water workers, Bmore gas and electric, and their tax revenue agency. It is horrible, unprofessional, and although many people do try to help, the bad apples make it worst, especially if you get a bad apple after waiting on the phone for 30 minutes to straighten out a tax/water bill. They are tenant-friendly too, but the city’s infrastructure and support is important too. I will relocate to Vegas, where I am from, because the service is 1000x better.

  24. I read Bob Rothman’s comments and totally agree. People get suckered into these deal because of the apparent numbers and when the bomb goes off, i.e. the proverbial nightmare drug-dealing tenant gets in and takes over, the whole thing comes apart at the seams. There’s risk and reward everywhere, but I’m of the opinion it’s less risky to invest in single family homes in lower-end areas than in multis. A large part of your business then doesn’t hang on one tenant’s behaviors. We are real estate investors, not DEA agents, social workers and damage control experts. Be smart going into deals and you’ll save yourself alot of brain-calories trying to figure out how to keep all the plates spinning.

  25. Short low income synopsis:
    Build a large cash reserve, do not depend on rents covering debt each month, if you do you will be a slave to a low income tenant, not a good way to live.
    Buy these properties dirt cheap, do not waste money on amenities.
    Do not count on appreciation except maybe in the negative not counting inflation.
    Damages will be higher, do not fix anything that can be left broken.
    Landscaping means knocking the weeds down when needed.
    Do not intercede between tenant arguments, let the strong prevail as long as they pay the rent.
    Do not raise the rent unless your fellow low income competitors do so as well.
    Join the local low income landlords association or find them at the existing association.
    Do not allow tenants to pay as they go, when collecting rents also hand out termination letters to those with an excuse, start evictions a.s.a.p. do not try to fix a bad tenant.

    Never lend your tenants money, they will ask believe me. If you feel compelled to be a nice person, get collateral an XBox 360 will be redeemed or the cable box is the true winner.

    Don’t feel compelled to be a nice person you will be sorry every time. God will still love you, even Mary and Joseph had to pay the inn keeper, and he put them in with the animals, you would do better then that.

    Always tell other landlords these folks were angels, just as you were told.
    Carpets are a total waste of time unless fixing the floors would cost more, buy the cheapest carpets as you will be throwing them away for each new tenant.
    Do not clean units between tenants you will be robbing them of the dirty unit they expect.
    Never clean the grease from a stove, it adds character to an old building.

    Cockroaches are not pets, do not charge extra for tenants who bring in their own cockroaches.

    If a tenant leaves an old car behind (like they would leave a new one) do not bother paying for towing. Instead put an anonymous add on Craigslist offering the car for free.

    Never allow tenants near copper piping, or anything else of value.

    Always inquire of the local government if there is any grant money for low income, pocket as much of the money as possible.
    Never sell mineral rights, you may be giving away any possible appreciation.

    Never use your own money buying low income, your cash on cash return will be great, an infinite return on your investment is sometimes not high enough.

    Professional low income landlords are the true hero’s because they keep these folks in the bad part of town, away from your nice rentals. Redevelopment would not be possible if not for low income landlords and tenants totally wearing out a neighborhood.

    Never get upset with low income tenants, it is a numbers game. Move em in, and move em out. Keep the cash flowing at all costs. These properties are like a boat approaching the falls you only have so much time to extract as much money as possible.

    Once you become a fat bastard, buy some nice single homes in the suburbs that have no cash flow but will appreciate. In this way you can at some future date have an absolute auction of your low income units or just abandon them.

  26. I am investing in lower income neighborhoods not because I want to, but because there aren’t any alternative options. I imagine this something familiar to investors who live around affluent areas where the wealth just sloshes around. The area I would like to invest (median family income ~100k) has completely dried up of foreclosure deals. The same goes for the surrounding cities.

    The past 3 deals I made an offer for usually the highest bidder above asking was passed over for an all cash buyer. The area is a good neighborhood and at the price asked would have yielded a conservative CoC return of ~7-12% with a 25% down payment conventional loan.

    The reason I can’t compete with the all cash buyers in this area are because the properties go for $350-700. I don’t have that kind of cash on hand. And even if I did, that is a lot of cash to put in to one property. I would rather have a more diversified portfolio of less expensive properties. Another factor you need to think about reducing risk.

    Now… drive an hour outside this area and we have a completely different world. Mostly poor neighborhoods. Home prices are $35-150. Also there is an abundance of inventory here. Homes are still selling, but it feels like there is more supply than investors can pick up fast enough. The average CoC returns are better, 20-40%, with some of desperate sellers yielding 70-100% CoC returns. Yes I realize the increased risk of a bad neighborhood is being priced in to these homes, but seriously… Some of these places arent that bad, and the risk/reward plus the fact that I can actually afford more than one property makes this a more reasonable strategy IMHO.

    • Hey Joe!

      If you are interested in hearing about areas that have those lower purchase prices, with the returns of the higher-end ones, and the quality of the higher-end properties, I can help you out. I’m not sure if you are set on one area, but if not, I can let you know what I’ve been buying. Sounds like what you are looking for.

      Ali

  27. Dennis, I like this one: “Cockroaches are not pets, do not charge extra for tenants who bring in their own cockroaches.” I always wondered why they had pet addendums but not cockroach addendums. Now I know why… Thanks for clearing that up!

    Home Depot does need to start making pizza colored carpet. Low income landlords could get away with never having to replace it.

