To 'hood or not to 'hood
Property Manager · CT · Member since 2009 · 5 posts · 0 votes
Hi Everyone--
I am looking for some insight about investing in the hood aka rougher part of town, where properties are much less inexpensive - it would be nice to help contribute to these rough areas by making them look nicer and more inviting.
At the same time, there are a lot of concerning elements to contend with.
I look forward to your feedback!
Alison
I was reading an article in a magazine ( I can't remember which one) They were talking about some investors that were getting grants and money infusions from the local municipalities to help with doing exactly what you are talking about. I'll make an effort in finding the exact article.
I for one am not against the idea of going into a certain area and 'attempting' to improve the quality of life.
I know here in downtown phoenix, there has been major renovations from developers to improve the look/feel of downtown. I'd have to say they did an amazing job. The city was a major partner in the development. The condemned and tore down entire blocks, not just a few properties but entire neighborhoods and rebuilt them.
without blabbering on like I can easily do sometimes, I would consider this if its' something you really want to do. I'd start researching if you can get some help from the local government with zoning and planning. Good luck! I'd like to hear an update later on
Alison,
First, let me define what I consider to be "the hood". I would consider these to be low income areas where many of the properties are run-down; most of the properties are rentals; and many of the people are low life druggies, criminals, and other assorted scumbags. I would not consider "the hood" to be areas with a lot of gang activity or areas where frequent murders occur. I consider those areas to be war zones and I would not buy there.
Furthermore, while turning a street or neighborhood around feels good and is a source of pride, I would certainly not get into this business for that reason. Turning streets and neighborhoods around is a pain in the butt and can be somewhat dangerous. This is a HANDS-ON effort that will require a lot of personal involvement and time on your part. It is not conducive to being handed off to a paid property manager.
Turning a street around usually takes buying more than one property on the street, although YOU don't necessarily have to do all the buying. If another good landlord buys some of the property, that serves the same purpose.
The druggies, criminals, and scumbags won't give up the area easily. It can be a real fight to get the losers to stay away, even after you evict them. When I turn a street around, I work with the police, building department, city council, and the nuisance board. It's easier if everyone is working together and on the same page. I have found that these agencies are thrilled when an investor wants to improve the neighborhood. The key is to be proactive - go talk to these agencies before you buy the property and try to build working relationships with key people.
Good Luck,
Mike
I second what Mike said and to add to that, if you go a bit rural or into a smaller town of around 150,000 people, the "hood" becomes a much nicer "hood" than in major cities. The police generally have it under control and know the troublemakers on a first name basis.
Here's my opinion: the 'hood' is where you find good cash flow, and the 'war-zone' is where you don't want to be.
But understand this -- if you want superior cash flow you've got to go where other investors don't want to go, and it ain't easy money: You'll earn it.
I don't have a problem with investing in the hood either, but you have to remember that the people who are going to rent your units there are mostly not the greatest people to deal with either. You will have lots of drama and have to understand how to stay out of it. Also as Mike said, there is a big difference between a low to no income neighborhood and a war zone, although I have to add, what one person see's as a war zone, another person who has worked or lived in that environment, may find it OK. Much of it is a matter of perception.
I use 2 rules when I am hunting for a deal. First is, will I feel comfortable letting my wife and young daughter work in this house without me and second, when it's vacant will I have to worry about someone breaking in and stealing all the wiring out it. I have been looking at an area of really cheap rentals, the area is bad, but do-able, but then I turn around and think about the house being vacant over night and how much it's going to cost me to replace the breaker box, wiring and damaged door and it just comes down to it's not worth the risk.
This is a white, low to no income neighborhood, where the tenants sit on the front porch all day and drink beer and smoke pot. I would feel comfortable in this neighborhood and get along well with them, because I grew up around these type of people. But these same people will turn around and steal from you just as fast as you turn your back and I wouldn't feel good with letting my wife help rehab a house down there.
Since this was brought up, I have to relate something else I discovered about the rural "hood". They are generally more racially mixed than what I ran into in Chicago, and there doesn't seem to be the same level of tension. Springfield, Missouri was generally like that. There are some exceptions, but they are highly isolated and in specific territories.
