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
Thought of the perfect analogy (for me anyway).
A Colorado elk tag costs about 500 bucks and public land is free to hunt.
A good Colorado elk guide costs about 4 grand and sometimes gets you private land access.
Does hiring a good guide change the chances of success? Most certainly. Does it change the meat yield of an elk? Not one bit. Is the price worth having the guide? That's up to you but it doesn't change the meat yield of an elk.
Hi Everyone--
Thanks so much for all your insight, it is great to hear different points of view, and experiences.
What are 50%/2% deals? I have never heard of this term.
Thanks!
Yeah, and to be honest - reflecting back I put a lot more time into looking when I started into this. I tend to forget that now it's a lot easier because I know my market as well as I do and I know it because of past time I put into it. Now that I know where I want to buy and the construction quality based on age and geographic location here and the type of storage shed that all Habitat for Humanity reos have on their properties, it does take a lot less time for me.
Tim
Allison,
Check the landlording forum. There's a couple sticky threads that will explain both in great detail.
Tim
Tim,
So, I am just a Realtor? Too funny........ That is about the most offensive word you could call me! :lol:
Maybe that is something we need to start talking about more here on BP.
The 50%/2% rule is an amazing tool, I am not going to argue that at all. If you can meet the rule, you have a great investment.
That said, MikeOh hit on a great point in an above post. It will take a lot of time, work, and a little capital to make most of those deals happen.
What I see in the field is that folks feel they can just make a call and guys like us will just provide multiple deals that fit this criteria, and that is just not the reality.
Tim,
You hit on a great point too.
You have experience that most folks do not come armed with.
People like you, Mike, and me have a responsibility to the public to create an environment where they can learn from us, but also to make it clear that it has taken us a long time to get where we are.
Great thread everyone!
Tim
ABSOLUTELY! You can't expect someone else to do all the work and you to get all the profits. The people buying "turn-key" properties are making the decision to trade the cash flow for the convenience of having someone else do all the work.
The other thing I wonder is whether you're rehabbing them to a higher standard because you're selling them as opposed to how they would be rehabbed if you were a landlord looking for cash flow. I would think that since many of these California investors (I'm assuming that they're mostly newbies) would be more like homeowners than experienced landlords and would tend to demand a prettier rehab than is justified based on the business. I make my rentals safe and clean and don't put one penny more into them than is justified to collect market rent. In fact, I often take things out of them (such as dishwashers, ceiling fans, screen doors, garbage disposals, and other items that are not tenant friendly).
The point is that it's two different businesses. One business is the rental property business where you must make money (cash flow) for the business to survive. The other business is the rental property sales business, where you must make money (cash flow) from the buyers for the business to survive.
The end buyer is not in business at all, they're buying their property for a long term investment and therefore don't need current cash flow.
Mike
Intellectually honesty, yes, they meet the 50% rule for me...
Lets get real honest here...... It takes at least $35K in capital, a full team of trusted contractors, a great property manager, and 5 years of my blood/sweat/tears to meet the rule and ensure that the investment is sound........LOL
It goes back to realistic expectations. What I do is not feasible for the average investor with another career path.
If you look at my properties, they still come as close as possible to meeting the rule for our clients. All while staying out of the war zones, keeping low vacancy rates, and having a quality product that will pass inspection.
I keep tabs on my competitors, and I have yet to find very many that can match what we do!
P.S. I never stated the details of the house I hit my head on? It was a future project I was inspecting, and we just got the news that our offer was Pending the day after the incident.....
I have no idea why you are trying to put me on the defensive, but a word of advice, please bring more to the table than assumptions and outdated Realtor.com data when you launch an attack on somebody about their home market. :wink:
To answer Mike's question, we do not do what I would call an "Owner Occupant" rehab, but we do not do a "Paint & Carpet" rehab either.
I run my own investments in the same fashion as the properties we sell. I do not rehab ANYTHING that I would not own myself. I believe sensible quality is much more important than quantity.