  28. Wow, Dennis’ comment scares me. Guess now I know why the slums of town are as bad as they are… landlords who don’t give a @#$%.

    Slumlords are an insult to the true real estate investing professional, and in my book slumlording should be a criminal offense. I have seen properties so neglected that I wouldn’t let a pig live there, and yet the rents were kept as high as possible, preying upon desperate people who could not, for a variety of reasons, rent elsewhere. Anyone who thinks like you should be ashamed of yourself.

    I imagine while you’re ripping off the middle income tax payers for low income housing grant money, and “pocket as much of the money as possible,” you also have the nerve to tell everyone about what a bad job “the government” does, and how it’s all up to the private investor to fix things. Raider capitalists like you and Romney have nearly bankrupted this country, taking money that was meant to go into the economy for everyone’s benefit, and using it to line your own pockets at societies expense.

    “Fat bastard” indeed.

    As an owner of several multi-unit properties on the poor side of town, I take pride in being part of THE SOLUTION – not part of the problem. When you take care of your properties, the properties will take care of you…for life. I’m not into “flips” to the next sucker, and “get rich quick” schemes. This is my profession, and I’m in it for life. I look at every building as a 100 year commitment and invest in the long term outlook of the community I’m a part of.

    When it comes to the residents, I have no nonsense policies towards drugs, trouble makers and deadbeats, but I provide a decent home and timely repairs to those who live on a modest fixed income, such as seniors, the disabled, struggling single parents trying to work or go to school while taking care of the kids as well. I’ve been there. I was once a kid growing up on welfare in section 8 housing, having to walk a mile to the library in order to see what the internet was. Don’t you dare think that because someone is poor, they are less of a person than you are, or that you wouldn’t behave the exact same way if you had to walk a mile in their shoes.

    • Aria,

      You need to work on your a sense of humor, my comments were completely tongue and cheek.

      I can answer your question of how some low income tenants end up in slums. This is America where people end up living in slums because this was their plan in life, or should I say for the most part they did all the things on the list that led them to the slums.

      You are also confused as to the role Mitt Romney and his other partners at Bain Capital played. I will assume that your primary reason for buying REI is to make a profit. By doing so what you have done is to apply your capital along with some leverage, in the hope of a resulting increase in your total capital or what is called today an ill deserved or ill gotten gain.

      Which by the way you collect from your tenants, you are from their point of view getting rich at their expense.
      Capitalism in my opinion is the most moral system that has ever come to be invented, where anyone can use their God given talents to grow capital from nothing, and then apply that capital growth to create a large net worth if they desire.

      So let me get this straight Mitt is a monster because he risked his and others capital to increase his net worth and make his partners and investors wealth?
      Unfortunately you don’t question what the media or maybe your higher education has led you to believe.
      Investing one’s money for a fair or for that matter insane return is intelligent and responsible.
      Investing others money or your own for the purpose of loosing it is illegal and immoral.

      I might mention our present administration’s investments into companies who have ties to the president. These companies then immediately declared bankruptcy and the money somehow vanished. Or maybe the ex governor of NJ having his capital investment company go bankrupt and somehow along the way lost track of 12 billion dollars of his investors money. Lucky for Mr. Corzine he had a friendly president in office with a very busy justice department that could not get around to prosecuting him.

      But I digress; you in fact are putting yourself above your tenants by saying you invest in the poorer side of town. All of my units are in the same two block of my office, I can walk the streets without a worry of being accosted, I have walked these streets day and night for 30 years.
      I don’t classify my tenants as poor all of them have a greater percentage of spendable income than do I.
      The rich invest their money and live on what is left, but the poor spend their money and invest what is left.

      I had a tenant a young East Indian man, who came to the US for one purpose; to get rich. He supposedly spoke English but I could only understand every other word. He moved into one of my single family houses with his extended family, paid the rent the week before the first of every month. He also painted the inside, and had new bone white carpets installed (they are long gone). He told me this was his home and wanted to live in a nice home. He was not on public assistance (I do not take section 8) worked about 90 hours a week, about 2 years later he bought his own home just over the river in NJ.

      How is it possible this fellow could come from another country, not speak the language, but act as responsibly as he did? Because he had a plan, a desire, he could have acted as all his neighbors, he could have chosen instead to be poor in America which I am sure is much nicer then poor in India.

      Poor in America is a choice, did you ever ask yourself why you are not poor? The poor are not victims of anyone but themselves.
      Yes I know some folks just get dealt a terrible hand, but if they don’t make that hand worse by picking up bad habits to make things beyond hope, I know our system and people will always step up to the plate. Single women know why and how they got pregnant, they are poor by choice.
      Ever allow a tenant to live in one of your buildings for free for 2 years? I have, but that was my choice to grant a veteran time to get into an assisted care facility. He was a gracious tenant who in turn created his own clean streets program (he was a character).

      You are the one who is confused most of these people are happy to live in slums. The rent is low leaving extra money each month for what really makes them happy. I offered to sell one of my problematic 3 units to one my long term tenants.

      The deal as follows: he had won the lawsuit lottery gaining $5000. During his tenancy which is still ongoing he paid me $61,000 in rent, I paid $60k for the building netting $10k at closing. My offer to him was $5000 down, and 180 payments of $600 on a land contract. He would also be collecting $1150 total from the other two units, in effect living rent free. I had also offered to teach him how to run the building until he had a handle on landlording. He turned me down, in doing so stating landlording was too much work and he would rather just keep things simple.

