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The Truth About Cheap Properties and War Zones (Hint… It’s Not What You Think!)

by Lisa Phillips on December 8, 2013 · 12 comments

  
War Zones

There are a quite a few investors who brave the perils of buying and holding properties for basement prices, all in the name of real estate investing and consistent $400+ cash flows.

These areas can range from quaint working class areas to working class row homes in the inner-city. Most can be seen from foreclosures listing on the national MLS and HUD, but opportunities for excellent cash flow nonetheless. But, when I listen to the discussion, I find that people assume that low priced housing means that it’s a “war zone”, and that’s just not the case.

I’m going to show you here why sometimes it’s as simple as location, and being old, that determines that lower price, even more so than the supposed crime associated that may be associated with that property address.

Waiting for the Money

Sometimes the money just hasn’t reached that area yet, because there were more prime locations that are taking all the money first!

This is completely legitimate reason why some low priced houses just sort of sit on the market, and not picked up quickly. Not every town has a ton of investors sitting there waiting to pick up every house on the market. Most of the money follows a sure bet: Universities, downtown revitalization efforts, prominent business parks and facilities, etc. There is enough money being constantly poured into those areas from developers, new restaurants and bars, etc, that there simply isn’t enough money for everyone to spend their money for a return in every suburb available. In time, that neighborhood can be the next hot spot if its in a solid location, prices are still low, and there are strategic geographic indicators such as access to highways, availability of parks, or even open land that can be easily converted into a school yard, that’s when you will see the money from investors coming as fast as possible to those areas. Don’t assume it’s a “war zone,” however.

Age Plays a Major Role

Depressed housing prices usually stem from neighborhoods being just plain old. That’s it!

Solid tract houses that are functional, safe, and livable, although built in 1956. I have fixed these houses up, and they are some of the most solidly built houses I have ever been in, by the way, and can easily last me another 40 years; all the while fending off structural and water damage with solid, sturdy bones. They’ve actually been quite amazing when I think about it. If being old is a deal breaker for you in real estate investing, you’re always going to be paying a premium that dips into your cash flow and slows your rate of appreciation. But, if you want opportunity to make great deals on a buy and hold rental, this shouldn’t scare you off. It makes sense that older homes have zero premiums, thus have to offer lower price to entice investors.

Low priced housing in a large city versus small or medium sized cities can cost the same, but have a completely different demographic and feel. This can cause a lot of misinformation, as you are judging a depressed house in New York City to one in Columbus, OH. The prices can be the same, but there is a world of difference in what that neighborhood looks and feels like, just because land and population density is so stratified. That is why you can’t judge a book by its price tag, you have to read the content to see if it’s that diamond in the rough you were searching for.

Check out the Neighborhood For Yourself

Maybe because I grew up in a working class neighborhood, I knew you should look first before you pass an investment off as “it’s so low, it must be in a war zone!”

Maybe that familiarity made me get some guts and check these neighborhoods out firsthand: I mean, the profit margins are so great! Who knows, but sometimes it’s interesting to hear someone who has never been to a neighborhood or community, so assuredly tell anyone that will listen how “bad” the neighborhood is and you should “definitely” pass it up. I guess that’s why there’s enough of these cash flowing properties to go around. We are all looking for a deal, and when these properties are denigrated sight unseen and passed up although the numbers are excellent for your portfolio, it’s funny how people tell everyone who listens how lousy it was for them, so it MUST be lousy for me. Good thing I and the other investors go look first before making blanket statements. The deals are there!

What really makes a neighborhood a “war zone” isn’t the price of the property, it’s the associated crime. That’s why we use the word “War.” Because as an investor we’re scared someone will burglarize the place when we’re not around, or worse yet… burglarize us!

I get the fear, but that scenario doesn’t have to happen. It’s personally never been the case for me, and I’ve been in some suspect areas when looking over potential homes. Now, some depressed houses are crappy, some are in “war zones,” but those are easy to spot and rule out of the question in minutes. All at the tips of your fingerprints, you can determine for most cities the crime rates associated with that address, the rents for that neighborhood, and see a map of the place on Google before even attempting to drive there. I mean, you just have to pay for internet access.

Conclusion

To all the BiggerPockets’ investors who invest in these neighborhoods, we have seen that there is more hype than reality. We see they are older but well kept neighborhoods. We see that they are foreclosures in these areas, so the price drops to bargain deal territory. For those who are scared that if you purchase these properties you think your guaranteed high crime, your guaranteed bad tenants, or your guaranteed theft and burglary…I think you need to keep reading BiggerPockets, because all of those “headaches” can easily be avoided with sound tenant screening and management, as well as doing basic research before going to look at those properties.

In the mean time, there is huge opportunity for the brave, prepared, and prudent.

Tune in next week, where I do another entry in BiggerPockets with BP contributor Al Williamson on how NOT to make mistakes investing in inner-city neighborhoods!

