Landlording & Rental Properties

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

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

Let me explain.

Several years ago, I was presented with an interesting deal to consider.

The property's numbers were great—$97,000 for six units, average rent at $475 per month, which following the 50 percent rule left $1,400 for a mortgage payment—plenty to cover the loan payment and provide substantial cash flow. The property was in need of some cosmetic renovations (paint, landscaping) to make it look less "scary," but I'm never worried about getting that sort of thing done. Additionally, the county assessed the property at more than double what was being asked.

However, the property had one problem: B Street.

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

After considering all of this, I didn’t know what to do about the property. I had never bought in that neighborhood—but the numbers made perfect sense and it fit my standards from a math perspective perfectly.

But was that enough?

young woman against a light blue background wearing a brightly colored striped sweater shrugging her shoulders with arms bent and palms facing ceiling expressing confusion

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 the county I was describing—such as B Street. But I don’t think that should be the primary reason for avoiding a purchase.

Related: Should I Buy These 80 Units? Would You?

And then there is the issue of safety.

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

In this specific instance, I did. While I wouldn’t leave my truck tool box unlocked and parked overnight, I didn’t feel like I was going to get mugged by simply being there.

And Then There Is the Issue of Tenants…

However, the major reason I was hesitant of purchasing in that location was not because of the location itself. I was 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 even further. A good friend of mine owned a small rental property near the one I was considering. He often hired me to answer phones and show units when he was out of town. Because his units were so cheap at the time ($395), the location and the unit mix (usually studios or one-bedrooms) attracted a certain type of tenant. The last time I helped him rent one of his units, I took over 50 phone calls in 36 hours. With each call, I explained the property and qualification standards over the phone (as to not waste anyone’s time).

man sitting clutching temples in front of blackboard filled with calculations

Out of those 50 phone calls, about 20 said they wanted to see the inside. I generally schedule as many showings within the same timeframe as possible to eliminate hassles and hedge against no-shows.

Of the 20 who made appointments to see the property, only 10 showed up.

Of those 10, only two qualified and one was interested.

Related: How to Use Price-to-Rent Ratio to Analyze a Location

Despite explaining the qualifications over the phone (including minimum income requirements), the other eight still showed up. The other 10 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 was 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” was vastly higher than other areas.

So What Would You Do?

Maybe you've been in this situation before. Maybe you're in it now! 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.

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    simonjames
    Replied about 7 years ago
    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.
    JWS
    Replied almost 7 years ago
    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.
    JWS
    Replied almost 7 years ago
    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.
    Rohit Yadav
    Replied over 6 years ago
    Very nice post. Real estate is good option for investment. If you are thinking about investing Real Estate in Gurgaon than go for Emaar mgf palm drive.
    Dani Johnson
    Replied about 6 years ago
    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!
    Andy
    Replied almost 6 years ago
    For me it worked out to buy in such a neighborhood
    Jennie
    Replied over 5 years ago
    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?
    Scott Blevins from Baltimore, Maryland
    Replied about 5 years ago
    What about doing it with section 8????
    Tim Waldorf from Schenectady, New York
    Replied about 5 years ago
    Should be “never buy a property in a location you don’t want to collect the rent after dark, unless you’re going to use an apartment manager.”
    Derek Askew Rental Property Investor from Spring Grove, PA (17362)
    Replied 6 months ago
    Hey Great article thanks for sharing! I’m in similar position now. But I have noticed when finding that “gem” tenant in that area it could be worth the XXX amount of no shows/unqualified prospects. I’ve experienced/know others who’ve experienced situations where tenants make 4-5X rent but still “struggle”/have issues paying rent. But also have tenants who make 2-2.5X rent and they are the MOST reliable when it comes to rent payments.