      The poor like to keep things simple, so stop feeling like the poor are behind the eight ball they are for the most part where they want to be, they have fulfilled all their goals. They do not call themselves poor, in fact for the most part they are having one hell of a life. Free health care, and one of my tenants gets a free ambulance to take her to the hospital for treatment for a self inflicted drug related health issue. They get a one month rent rebate from the State of PA, and Liheap subsidies to pay for their electric and gas, free food and a corner store that will give them 30% of the value of the food they purchase back in cash so they can buy some weed or a 40, one of my enterprising tenants allows the neighborhood druggies and hookers to use her bathroom and shower up, sometimes she let’s them sleep in the basement all for a fee. Btw, she is being evicted because as nice as I tried to make it for her, she has to continue what lead her to where she is today.
      With a fresh eviction she will be headed down to the next rung on the low income housing ladder. Maybe she will find that slumlord she is trying to meet.

      Oh, Fat Bastard is a term used in England to describe a rich man. At least that is what one of my English friends told me, the term he said predates Austin Powers by quite a few years.

      In the 90’s a French and English Company used the term on a wine label as a means to infer the wine had a rich character. Their idea was a smart one as it broke into the American market where the real money is.

      Please don’t call those who seek wealth evil, if GM had gone bankrupt in a legal manner as opposed to our government jury rigging the bankruptcy so as to cheat every mom and pop and investor out of their ownership interest in favor of a bloated Union. The split up of GM would have spawned tens of thousands of new small businesses which might have filled all of the vacant office space in Detroit and maybe have saved Detroit. Now nothing has changed there are 700,000 retired GM workers being supported by 70,000 working. The Volt automobile costs the taxpayers a loss of $250k for each car sold, in government subsidies. This is a guarantee of a future bankruptcy of GM. Bad companies should fail, this allows good companies to be rewarded for their efforts.
      While waiting for a plane in O’Hare airport I found the real estate section of REO’s in Detroit, we are missing out on some real deals, houses for $240 total price. So why don’t the poor pony us some money and buy these? It’s not like they didn’t live in these joints before.

      How about the local government giving a competing landlord all the money to build nicer buildings next to yours and then paying him all the rents so only his tenant would live for free? Would that maybe hurt your bottom line, not fair? This is the present mentality in Washington, this is right way to go, got to level the playing field give everybody a fair shot. Even if they don’t want to do what those in the middle class did to get where they are. like we all just had it dropped in our laps.

      • First, I never said anything against investing or capitalism, so changing the subject isn’t going to help you. “Investing” is ADDING VALUE to get a return over a period of time – such as sweat equity, or creating higher and better use. Your version of “capitalism” – taking government grant money from the taxpayers and stealing it for your personal use, is not “capitalism”, it’s criminal, pathological greed and theft.

        I don’t have time to respond to every one of your offensive and long-winded stereotypes of “the poor”, as if you personally understand the motivations of every last poor person in the United States, without ever having been in their shoes, as I have.

        Tell me what exactly you understand about being a 15 year old girl who’s boyfriend promises to take care of her and their future family, only to run off when he finds out she’s pregnant? And when the twins are born, her friends are thinking about college and getting a job, while she is up all night with crying babies and breastfeeding round the clock? And you have the shamelessness to say that “single women know why and how they got pregnant, they are poor by choice.” It takes TWO to make a baby, last I checked. No one chooses to throw themselves and their children into desperation and poverty. You can tell me its “a choice” when birth control is free, sexual education is mandatory and comprehensive in every state, and all mothers have access to child care and sick leave for their kids, rather than being punished by their jobs and corporations for having children or becoming pregnant.

        Tell me what exactly you understand about working hard all your life and getting ready for retirement, when you discover, age 65, that your company was a capitalist stock-options-scam like Enron, and your entire pension goes down the drain. Tell me what you understand about surviving on a social security or disability check because at 80 years of age, or battling cancer, you no longer have the ability to work. Tell me, what exactly you understand about the millions of people in this country who are one medical procedure away from bankruptcy, or the countless who are already bankrupt by medical bills (the #1 cause of bankruptcy in this country.)

        You know what, when you have to sell all your properties just to pay for chemo and radiation for a stage IV brain tumor, THEN you can come back here and tell me everyone in this country is “poor by choice.”

        Truly, your apathetic ignorance is stunning.

      • Amen, Denis,
        I am almost done reading “Atlas Shrugged,” and one theme of this book and others I’ve read like is is that, indeed, people are going where they are intending to end up. It amazes and concerns me when I hear the “rage” against those evil “one percenters” (the whole occupy wall street craze has subsided, thank goodness). Those one percenters who pretty much created the country and pay roughly a third of all tax revenue created, give or take, without whom we wouldn’t be able to fly, ride trains, or flush a toilet. I see a dangerous “demonizing” of “smart people who make money” in our society. Perhaps it’s been there all along and I’m just seeing it.

        I too considered “slum lords” to be or questionable character, as most of my 49 units are “blue collar” type. But I’ve got a few low income places and I see the same thing: These people make choice after choice after choice that puts them here. One of my greatest blessings is the sense I’ve developed to discern between “entitlement” attitude and those who are simply in a tough place (like your tenant from India) but are digging their way out and making a life.