Tim
I've been perusing a 'hood where I am very interested in buying houses because of the low price/good cash flow aspect... the longer I've spent investigating my target 'hood, I've noticed that there is actually a 'hood within a 'hood. Literally, it is across the tracks, seperated by a major road to the north and in the center. House prices are pretty similar for REO/Short sales, but on the West side (the good side), those houses are gone immediately... I scoped two out 3 weeks ago that I wanted to make an offer on, and they were already under contract as soon as I found them... drove by this morning and one already had a for sale sign on it. However on the other side of the tracks, there are a few houses I looked at 1-2 months ago that have fianlly sold, but they took longer. I have found a few pockets on the "bad" sides that might be promising, but not like the West. The point is to investigate your target hood and really find out who is there and where they are. I was surprised when I finally saw the whole picture, and finally, after 6-7 months of looking, I have identified areas that I am very confident to invest in...and ones that I'm not. Lastly, pay attention to visual cues; pride of ownership, trash, broken windows, etc... even the smallest details can really tell a story in these types of 'hoods. My 2 cents.
Tim,
I understand what you are saying, but the reason I specifically stated "white" was because, in my little city, there are different segments of the hood. Such as we have Mixed races, low to no income, Black, no to low income (Whites would not be welcome) and then White, no to low income (Blacks would not be welcome). The area I am talking about, a Black person would not want to live there nor would it be safe for them to live there. A White person would be accepted faster in the all Black neighborhood, then a Black person would be accepted in the all White neighborhood. It's just the dynamitic and mentality of our area.
Also the types of crimes committed are much different in each of these segments. None of these area's do I currently invest in, but I have spent a lot of time in all of them as a cop.
"gentrification" Not on your life. These folks are some of the lowest class people your going to meet. They make cash by stealing cars and chopping them up in their garage or back yard. They work the underground economy any way they can to get their beer, smoke and RentaCenter money.
lol, this is funny to me, cause I live in the hood, and I am more interested in investing outside of the hood. (seems that an LO would work better that way) Its also funny to me because of questioning whether to make money or not.
I agree with Tom though as far as the different perspectives on lower income neighborhoods. Its hard to mention the hood and not realize that there are race implications no matter how you cut it.
As much as I want to make money in this business and have studied info, and watched it going on in my own area I cant help but to get salty with people's attitudes at times.
"Level of gentrification" really? Its terms like that, mixed with reading different posts (especially about the economy and who's getting $$$) to see that being from different sides of the track is so real that it cant be ignored. Not everyone in these areas are deadbeats, junkie, thieves, and common criminals. Of course what's on the news has you believe otherwise, but it amazes me how many run to the area to make money.
You dont know how many people from these areas are laughing now to see the other side in a muck because of economy. Cause they aint got nothin, and now others get to see what its like.
To answer the question tho, I'd have to echo what others have said. Do it, and be ready for whatever...even a perfect tennant.
For me, the hood is just not worth it.
I know people who are very successful in these types of areas, but they are very hands on and work hard to maintain order.
In my opinion, the very low income areas should not be ventured by out of state folks. It is better served for the local investors who understand how to slumdog!
That said, out of state people fall prey to the "large" cash flow advertised on these types of properties. I lose a lot of business to properties in bad neighborhoods. Most of these investors have unrealistic expectations, then blame the property managers when they do not succeed. What these investors fail to understand that there is a huge difference between where the pen hits the paper, and real life rent collection.
Maybe this is why these 50% - 2% rules frustrate me so much here on BP. It creates an expectation difficult to achieve for a part time investor.
The fact is that if you not do this for a living, you will probably not have access to the properties that meet these rules. When these properties do pop up, you will be hard pressed to beat the full time investors who do this as their business to the party.
If you do have any that meet the 50% - 2% Rules, we have a group where you can offer them up located here >> http://biggerpockets.com/groups/137
I am confident they would sell VERY quickly!