Photo: ATOMIC Hot Links

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{ 12 comments… read them below or add one }

Dawn Anastasi December 8, 2013 at 1:42 pm

Great article, Lisa! I definitely have also gotten the impression that simply because I buy properties for really, really low prices (sometimes for less than what you can buy an SUV for) that the area must be a war zone. Not so! And yet, there are areas of the city I won’t invest in as I just don’t have the time and experience to invest that way. Working-class neighborhoods are the way to go.

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Lisa December 8, 2013 at 3:10 pm

You’re speaking my language Dawn! There is such a diversity in this price range (they cost less than these fancy Landrovers), and its pretty easy to differentiate one neighborhood to the next on which to pass on and when to go forward. It definitely shouldnt be overlooked out of hand as part of someones investing strategy, especially if they want cash flow with lower leverage. I will pass on many neighborhoods, but there are cash cows for others without any perceived “headaches” for the curious. And, there’s really enough to go around.

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Sergio December 8, 2013 at 7:10 pm

Great article Lisa

I have the best cash flow investing in those areas and who knows one days this areas can go up dramatically……

Thank again

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Lisa Phillips December 8, 2013 at 7:37 pm

Thank you Sergio. me too! The best deals, and there are so many, I can’t possibly take them all myself :-) Share the love!

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John December 15, 2013 at 8:32 pm

Lisa – thanks for opening my eyes to this. I am new to rei and bigger pockets (note to self, post intro on new member forum) and still working on my strategy. This was an area I had looked past.

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Lisa Phillips December 16, 2013 at 4:47 pm

Make sure you introduce yourself in the starting out forum, its very supportive! This strategy just makes sense for getting the most bang for your buck, its just about doing it strategically, I think.

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Shaun December 16, 2013 at 2:32 pm

Great article. Drives me crazy when people on the forums on BP will just talk about any place that has cheap properties being a war zone.
Every area will have their low end properties and the real War Zones are going to be cheap but just because they are cheap doesn’t mean they are bad areas.

BTW quite the interesting mix of topics on your book shelf. :)

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Lisa Phillips December 16, 2013 at 4:46 pm

Drives me crazy too! I always wonder if they’ve ever even driven down to these areas?? Before shouting people down, how about analyzing what you may or may not have done right. Some people have forgotten about working class neighborhoods are, where as others are definitely cashing in.

LOL about the bookshelf! It must be a male thing, but no female audience member has remarked on my bookcase, but not so much for the other side of the fence. If you saw my roommates bookshelf, it would be all about military history and analysis of every war ever waged.ever.

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Shaun December 17, 2013 at 8:45 am

No they don’t at all.
The typical profile of the most adamant critics of a super cheap property will be someone that lives in a super expensive area (Northeast or SoCal for example) and invest in moderately priced areas (Like some of the popular TX markets) and just can’t see how it is even possible to buy a nice house in an okay area for less than a car.

I see no problem with their idea of getting like $1,300 on a $120K purchase with a mortgage in a solid working class area.
So don’t say my way of getting $575 on a $19K (with the renovations needed) cash purchase in a decent neighborhood in a far less expensive area is crazy.
(BTW since the biggest issues cited by the Haters are high maintenance costs and management hassles the above mentioned property I have had rented for 6 months and I can’t even remember the tenants name since I have NEVER gotten a call from her :) )

As for the bookshelf, I’m a dork what actually caught my eye at first was the book about Microwave Physics. That did however prompt me to look at some of the other ones. :)

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Lisa December 17, 2013 at 1:42 pm

Exactly, you explained it very well. Your methods work, and so do mine. To be honest, before I moved across the country, I had no idea either. Once I got outside of Las Vegas, NV to Oh, that’s when I realized there are perfectly great neighborhoods in those price range. But I won’t pretend I haven’t been there before.

Microwave Physics – That one was tough. TOUGH :shudders:

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Geoff December 18, 2013 at 9:00 am

Great article Lisa. 2 years ago I bought 5 sfr for $139k. 7 years ago these houses were selling for $70k each. They gross $3500/mo. Great cash flow, good tenants, relatively quiet neighborhoods. My tenants don’t want to live in apartments, they are families that have kids and people over on the weekends/holidays. I have one woman who is a janitor, another who is a bus driver, another who does medical billing. These people need an affordable home and want to live peacefully. The point is that this is a very needed market. Like you said in your conclusion, proper management is critical. I keep rents slightly below market, respond immediately to repair requests, give on time rent incentives. I just sent all tenants a Christmas card with a $25 grocery store gift card. There’s a lot of bad landlords in these areas, if you are truly a good landlord with a quality home the tenants will stay which means $$$ you to.

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Lisa Phillips December 18, 2013 at 12:50 pm

Exactly. I tell people: Where does the medical billing person live? How about the assistant phlebotomist? They are working professionals who will pay good money for solid housing in safe neighborhoods, even if its not “new.” The problem I try to combat is when new investors are thinking of going there, and you have people saying,”Stay away from that neighborhood!” I just want to say – If you haven’t been there and invested there yourself, you should say,”Check the neighborhood out first and make sure you’re comfortable.” You see the difference?

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