Is this a horrible idea?
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesYes end of discussion unless your Habitat for humans or some other charity this is financial suicide in my mind and you will destroy your family
59 Replies
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Yes end of discussion unless your Habitat for humans or some other charity this is financial suicide in my mind and you will destroy your family
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
I tend to agree with Jay. It is possible that there are some successfully pulling off this strategy profitably, but I'd bet you anything that they are very hands on, local, and highly experienced investors that screen and manage their tenants VERY carefully. In general, I'd advise a newbie to start in plain vanillla rentals in class B or better neighborhoods. House hacking is a great way to start to do that. Lower risk, lower return, but "realizable return" ... then once you cut your teeth on a few of those, if you still want to venture into the hood then find somebody who is doing it successfully to mentor you.
Also, at some point, you have to ask yourself, if you are in a relatively inexpensive market where a down payment isn't much and rent is much higher than a mortgage and there are those people that can't or won't buy their home ... why do you think that is? Best to answer this question for yourself because these will be your tenants if you buy in those neighborhoods, they'll help you discover those answers, and you may not like the answers you discover.
- Augusta, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
If this helps...when I first started out I had this "dream" of saving older homes in a nearby neighborhood that was teetering on the brink if sliding into the muck of human existence (so to speak). I love older houses and hoped others would too (note: these would be rentals). Almost a decade later about the only interesting thing in all of this are the colorful folks who swim by as we work on the 7 houses we own in that particular neighborhood. The last guy who was helping us replace the old water lines to the house took a long time doing so as he kept getting stopped by certain ladies "of the night" asking if he'd like their business (he declined). Sometimes I suspect the only reason I haven't gotten mugged is that in my work clothes I probably look worse than what lives in the neighborhood. In the end nobody with the name of "Melissa" or "Sarah" or "Jessica" is likely to be brave enough to rent these although many will call because the rents are lower than in other parts of my area. I typically save time by suggesting they drive by the house first and once they see the area I never hear back from them again. I know who is not as afraid to reside there. I'm not saying I'm the only one trying to "save" this neighborhood; there are others trying hard to bring it back to what it once was. But it's a struggle and since my city isn't the least bit interested in helping this particular neighborhood perhaps one that is hopeless. This is something you need to serious consider before starting your own project. Good luck....
Gail
- 10yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Unfortunately, REI isn't the place for your "dream". I'm not saying you should be a <fill in the blank with your most critical adjective for a REI here> REI, and that REI is the exact opposite of what you want it to be...not at all. REI is, and must be, a business first. If you start out by focusing on what the requirements would need to be to make your dream a success, you're going to lose money...big time. You won't be in business very long doing it, and, more important to your heart, you will end up hurting those you are trying to help even more.
My suggestion would be to become a successful (meaning you actually make money) REI, then take some of your profits and donate towards other groups that are successful helping those you're initial goal is to help.
- Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes10y
I would agree that one beginning investor should not try to turn around a neighborhood. However, I wouldn't dismiss your dream entirely. The spirit of your dream is to provide high quality housing to people who would not normally be able to find it. That is also the spirit of Section 8, and why Section 8 will pay for housing anywhere, not just in bad neighborhoods. It's also how some of my investments have been most successful.
To decide whether you can accomplish this half of your idea, do some more research about the neighborhoods in your city and surrounding towns. You need to know what Section 8 will pay in your county, and find SFH's that will cash flow appropriately, but are in neighborhoods that aren't intimidating for anyone to rent in. Shoot me a message if you want to discuss further. I'd be happy to help you look at the numbers in your area!
- 10yPatrick LiskaPro MemberInvestor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
I agree with comments above, as a first time investor, get some properties under your belt first that will make you money. i do believe you have a plan to secure money coming in with renting to section 8, government money will be guaranteed, but you will most likely be fixing the place up every time a tenant leaves. some towns just don't come back, so they only value you will have is the rental income, the asset may not grow in value and selling later may be hard providing no value in the future for your kids. And i could be wrong and you could buy some gold mines and make a lot of money, but i think the risk is too great for a new investor to try. I am fairly new myself, 3 properties and working on a fourth but i would not even take that risk myself, but to each there own, and i wish you luck in what ever you decide to do.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Joe Villeneuve very well put as usual.
@KJ Miller and it spawned a very dark time in my life Joe's response.. in the day before the great financial crisis I was a pretty substantial HML in the lower end fix and flip space with much of the loans I did C class some B's and tried not to do D's.