        Thank you for your post. the energy you put into it made a difference.
        Ken

        • Ken, are you seriously suggesting that anyone below the poverty line is there due to “choice after choice after choice that puts them (there)” because a crackpot like Ayn Rand says so? I bet you actually believe that America is the land of “equal opportunity” for everyone, home of the free and the brave, too. Those silly people on section 8… don’t they know they can just up and start a billion dollar company or run for president? It’s a choice! Just CHOOSE to be rich! Choose to be powerful! Choose to work at Walmart because it’s the only place left in town hiring in this economy, and just climb that ladder until you rule the world!

          I’m sure you’re not a fan of actual facts, but if you ever care to look some up, the majority of the poor in America are the elderly, which is a disgrace. Getting old and unable to work, last I checked, is not “a choice.” Secondly, the #1 cause of bankruptcy in this country, is medical bills due to major illness. Last I checked, getting cancer is also not “a choice.”

          The rest of the civilized world has long ago figured out that the elderly need care and pensions, and that all of society benefits when every man woman and child can see the doctor regularly due to public health plans, rather than wait until they are almost dead and forced into the ER with something catastrophically wrong, then economically ruined by the expense.

          Judging by your comments about the “poor people” and their “choices” I doubt you’ve spent much time outside the country club.

        • Aria,
          1. Being insulting and attacking doesn’t make you look any smarter. Drop the self righteous anger, we’re just communicating here. If you have something to teach, teach. What you’re doing here is the equivalent of taking a bowel movement in the middle of a crowded room.

          No, I’m not suggesting that ANYONE below the poverty line is …. etc. etc. I detected an amazing amount of acidic emotion though. What I am suggesting is that, if you take “1,000 people” who are living “section 8 type” lives, I truly believe that 950 of them, you will find, are living those lives due to (conscious or unconscious) choice. I say this because I’ve observed life and judged it to be so. You may have glossed over this point: “…I’ve developed to discern between “entitlement” attitude and those who are simply in a tough place (like your tenant from India) but are digging their way out and making a life.”

          I personally spent a good deal of my youth dirt poor. No country club for me.

          FYI: #1 selling hardcover book: Bible. #2 best selling hardcover book: Atlas Shrugged.

        • Thanks for proving Ken, that you can’t be bothered with actual facts or statistics, just the world according to your personal opinion. Are you aware that, like bestselling books (thanks for the laugh), data on the poor is actually carefully collected and written down? Look up actual facts sometime before you go spouting off nonsense – “950 out of 1000″ people who are “section 8 types” are not there “by choice” unless getting old or being disabled is done by choice according to you. And unless you are literally a millionaire to begin with, you are one unexpected illness away from bankruptcy.

          These are not opinions. These are the facts of living in America today.

        • To be poor in America where there’s so much opportunity compared to being poor in India or any other 3rd world country w/o the same infrastructure and opportunity for people is a huge difference.. and no comparison. I think the point about statement: “In America, being poor is a choice” is that with so much opportunity, rich infrastructure, and resources available to us, you CANNOT stay poor if you take action on what is already given/available to you. While people may not actively choose to be poor, it’s much easier to stay “poor” in America, when you’ve grown up w/such high standards compared to the poverty in a 3rd world country..

          The case of being poor by choice is made every time by the immigrants who truly DO come from POOR countries and find ways to make a MUCH BETTER life for themselves from where they came. The example Dennis gave about the east indian is a PERFECT EXAMPLE of someone not choosing to be a victim of circumstance that some people in America claim! The choices made by people from America are SO MUCH DIFFERENT than the (even more poor) immigrants who come to America from a 3rd world country. They truly know what living in poverty is compared to the standard of poverty of America. I think it’s very easy for us to limit ourselves by our beliefs and comforts. It really seems to be the default for being human.

          No one makes choices that purposely lead themselves to their own financial demise & well-being. The path of poverty (or even poor health) is typically filled with “easy” choices rather than “the right” choices and instant gratification over compounded interest of a reward down the line. easy choices and quick gratification encourages and leads to poor habits, which inevitably leads to bad situations and poor quality life styles.

          While Dennis’ statement sounds harsh (paraphrased) that “people in america are poor by choice,” the chances of staying poor in America than in a 3rd world country SHOULD BE close to 0 if you have the right attitude and value system. Chances are that the timeline of someone and where they are today can, most often than not, clearly show evidence of the string of consistent choices and habits that led them to where they are today (rich or poor or somewhere in between).

          Perhaps a nicer way to approach this would be with a question: With so many resources and opportunities given to us in America compared to a 3rd world country like Africa, how can anyone stay poor? Sometimes we are just a victim of our own comforts and beliefs than our environment and circumstances.

    • I go in these neighborhoods, but when I meet a neighbor and go into their house, and see how their landlords give them the bare minimum, I am conflicted. I gave my property a lot of care, and i know some people looked at how much effort i put in it and asked why I put in so much…I did, and depending on how it goes, I may do it again if it doesnt bite me in the face. My standard is would I live there, and I fix it up accordingly (which is really nice). However, you are right that others dont care. However, because I take the care that I do, the neighbors now go around and call me Ms. Lisa, and respect what I’ve done. Thats worth something. Because it was a nicer fix up, I got a really good tenant who recognized the value, and I think that tenant alone brings up the clientele of the neighborhood (corrections officer). So, I hear what you are saying, and I think we are the same when it comes to this neighborhood, but sometimes I do get asked why I bought a brand new stove/oven/refrigerator, and I just think its what I would expect. Im waiting and see, but I think that extra effort I did is paying for it.

