Last week on the BiggerPockets.com blog I discussed a property I was trying to decide whether to pursue or not. The property was located in a lower-income “rough” area of my town and needed significant cosmetic fixes (and perhaps more than just cosmetic.) I’ll tell you later what I did this week with the property, but first I want to explore the issue a little further.
This post became exceptionally popular and at the time of this writing has over 90 comments as people discussed the pros and cons of investing in lower-income areas. Clearly – this issue is a hot topic and something most investors will face from time to time. To summarize the comments (in case you don’t want to read all 90+):
- Many investors would never consider buying a property in a rough area
- Some do buy in low-income areas but chose to rehab it to high standards
- Some suggest buying all you can in that same area and improving the entire neighborhood
- Some suggest buying for cheap, keeping it cheap, and getting all the cash out without improving much.
That last view in the list seems to be the most controversial – purchasing a low-income property without any real desire to improve it. I’m sure you’ve seen the properties – as they stand out like a sore thumb. Deteriorating paint, junk cars littering the area, bedsheets hanging in the windows, and a variety of tenants who I would be nervous talking with, unarmed. Most of the world would look at this type of property and say it must be owned by a “slumlord.”
No one wants to claim to be a “slumlord.” So today I want to look at exactly what makes a slumlord and how to avoid being one.
What is a Slumlord?
Wikipedia defines “Slumlord” as
“a derogatory term for landlords, generally absentee landlords, who attempt to maximize profit by minimizing spending on property maintenance, often in deteriorating neighborhoods.”
Using this definition – it would seem that the majority of landlords could be defined as a slumlord. The main qualification in this definition is “maximizing profit by minimizing spending.” I would argue that if you are a landlord and not attempting to minimize your spending on property maintenance then you are spending significantly more than needed.
No landlord wants to spend a lot on maintenance. Maintenance is one of the largest expenses a landlord might face and spending money unnecessarily is like throwing money out the window. That’s why we get multiple bids, often do maintenance work ourselves, and use cheaper options when possible. Why spend twenty when ten will do perfectly fine? Why replace when something can be repaired?
I’m not suggesting a landlord should refuse a property maintenance issue – but “minimizing” expenses is key in running any business – real estate or other.
Exploiting The Poor
I think the key concept that is missing from this definition is “exploitation.”
The truer definition of slumlord, I believe, is
“a derogatory term for landlords, generally absentee landlords, who attempt to exploit tenants and maximize profits by refusing to spend on property maintenance, often in deteriorating neighborhoods.”
To me, a slumlord is one who takes advantage of a tenant’s situation in life to maximize their profits. A tenant who cannot afford a more expensive place often has no other option but to put up refused maintenance and deteriorating property condition. Sure, they could move somewhere else. Moving, however, is not free. It takes time, money, and acceptance into a new place that might not be any better.
Sure, we could talk about why the poor are poor and who’s responsibility it is to help them. I don’t want to go there though. In fact, I want to steer clear of the politics and rhetoric and focus on something not often talked about in business: the heart.
A slumlord is a condition of the heart.
It’s not about what a property looks like – it’s about what your personality looks like. Do you exploit the poor because they have no other options (or don’t feel they have other options?) Do you refuse needed maintenance because the tenant won’t leave? Do you ignore your tenants important requests simply because you don’t want to spend money? Then you might be a slumlord.
Again, I don’t think it’s mandatory that landlords pay for high-end repairs whenever a tenant wants one. However, providing and maintaining basic services with your property – even if it costs money – is not only good for overall business but also simply the right thing to do.
As the Biblical adage states, “What good is it to gain the whole world but lose your soul?”
My Decision About the Property
As for the property under consideration – I decided to pass. For me – I decided that the great cashflow but more intensive management did not currently fit where I want my business to be. For others – it might be the perfect investment. As I’ve stated time and time again – there are many ways to make money in real estate (see my article “The Top 100 Ways to Make Money in Real Estate“) Several years ago this may have fit more closely with my business model. However, today not so much.
This one, while it does make money, didn’t fit my standards close enough. I wish whoever buys it good luck- but for me I pass.
Let me know what you think below. Adding a comment is easy. Simply enter your name and email (and website if you have one), write your comment, and press submit. Easy as can be!
Do you agree with my definition of “slumlord?”
How would you define it?
Photo: Angela Anderson-CobbAre You a 'Slumlord'? by Brandon Turner