But when the you know what hit the fan.. I had borrowers jumping off of ships like rats. I had never owned any of these cash flow cows or dealt with this tenant base that lives in the mid west inner cities... fast forward to 09 and I am now the proud owner of 200 of them. and getting a PHD in the subject matter and losing millions of dollars.. my retirement at that time is was basically financially set and just managed my 20 some employees by 2010 business was a shell of its self from 30 million on the books to 6 million and a 6 million dollar hard money company is a hobby company that can be run by 2 people not 20. So as I collected my inner city cash cows it became evident that the best exit was donations to Habitat for Humans and local church's... rehab and owning them then reselling we did some of that.. selling as OREO we did a lot of that.. But I would say I donated 10% or more of the portfolio and took 100% loss on the house and called it a day.
NOw on the bright side I was able to go back 5 years and I got virtually every tax dollar I ever paid back on loss carry back along with paid no tax's for 4 years LOL.. But believe me I would much rather have kept my company going .. kept the deposit on the jet I had etc etc.. And the Hood will tear you down unless you live there and work it like a BUSINESS with not one thought of charity or doing good for the community.. the tenants do not give a rip about that they just want a home and they are highly transient by nature so your dealing with constant move outs make ready's releasing etc.
So in a long winded way to Joe's point if its charity you want just buy a house and donate it.. and feel good about it... or do as President Carter does and donate your time and build houses for Habitat. But don't try to confuse the two and think your going to profit from your charitable work.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes10y
Originally posted by @KJ Miller:
So, I'm still learning the ropes and not ready to jump in to actual investing just yet, but I just wanted to throw my plan out there and see what people thought of it (especially Kansas City folk). Obviously the main reason I want to get into real estate investing is to help make a better life for myself and my growing family, however I would also like to make a difference in my city. I have a dream of purchasing homes in lower income and rougher neighborhoods and providing quality sfh's to people where they wouldn't normally be able to find them. I would like to provide quality section8 housing for the less fortunate, but still make a better life for my family while making lives better for others. Is this even a reality? Am I crazy?
Admirable, but not realistic. Those that are less fortunate are not in that position because of bad luck or something out of their control. They are there because of poor decisions and lifestyle choices. They will not appreciate what you are trying to do. They will only try to squeeze everything out of you that they can. If you give an inch, they will take a mile and you will loose money, lots of money.
The rental business is a rough business. Especially in low income neighborhoods. You will be dealing with some questionable characters and you will always need to keep your guard up and your eye towards profitability.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@KJ Miller Ok you have gotten some good feedback by pro's in the business and really understand the asset class.
James who runs a company in Cleveland dealing with this every day and owns a substantial amount of them.. Not all inner city I would venture.
Joe who works Detroit and deals with I think a little higher grade than what you describe but knows the score and knows to stay away from what your describing for financial health reasons.
Myself the accidental landlord who knew not of what he was doing, back in the day and was forced into dealing with inner city and this tenant demographic. ( probably closest to your skill set at this time)
And then others who think you should do it that you would be a do gooder
whats your thoughts ? Just curious how people think about this I always wondered how people ended up owning these homes I know how I did.. But for others who buy them by choice.. Was your mind already made up and your doing it no matter what.. or did this thread give you pause to rethink.. ?
- Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes10y
Originally posted by @James Wise:
Originally posted by @KJ Miller:
So, I'm still learning the ropes and not ready to jump in to actual investing just yet, but I just wanted to throw my plan out there and see what people thought of it (especially Kansas City folk). Obviously the main reason I want to get into real estate investing is to help make a better life for myself and my growing family, however I would also like to make a difference in my city. I have a dream of purchasing homes in lower income and rougher neighborhoods and providing quality sfh's to people where they wouldn't normally be able to find them. I would like to provide quality section8 housing for the less fortunate, but still make a better life for my family while making lives better for others. Is this even a reality? Am I crazy?
Admiral, but not realistic. Those that are less fortunate are not in that position because of bad luck or something out of their control. They are there because of poor decisions and lifestyle choices. They will not appreciate what you are trying to do. They will only try to squeeze everything out of you that they can. If you give an inch, they will take a mile and you will loose money, lots of money.
The rental business is a rough business. Especially in low income neighborhoods. You will be dealing with some questionable characters and you will always need to keep your guard up and your eye towards profitability.