      • Lisa,

        You put in the effort as did I many years ago, but you will be disappointed just as I was.
        It is simply human nature which cannot be changed.

        We all have a tenant mentality when we do not have a direct ownership of an asset.

        Have you ever rented a car or stayed the night in a fine hotel?
        Did you treat the asset as if it were your own?
        Have you ever been on someone else’s property and left it in better condition then when you arrived? If you have you are a one in a billion.

        When I was a child my father rented the same house in Ocean City, NJ for two weeks,, the place actually looked like the house in this thread. Each year he would fix everything that was broken with the help of his sons, my mother would clean the place from top to bottom before we left. I thought we owned the house, but my father said nothing makes a landlord happier then a tenant who cared for his property. As rents increased each year in this popular vacation resort our family paid the same this when on for 10 years when the owner died and the property fell into a disagreement between heirs.

        All my tenants would need to do to have me provide nicer amenities would be to take care of the ones that were in place. All of my buildings were heavily renovated because I bought them for pennies on the dollar. Dirty carpets and marred paint does not happen on its own, trash and litter is not deposited in the streets by rich folks from the suburbs. I do not live in this area and frankly I do not care how these folks choose to live.
        I live in a quiet suburban area of many races and cultures and somehow our streets are not littered with trash, and there is no crime. Most of the time our doors are not locked neither are our cars.

        People in low income areas could easily live in the same way if they wanted to.
        How much money has been dumped into the inner cities of America? What is different in the poor areas? How have all of these government programs helped the poor, you don’t seem to realize they are all slaves. Slaves to a government check and I and other low income landlords are actually providing voter storage facilities, for these slaves to a government pay check.

        In the end all of this is going to stop, just as it is in most of Europe when it does it will not end nicely those with low income tenants might rue the day they bought their properties. Either way I continue to grow my capital by collecting the most from my investments as possible. Any time one of my tenants wants to buy in all they have to do is step up, but I am not going to hold my breath while waiting. Our government has decided to provide everything these folks need to stay where they are and most choose to do so in the richest nation in history. Where there is so much money available that one cannot fail, but some do choose to fail.

        • that impression, so far, has not struck me. I see in some the lack of knowledge on how to get out of the circumstances, and I see people working 2 jobs to make it. Its a wide mix of people in this area, and drives, and levels of civic responsibility. I have thus far been pleasantly suprised over the last year in fixing it up and renting it out.

        • You have no idea what you are talking about Ken. Nobody chooses to be bankrupt by medical bills, nobody chooses to get old, disabled, sick or unable to pay for the basics in life. The profound ignorance in saying someone who could not afford to go to college, and has to work two minimum wage jobs just to pay the bills and try to pay for childcare, is making “a choice” to be poor, or has the same opportunities as everyone else, is stunning.

          When college, childcare, drug treatment, healthcare, counseling, prescription drugs, transportation, access to parks, libraries, public transportation, etc is EQUAL to everyone, THEN you can say we all have equal choices and opportunities.You can not claim equal opportunity without equal social benefits for all. My point is not to say that is possible, or likely anytime soon, my point is that as someone who’s LUCKY enough to not be in the disadvantaged position, you could use a dose of reality and a lot less self-righteous smugness towards low income tenants.

        • Aria, you seem to miss the point. I don’t believe anyone says it is a choice to get cancer or all of the other tragedies you describe. I believe the vast majority of people have a path to great wealth in the US. You mentioned being a millionaire as a number of net worth where someone could be ok with some of the tragedies you described assuming they could buy their way out. I am 27 and have absilutely no doubt in my mind that I will have a net worth north of a million dollars. It really isn’t that difficult over time. My life choices will determine if I can accomplish this or not. I was lucky enough to have parents who stayed married and where there for me. They told me no and taught me the value of work and the dollar, this is something that many of the “poor” do not have. Something I see from my experience is folks my age who would rather play video games, drink beer before noon on weekends (as I work and don’t see them during the week in the morning) or surely have one by the time I get off of work at 4pm on a regular basis than rake the yard, do the dishes, vacuum, clean, cut the grass, read their kids a book and the list goes on. The more I go on the more I see the value in taking time to teach my 2 year old as I take him with to work on properties in various areas. Taking the time to landscape my yard and help not only my immediate neighbors ( I still live in my first duplex, no one would mistake it for a rich part of town) but also the neighbors of my rental properties. I don’t have fancy game systems or any actually, my TV is 5 years old, my truck is 16 years old, my wife’s is 5 but also a practical kia sorento and she deserves better than me in my opinion. I have also built a garage and poured a driveway for my tenants, put in energy efficient windows in most properties, new siding, and so on lots of improvements butit is for a win/win scenario. I will not buy a new fridge or stove or similiar items because I can get a better deal on used and provide a better product for my tenants as well as maintain lower costs to be able to consider to provide future service. When I put in a new bathroom, put a washer/dryer on the 2nd floor, energy efficient windows, C/A, or adding a garage I will charge the tenant more in rent because of this added feature and most of the time they come out ahead, for example a $100/m savings in their utility bills and an increase of $75/m leaves them with an advantage and I set my rate of return.