So what we focus on is the solid blue collar neighborhoods where rent collection will not be near as much of a problem. Our cash flow might be a bit smaller on paper, but I would say with confidence that we end up better in the end, as we actually collect the rent.
Point to Ponder: The reality is that there are few people retiring on the positive cash flow of a handful of properties. Creating wealth is based on the long term payoff and appreciation of the asset, not a few hundred dollars in cash flow......
I would agree with Harrison.
I have a property in the "hood" and have been trying to sel it for over a year. Cash flow or not, it is hard to cash out of these investments and hence I will avoid them at all costs in the future.
50% / 2% "Certified" deals?
Who's the non-biased, 3rd party "certifier"?
I am confused by your colorful (Now edited LOL) comment Tim...
It is a place for people to offer up the properties they have that will meet these rules.
The non-biased factor comes in from the members. I doubt very much can get passed the BP community here. Am I wrong?
Offer up some deals my friend!
Tom/Sam,
I'm trying to give you ideas for terms that aren't in conflict with the Fair Housing Act is all. Whether or not there are latent racial implications in terminology, using terms that are ambiguous (especially in a public forum that is referenced by mass media reporters on a fairly regular basis now) keep one in a better legal situation. I've had contact with two news reporters through this site now. It is being read by folks who may or may not be liking investors.
Tim
I know, I am just busting your chops! :lol:
I also agree with you to an extent, but gentrification is a fine line term. Some view it as malicious. Which is why I mentioned the implications.
"Scared money dont make money" is a saying I've grown up with. So like others who stated what to look out for, I added something also. Hopefully my view gave enough of a different perspective on the situation.
I agree with that. Even if you are a part-time investor, you'll need to put in the same work and have the same connections as a full-time investor if you want to get the deals.
I would go one step farther and say that almost NO-ONE is retiring on the cash flow from a handful of properties. You must have a BUNCH of properties if you want to quit your day job and even more if you want to retire hands-free.
However, if you do make a living off the cash flow, you can not help but gain a lot of wealth. It's virtually impossible to have positive cash flow without significant equity in each property. You'll almost certainly be a millionaire if you have enough properties to live off the cash flow. Unfortunately, being a millionaire won't even buy you a bag of McDonaldland Cookies. Wealth by itself if nearly useless. What's important is the income stream you can generate with that wealth. You can't eat wealth, but you can eat with cash flow!
Mike
Tim,
I work in the Indianapolis market every single day, and there are no houses available for $10K that need "little to no" work! If this were true, I can promise you that very few people would beat me to them! :lol:
Sorry, but that statement is irresponsible, and just adds to the near impossible expectations that these rules give to most people.....
Many of those homes your searched on Realtor.com are going to be in the "war zones" and/or need major repairs. Trying to meet this rule may look great on the paper, but again, bring your Smith & Wesson to collect the rent!
Others are going to have so many hidden rehab expenses, it will bury the average guy with little to no experience.
Not to mention the time and effort to find the house, doing the rehab from 2,000 miles away, and dealing with some drunken contractor out of the phone book who is stealing your money!
This is just not the reality for most folks my friend.....You are speaking from the pulpit of the "in your own backyard" investor. I am not questioning for a moment that it works for you, but that philosophy does not work for the guy sitting in Manhattan or San Francisco.
If you research my properties, you will be hard pressed to find very many of my competitors who can touch our projects in price point and quality. This is not coming from some big ego that I have, but the fact that I have busted my arse to create one of the best programs in the country.
The average investor does not want to become a construction manager, property manager, or birdog. They want turn-key properties that will generate some solid equity over time, with rents that cover their expenses. If you can get some cash flow along the way, that is just icing on the cake.
Matty, I agree....
I know a lot of guys who decided not to leverage themselves up to their neck, and they are sleeping well at night.
They might not make as much money as a guy who leveraged and was able to get a little lucky, but they are not in a position to lose everything either. It really depends on how much is enough for a person to make them happy and secure.
Do you ever wonder why certain people never seem satisfied? You see these guys making millions, and still screwing the system to make more......What good is money if you do not have time, or can relax enough to enjoy it.