There are some parts of Cleveland and Akron that have had very nice (I mean very nice) section 8 housing built and the people that move in do not take care of them. It's sad and it just goes to show that people do not appreciate what they don't pay for. Your intentions are noble, but at the end of the day, people that don't want to better their lives on their own will never appreciate what you are trying to do for them.
My suggestion would be to provide quality housing from a landlord with integrity (That's you) and better your community by not being a shady landlord.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes10y
Great thread. Lots of quality info here for those getting into the business.
Here a quick story that will highlight the tenant mentality.
@Federico Gutierrez & I are buying this mixed use apartment building. Great building and it is NOT in a rough neighborhood. It is in a nice suburb. It is currently in escrow and I needed to do some creative things to get the financing approved.
The building is owned by this incredibly nice little old lady. Her father built the thing 60 years ago to run his shoe repair shop. She inherited the building years ago and ran the thing like an incredibly nice little old lady would run such a building. She cares for the building and the tenants. Her agent, myself and her actually did the closing in person. This is very uncommon but it was very important for her to meet the person that would be taking over the building and handling the tenants.
9 units in the thing. 7 units are occupied. Not one written lease, all handshake agreements. 2 units are empty. To get the financing to go through on this thing we go in and take over the management duties. We fill the 2 empties and get written leases on the remaining 7 tenants.
Twice I am sitting in one of the tenant's kitchens and the unit is immaculate. Beautiful cabinets and counter tops, freshly painted etc....The unit is 1 bed and includes free heat. It is worth $600-$650 any day of the week. The tenant is paying $450 and is going on and on to me about how happy she is that someone else is taking over the building because her current landlord is mean and neglects the building. So happy that a professional company will be in charge now and all the things in her unit can be repaired.
These tenants have been getting away with murder and they don't appreciate it nor do they even comprehend it. This is the type of landlord that would send in her grandson to change light bulbs all while practically GIVING away the units. In response to this all the tenants can do is bad mouth her and want MORE MORE MORE
That right there is the tenant mentality and the reason someone should NEVER go into this business hoping to help out the less fortunate. Again this was not even a bad neighborhood, this was a great neighborhood tenants just feel entitled to everything. The lower the class of tenant the more entitled that they feel. You get into the section 8 tenants and the entitlement is crazy because these folks get everything handed to them. Rent, utilities etc. They don't work for anything and are used to handouts. They will bleed you dry if you let them.
- Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes10y
@KJ Miller Never let others crush your dreams. Or define them.
That being said, if you want to fly big jets, you may need to start with hang gliders while you develop and test your plan. You fo have a written plan, don't you?
If not, that's your first hurdle.
Some years ago I was a speaker at my state's code enforcement association annual conference. Discussed exactly what I do and know to work.
One of those key points was that fixing up a single house in a given neighborhood can be a catalyst for other neighbors who will be inspired to improve their property, too.
However, I am not in the economic building business. I can't fix other people and I can't change a person with a scarcity mindset that their mind is their prison.
Plan your work, work your plan and don't plan the results.
- Investor · west seneca, NY · Member since 2014 · 376 posts · 211 votes10y
hello, KJ. its a noble idea, but not a financial practical one. there are reasons these areas of any town are in disrepair. its because those who live there, treat where they live and how they live with just as little concern as they can. they also look at paying their bills in the same manner. there is a reason most of these people are on the section 8 program. they have little intrest in doing anything to better their lives, and they will treat your rent in the same manner. i applaud you wanting to break into the real estate world, and i recommend that you do so, but find better areas. you will pay more money for sfh's in other areas, but you will have less headaches
- 10yBill ThompsonPro MemberRental Property Investor · Jamaica Plain, MA · Member since 2015 · 60 posts · 88 votes
It is not a horrible idea and you are not crazy. What you are contemplating is ambitious but doable. I know this from personal experience.
I own several multifamily properties in what I would describe is an improving C level neighborhood in Boston. I have seen great appreciation, strong cash flow, and deliberately charge 15-25% less rent so my units are affordable to working people. I have not experienced any major issues with tenants, turnover is low, and my units are returned in good condition when it does occur. I don't want to make this sound like utopia because it is not. Acquiring and renovating properties can be risky business... being a landlord is "real" work if you self manage. The point is your idea can work, it all depends upon circumstance. Here are some things to consider...