          I think people need to understand that business is good, ethical capitalism is truely the best system the world has every seen for all the players involved. At the end of the day people will not change unless they personally choose to. Some will choose to sacrifice to succeed later, some choose to live like their is no tomorrow and in turn sacrifice more with each passing day. I imagine this conversation will not change any of the folks on here’s firm held belief but people continue to try. It is a lesson in futility, the worry of something we can’t change takes away what little power we individually hold. But leveraging that little power into living and leading by example can make one very wealthy and this is a direct response from serving others and serving them well.

  29. This whole business model requires that you don’t want or expect quality. Any quality in the building will not be appreciated and will be abused, if not destroyed, and any quality tenant will move to a better area. Accept this fact as the nature of the beast or don’t invest there. It’s not really a question of right or wrong or about morality. It just is what it is.
    If you are thinking of doing these deals because you can’t find deals in better areas, I’d suggest learning marketing strategies that will allow you to CREATE deals in better areas. Too many people are looking for deals when in fact most good deals are created. Start ignoring list prices and start putting in 10 offers a week on properties at the price you’d like to buy them at. Test for a motivated seller long enough, and sure enough you will find one… and two, three etc. Put up some We Buy Houses signs and find people who want to dump their property. It isn’t hard to create great deals… but it is hard to find them.

  30. Jerry, Dennis and Ken defend the 1% as if there are no Montgomery Burns, Dennis Koslowskis, Alan Stanfords, Bernie Madoffs, Ken Lays, or evil rapacious slumlords amongst us. (Okay, Monty is fictional) Here are a few of my facts, ( :IF you don’t like them, I have others) There are scummy people, thieves, schemers and slobs in all layers of the economic spectrum. And there are good, clean, responsible people at all levels, too.

    One of the reasons poor neighborhoods have higher levels of trash and litter, is the sheer density. There is litter in my half million dollar neighborhood. There is more litter in my rental neighborhood partly because the population density is higher.

    Your dystopian view of the poor would be true if all poor people had a “level playing field” and “equality of opportunity – not a guarantee of equality of outcome”

    If we lived in a society that really gave all poor a chance to work their way into the middle class, and the middle the opportunity to work their way up to rich, then we would still have some poor people who would make the choice to be poor, and others whose accident, illness, infirmities or even low IQ prevents them from making progress. In a society with economic justice, we would have fewer of them.

    I don’t like it either, when a low income tenant trashes one of my houses, But the 80/20 rule applies even with the poor. 90% of my tenants keep their homes clean and pay their rent, (though not manicured and not always on time) Even the slobs paid rent.

    Why do I clean and paint between tenants? There are two types of tenants that will rent a clean house: Clean people and slobs. There is one type of tenant that wants a dirty one in disrepair. You got it: the slobs.

    • Thank-you for the valid points, Jim. You’re right on in that if a slumlord looks down upon their residents as “inherently” stupid, messy, choosing to be poor, etc, they create a self-fulfilling prophesy of headaches by how they neglect the property.

      It is ALWAYS the quality of the unit that attracts the quality of the tenant, like a magnet. When the owner doesn’t bother to clean or paint or make safe and sanitary the rental, when the owner don’t bother to keep up with repairs, what kind of example does that set for the resident? I wouldn’t be surprised if the real “human nature” in this situation would be to trash the place as much as possible in a passive-aggressive attempt to get back at a shitty landlord.

      • Aria –
        Just like others in this discussion before you, you are making a distinction that there are both high and low quality tenants. I want to make sure that you realize that, as the is really what the others are saying as well. Perhaps they are making light of it, but it is clear to me that you guys believe the same thing.

        What troubles me is that in the previous several posts from you, it sounds like you’re saying that everything is the fault of the landlord. While there are certainly slumlords out there, plenty of good landlords are victimized by the bad tenants.

        No matter how well you treat some people and how nice a place you deliver to them, there are always tenants who treat their rental like crap.

        It is inexcusable.

    • Jim,

      This is a laugh, please stop deluding yourself about the trash in the hood.

      In Philadelphia there are neighborhoods in which the residents will not sell to outsiders, these blocks are pristine. People take great care to keep their walks and streets spotless. Don’t get confused most of these same people have very low incomes but have learned to live in their means. Please don’t get me wrong this cuts across all racial lines, these neighborhoods are of every color and culture people. My comments are all directed to people who are on a fast track to the bottom of which all are tenants.

      People who succeed in life for the most part have solid families and this is the reason, a stable environment breeds a very good shot at a peaceable life. Single motherhood is promoted by government as is dependency. Human nature if left to itself will always sink to the base level where no one feels they have worth and because of this feel nothing else has any worth including the property or life of others.

      I have seen my tenants go through their mail tossing anything they do not want on the ground. I installed a trash can near the boxes but the City fined me for having a trash container out before trash day.

      If you really think of it the US government is the biggest and worst form of slumlord.

      Let me recommend a book by a famous American. His autobiography “Up from Slavery” by Booker T. Washington.
      This is a book that should be required reading, no student should be allowed to graduate without first reading this book. And yet our public school system only promotes nonsense funneling everyone towards higher education, where they can be brainwashed some more.

      I know a lot of the BP investors are for more dependency and more section 8 which if you think about it is welfare for landlords. The government pays 30% more for housing, if you think about it a guaranteed check in the mail every month. Don’t most business give a discount for prompt payment? I know I do, if a tenant pays on time they save the 10% late fee.

