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.
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 LinksThe Truth About Cheap Properties and War Zones (Hint... It's Not What You Think!) by Lisa Phillips