1. Set aside the fact your target area is low-income and evaluate the area from a "location, location, location" perspective. How's the proximity to downtown? Is it located near a major transit line? Is there nearby shopping, parks or other amenities? I'm a native New Yorker and lived in long island, the south Bronx and the lower-east of Manhattan during the 70's. The lower east side was the greatest ghetto of them all. Look at it now. The people can change, the location can not! Your ideas works best for low income areas that have POTENTIAL based on location.
2. Think about your potential investment area in terms of filling an unmet need. Does the area your considering really need more section 8 units? Does it have enough moderate rate / workforce housing? In my opinion we have bad public policy in this country that leads to an over concentration of poor people in many urban areas, which then leads to high crime, substance abuse, poor schools, etc. Why limit your pool of renters to section 8? I renovate to an A/B+ level and have no problem finding good non-section 8 tenants in my C area. My tenants are school teachers, bus drivers, court officers, landscapers... just regular working folk. For me this is where the unmet need is in my investment area.
3. Consider whether you are willing to commit the time and have the temperament to be a successful investor in a low-income communities. It is imperative that you be very "hands-on" to make this work. I screen all of my tenants personally. I feel like I have a responsibility to bring good people to the neighborhood. It is also important to make sure your unit is up to par. A subpar unit will ultimately lead to compromises on tenant quality. You need a good team and a system in place to deal with property management issues. Because of the hands-on nature, you need to be comfortable in your investment area. If you are afraid to go see your property or have "issues" with low income people or their circumstance, this is not the right fit for you.
4. I believe it is possible to be a socially responsible investor in low-income communities and still make a decent profit. Where I live the larger private investors are making a killing in these communities, it's the small "mom and pop" investors that have problems because of inexperience and no money to address deferred maintenance. The problem with large investors is many of them do care about the communities in which they invest. They do the bare minimum to maintain their property. Some of them that bought cheap for speculation just board-up their properties and leave that way. I believe positive change can occur one house at a time, one tenant at a time. The foundation of a vital community is PRIDE in neighborhood, a concept lost on investors that are only "in it" for the money. There is a right way and a wrong way to go about investing in these communities. If you move forward, make sure you are part of the solution, not part of the problem.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Bill Thompson some great points.
the death nell of anyone moving into this asset class is lack of understanding how tough it really is... UNDER capitalization, and the ability to scale quickly to make this all work.
I fund a few folks today that this is their bread and butter and they do pretty well with it.
ONe of them has almost 2oo homes now I funded 130 of them in the last 20 months for them.. So it allowed them to scale rapidly and to have the income and cash flow to hire full time maintenance and a leasing agent. Plus there are two partners they were born and raised there they know the market as well as anyone could and they will do this as their life's work.
But make no mistake they understand their tenant base and how to work them.. 3rd party PM and you would get killed financially I have seen that show play out personally ....
- Grand Rapids, MI · Member since 2015 · 23 posts · 12 votes10y
@kj miller It sounds like your desire is to help people and the real estate part of it is a bonus. This is just my 2 cents worth but have you considered setting up a non profit organization to accomplish your goals? I by no means know the ins and outs of the technical process for starting a non profit, but believe it would allow you to bring on like minded people who may shy away from investing in a for profit company but would be willing to donate time, money or expertise to you for a good cause.
- 10ySeth RouchPro MemberSpecialist · Denver, CO · Member since 2015 · 85 posts · 29 votes
KJ,
I've had similar thoughts when I started out and have done a little of what you're talking about. It did not have the same effect that I initially thought. The tenants did not understand the concept and were unable to appreciate that I was attempting to give them a better living situation. The units ended up in terrible condition and any financial gain ended up back into the property for repairs. Best of luck --Seth
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
Having more of a mission, vision and purpose in this industry than making money is admirable (and necessary!) I would have thrown up the white flag of surrender years ago without more of a goal than making money.
That said, like @James Wise has pointed out so illustratively twice, I no longer 'rescue' single mom's from the half-way house. I no longer have all that compassion and generosity I had as a bright-eyed newb. I don't listen to the stories or wait for their drug addiction to relapse. I learned the hard way that a lot of folks just don't care about anything but themselves and what you can do for them. What you're thinking of doing sounds like you'll be in a whole neighborhood of them.