  31. Thanks for the kind words Karen, Brandon and Josh. I really appreciate it! Hey Brandon, if you tweet my comment please mention my name. It may just be an odd fetish I have, but it tickles me to no end when Google spiders crawl all over me : – )

    I am an agent and I’ve done some research on list price vs sales price on solds in my area. I’m finding that in my market that about 1/4 of the time the disparity between the the list and sales price is quite dramatic. In light of this, it makes little sense to look at the list price and try to determine if it’s a deal or not. You just don’t know if it’s a deal until you try to make it one. I tried to convey this point to someone not long ago and they disagreed. Mind you, this raw MLS data is as accurate as accurate can get. Here’s something I’ve learned about people: Some people will never let facts influence their opinions.

    • Jerry:
      I NEVER go by asking price. Irrelevant. Many sellers put up what they’d “like” to get, but don’t believe it themselves.

      My main point is that I will pay only what I am willing to pay. Read above: asking price is irrelevant.

      I comp the property then deduct all of my costs and expected profit. Then, I begin negotiations. I hate when a seller accepts my first offer – I’ve offered too much.

      Know, before negotiating, what the property is “worth,” all your anticipated costs (more than you will expect), and the profit you require.

      If a seller can’t work with that, move on.

  32. Jim Walker… good points but highly disagree that the trash in low income areas is due to population density. My first property (12 years ago) was in a terrible neighborhood. It always amazed me to see the trash pile up almost in front of my eyes. People (just about every one of them) throw any wrapper, plastic bottle or whatever right on the ground and keep walking. Then they say, “Some day I’m going to get out of this S-hole.” Really? Did you ever realize you ARE this S-hole? It is a reflection of you. You pack your own lunch and open your lunchbox and complain about what’s for eats.
    I remember on day as a kid I was riding bikes with my best friend in the woods. I through a wrapped on the ground and he told me to pick it up. I laughed. He said firmly, “No. Pick it up.” I concurred. I didn’t litter from that day on, which was 25 years ago. Sadly, nobody teaches people in these depressed areas these simple manners. Thankfully, I had a friend that did.

  33. Only having been a landlord 3 years, I still hold the premise that if I offer nicer properties (within reason), then they’ll take better care of them. I think this has panned out pretty accurately so far. There are exceptions. The people who are living low quality lives by their ongoing moment by moment choices don’t care, but I do my best to recognize and avoid those, hence I become jaded!

    • That has been my experience so far, one in a low income distressed area, and the other in a lower middle income area in Columbus, OH.

    • This is good to know!! I always think, in the back of my mind, that because I’m new, there’s a good chance I’m wrong (no matter what I’m thinking!) — I’m averaging out ok though!! ha ha!

  34. Carlos Garbiras on

    Hi Brandon,

    I’ve been reading your blog for a while now and I love your content. I was happily surprised to see your post here on Bigger Pockets. I’ve learned tons from this open question blog post. I’ve also learned what people in each side think about this kind of investment. If the numbers make sense you should do it. I’m sure there are a lot of lessons that you’ll learn in the process that you will be able to share with your audience. I also believe in the positive impact that responsible landlords can have in this kind of neighborhoods.

    Let us know what you decide. I’m interesting in knowing.

    • Brandon Turner

      Hey Carlos- thanks! I get to write each Sunday for BiggerPockets, which is awesome! This has been a super fun conversation, so thanks for joining in!

      As for the property – I decided to pass for now. I’m not opposed to the work, but I feel like my business is moving away from the tenant headache and more into the “big picture” so it didn’t quite fit with my changing business model. Five years ago I would have pounced on this :)

      Thanks for the comment and keep in touch!

      Brandon

  35. To truly sum up, there are easier ways to make money in REI. Unless you are an advanced landlord, the area is in a long term gentrification process as opposed to a declining process. I would strongly caution not getting involved.

    Leave these rentals to those we sometimes unfairly call slumlords, who sometimes are the real heros by providing housing to people who deserve to live under a bridge in a cardboard box, and would be doing so if they voted Republican.

    • Just to clarify, what exactly is the type of ‘bad’ we are talking about here? For example, if the tenants are illegal immigrants (family with kids) that work in construction and pay cash, in a neighborhood that has an occasional shooting… would you say that this would fall under the subject of the above topic? I mean, I’m thinking, these folks need a place to live. They need to put food on the table, and they don’t qualify for government hand outs because they are illegals, so they must work, and if they work and have families, how terrible can it be? Am I fooling myself?

      • Brandon Turner

        That’s a great question. Yes, this neighborhood has a lot of illegal immigrants – but I think this area was just a bit worse than a family neighborhood for immigrants. This was more like “single guy 45 years old smokes a lot of pot and does meth” sort of neighborhood, or property at least. I believe, though, by fixing the place up a bit it could have transformed the neighborhood into more of a “working class” illegal immigrant neighborhood – which I’m okay with.

        On that note – I struggle renting to illegal immigrants because there is seldom any course of action to go after them if they do something bad. If they rob the place – I could never find them. I couldn’t take them to court to garnish wages, etc. So now, I require at least one adult living at the premise to have a valid social security number.

      • I would welcome working illegals, none of my business except if they are buying and storing lots of nitrogen based fertilizer on the property. Working immigrants are in most cases not less bad tenants most are actually not really tenants. They fully expect to buy their own home some day. A true tenant is a permanent tenant one who would never think of buying as this would require putting down roots, and maybe mowing the lawn, maybe missing a tv show while mowing that lawn. Nooo Waaay!

        Less bad is just that less then good. A good tenant is one with credit, a checking account, a plan in life, and some good habits, one that cares about their rental history.

        A less bad tenant is one that in some form or another can scrape up the rent and other costs of living in a rental each month. The bad scale notches down when the rent is paid but the utilities are randomly cut off except cable tv which gets paid first on the food chain before food for the kiddies.

        The less bad scale goes down a bit more when the rent is late on a semi regular basis, but paid before the eviction is filed. I don’t go much “less bad” then this, as I have good cash reserves, without good cash reserves the landlord is a slave to the low income tenant as he needs to cater to their whims until the mortgage is paid off.

        Obvious drug use beyond smoking pot is also not allowed, sale of drugs in any form is going to get you a one way ticket out of my properties. Although I will admit in the past I looked the other way because they acted in a very stealthy manner, which did not cause any other tenants to have concern. These particular tenants finally stepped over the less bad line and are gone.
        I will no longer allow any drug sales of any kind no matter how stealthy the dealer is.
        Just remember drug users need their stuff and selling it in most large cities is technically not illegal accept when the police occasionally grab a nice car or some cash to pay the bills at the station from the nearest successful dealer in a raid or traffic stop.

        No one really thinks the government wants to stop drugs in the Cities do they?

        I could end all drug usage by the poor and most in the middle class in one year.
        Simply require a clean drug test before any government assistance check of any kind would be sent out. In the American tradition 3 strikes and you are out, no more assistance of any kind. Which would be the end of drugs in America except by the idle rich, who don’t need to steal your copper pipes to buy their fun stuff.

        While I am on the subject I could end the bulk of poverty in a year. Change the tax code the more money you make over say $20k the less taxes you pay. There would be exemptions for less then able bodied people. Anyone starting a business with 3 or more full time employees on the payroll but under 100 would pay half the corporate tax the owner of said business would pay a flat 10% tax on income.

        I am thinking this would put 95% of police and 99% of the criminal justice system out of work. We can’t have that, we need these permanent low income folks around in order to keep the government employed.

        Oh well, you could look at low income tenants like I do, a way of getting some of your taxes back from government, and of course on the backs of the poor they have to do something to earn their keep besides voting for the people that keep them in poverty.

  36. Hi Brandon,

    I’ve looked into Section 8 extensively. If there’s a US city what that pops up most often, it’s Chicago. I don’t think we can be beat for “slums”.

    I’ve talked to the CHA (Chicago Housing Authority, or local Section 8 governance) and met with their directors. Also talked to a lot of realtors, property managers and agents who placed Section 8 tenants. It’s a viable strategy with high risk and high rewards. The key seems to be to find good neighborhoods that hold value over to mid-to-long term (at least 5 years). Chicago, especially south side, has an incredible crime problem and there are hoods that you would just never touch no matter what. CHA did what they could to bring down the projects, but they dispersed them into the same area under new construction apartment buildings, so it’s harder to identify section 8 areas. Illinois is also tenant friendly as well so it’s a real pain to evict bad tenants (takes at least 3 months, sometimes a year).

    Speak to the experts on where the best areas are that have stayed stable despite the presence of Section 8 tenants. I guess I’d agree with the other commentators, that location is still important. If you can’t offload the property in 5 years because it continued going downhill, you have a real problem. Find the few nice spots that have not become slummy. You actually find high quality Section 8 and market tenants there.

  37. Thanks for sharing this. Long-term ownership is the key to genuine land parcel wealth. If you buy decent properties and contain them forever, that’s going to supply the highest likelihood that your genuine land parcel will have significant equity down the road.

  38. Hello . . . we did buy a multi-family in a bad part of town. It has secure off-street parking, gates, and a video system for security. Once on the property it is quiet and peaceful and beautifully landscaped – the tenants are all long term and very nice. It is also on a bus-line and walking distance to shopping. I would do this again with another MF unit. I think lower income tenants appreciate slightly lower rent (we strive to be a little under market) and being close to town (walk or short drives to save on gas) and yet feeling very safe.

  39. Dani Johnson on

    Dennis-the truth of the matter is: 1. You wouldn’t hire any of these people to work for you no matter what they did. You have friends, relatives, school-mates, country-men to participate in any TRUE opportunities that come your way or that YOU create! 2. The bird feeder + the “free I-PAD serve important functions for you. To keep these people away from you until such time as you can get some money FROM them. Even if it is a small amount each month! Let me know your thoughts!
    Hope this helps!

  40. I am looking at a rental property (my first) in a not very nice neighbor hood as well. There is a strange twist to my predicament though, it’s in a college town very close to campus. It is a notoriously bad part of town, but I would say mild compared to big cities. Crime would be theft over anything. I’m hoping I can bank on renting to college students who are looking to live in a rental with low monthly payments. I went to look at it today and the unit across the street has been completely renovated and looks beautiful, we talked to a student who lives in the unit and likes it because it’s a cheap and nice place. He did say it isn’t the nicest area but I is right for the price.

    The 4 plex is vacant, listed at $280k. It has 4 4 bed 2 bath units that can be rented for 1000 each. I’m planing on living in one unit and getting the owner occupied FHA loa for 3.5% down. If I put $50k into it (hopefully with the 50k included in the loan) my mortgage payments will be around $2000 and I’ll be bringing in $4000.

    Is it worth it? Too much for a first investment or just ambitious enough? Does the college town factor make any difference, or should I run for the hills?

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