That said, I still enjoy fixing up and/or making better a property and neighborhood that deserves it. I would just caution your trying to single-handily trying to reverse blight. I would focus on that one house in a decent neighborhood that needs TLC. Keep your compassion and do goodness as long as you can @KJ Miller!
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@KJ Miller I did not read your profile prior to answering.. after looking at it and realizing you have zero experience.. I think you can find your charitable desires in many other avenues than trying to provide housing in the worse neighborhoods in America.
@Steve Vaughan well said as usual... and the tenants you described is the tenant you deal with in the inner cities urban core of the mid west... plain and simple
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes10y
It's not crazy, but I would be very careful in lower end areas. You simply rehab the equity out of a house so quickly and large turnovers or vandalism can kill any cash flow. I've seen people do it right and make money, but they usually specialize in it and are never new to real estate. I would start in more working class/middle class areas and learn the business. Then you can try to work your way into low income areas once you've gained more of a foot hold.
- 10yMichele FischerPro MemberRental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes
KJ, you may want to check out my BP personal blog posts, and podcast, if you have not listened to it. My husband and I are currently focusing on the low income niche. We are a bit different, since we can't participate in Section 8, so we are the next bracket down. It is a lot of hard work and a lot of what feels like beating our head against the wall. It is really hard to screen out the worst tenants, but solid screening really helps. As does a fantastic property manager who is successful in that niche, if you can find one. Al Williamson is another BP member who is trying to balance profit and giving back to a neighborhood.
- Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes10y
People need housing, as a landlord and investors, you are in a position to accept section-8 subsidized rent. It usually comes when expect, however I remember years ago the rent payments were slow coming.
Sec-8 usually pays a little higher than market rents.
You should really investigate before you take a tenant on, there are times when you could rent to one couple with 2 kids and later find 10 people, two dogs, a cat and a pet in the house. It does not take long to have the house look like a zoo.
Until you you know you have a good tenant, make sure you make regular inspections.
I think your heart is in the right place. Protect your interest, treat tenants like customers but make sure your equity is protected.
Charles
- Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes10y
@KJ Miller Real estate investing is a business and as such MUST be treated like one to be successful. Operating a charity is also a business and also must be treated like one. Trying to blend the two together is fraught with so much danger, even for experienced business people and professional real estate investors.
Having a dream to help those that appear less fortunate is admirable and one that I hope you can realise in the future, assuming this is your real passion and not just a fad. People who do great charity work are committed and focused on that. They do whatever they need to do to succeed, just like any successful business person would. In fact @Jay Hinrichs has even mentioned how he dealt with some very tough decisions to stay afloat and he is one of the most experienced real estate investors you are ever likely to come across. His business acumen and experience helped him survive what was one of the most difficult periods in real estate investing history. Based on your lack of knowledge and experience at the present time your dream is just that, a dream.
Start by learning how to make real estate investing a profitable business and make money for you and your family, Do this in markets that afford you the opportunity of a greater potential for succeeding. The lower end of the market is not the place to start. Start where any mistakes you make will not kill off your business, or your desire to learn.
Once you have mastered the real estate business and are making lots of money then you can choose how to best help those less fortunate than you. You may find that housing is not the best way to help. In fact, in many low socioeconomic societies the greatest challenge is lack of education, not poor quality housing.
Caring for and maintaining a level of cleanliness and having consideration for other people's property is not limited by how much money one earns, but by one's attitude. You can be poor and still be clean and mindful. However, many tenants in poor areas do not care very much about the property or its appearance. Hence the problems with trying to make money form these types of properties. There are many stories here on BP of people who do succeed in these markets, but one thing most of them have in common is the owner/investor hand picks the tenant. They want people who care. @Bill Thompson suggests he chooses people like teachers, court officers, landscapers etc. People who have some form of decent education and responsible employment. He is on the right track.
Ghettos are not caused by the buildings within them, they are caused by the people and their life choices. Buildings become derelict through neglect and vandalism, not from caring and maintenance. It's the people neglecting them and mistreating them that causes the problem, not the building itself. When gentrification occurs in areas that were once ghettos it was not the buildings that changed, it was the people and their attitudes towards their environment. Until the people in an area change their attitude to their environment the area will struggle to have any meaningful change. If that means new people moving in, how does that help those who have to move out? Do you want to help the people or change the neighbourhood?
You may one day be able to help revitalise an area and that would be great but until then go out and learn all you can about making money and creating wealth and then do something awesome!
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