We rehab to a higher standard because we found early on that selling "paint & carpet" rehabs in war zones was a horrible business model. There is nothing I hate more than "Sticker Back" tile!! When I owned these types of properties, I had high vacancy rates and lots or surprise repairs. So the reality was that it met the rule on the front end, but failed on the back end. It takes a special breed to make these work.....
Yes, we could do more houses, make them look more cash flow attractive, and sell more volume. However, we would also have plenty of unsatisfied clients whose expectations of these properties were unrealistic, it would cause more headaches then they are worth. (Been there, done that, in the low end duplex world)
At the end of the day, the properties we rehab will cause little for an investor to complain about.
To answer your other question about experienced investors, before the loss of stated loans, and then the FM 4 mortgage rule, most of my investors where people that owned 10+ properties and ran their own business.
Since most of these folks show little on their tax returns, the loss of stated loans put them on temporary hold, and they had to re-evaluate how they invested. The situation that started in Oct 2007 almost put me out of business. All of our capital was tied up, we had nothing coming in, and many of the people involved just packed up and quit!
Since quitting is not in my nature, the only option I had was to work hard, fight the market, find out who my real friends were, and search for viable solutions.
Over the last 12 months, we started working with the newbie investors. While it is much more time intensive, it has its rewards. We are working hard to put people on the right path.
They might not be able to meet the 50% / 2% Rules today, but they sure will be able to in the future by having a team like us in their corner.
We get newer investors calling us wanting to buy 3-4 properties. Most of the time we will only sell them 1 or 2. Why? Because we want them to succeed and do not want to see them over extended.
This blows peoples minds, as when they call our competitors, they are usually bombarded with pressure sales tactics. We honestly do not care if you buy today, we have plenty of buyers, and will have more properties for you later when you are ready. I am not going anywhere!.... :mrgreen:
Like I said, we work hard to be fair, present the best turn-key investment possible, offer a quality product, and create an environment for an investor to succeed.
We "Keep it Simple".
With a Zero to 5% Down Program to boot!!!! LOL
I took it from your blog that the house you were working on is where you hit your head, but if you got the Lenna Court property, congratulations. It's the ideal type of property I look for in a rental - 1960s build, basic rectangle with a simple 4/12 pitch gable roof. These designs are easy to rehab and maintain.
Here's one piece of free advice. I have the feeling we're going to get a hail year this spring because of the heavy swings in temperature and in addition to the shingle roof, it looks like it has aluminum siding. Roofs take hail hits all the time. Aluminum siding is also easily damaged by hail. You find the dents my shining a spot light down the side and looking for the shadows and circling them with a red piece of chalk for you adjuster when they come out. If you have hits to all sides and the roof - enough to warrant replacement, the insurance company will cover a new roof and siding. New roof and siding at no cost to you (outside of deductible) is certainly not a bad thing when you're trying to sell a property at a profit. I'm no promoting fraud, simply explaining how the system works.
We market to investors who do not have the opportunities in their home markets.
What I have found out in my adventures is this. You have two mindsets of real estate wealth.
1. The people that do everything themselves, like you and Mike. You guys love what you do, it is your full time passion, and it shows.
2. The people who just want to invest in real estate and make a fair rate of return, not unlike what is expected from a stock investment. They have no desire to pick up a hammer, just like they do not want to run Bank of America.
You and I are debating over apples and oranges here.
If you live in Manhattan or San Fransisco, you can not buy a home for $47K in your backyard. Also, if you live on the coast, odds are it is not worth your time to fly to the Midwest and pick up a hammer.
Again, it goes back to realistic expectations.
Tim, I think the reason we are having a disconnect is because you are very spoiled by the investments that your market area provides. You have also stated that you are a contractor, insurance adjuster, and manage your own investments. These are not skills you picked up last week.....these are skills that you want to have, and skills that I am sure have taken you a lot of time, money, and missteps along the way to learn. I feel that you might be at a point where you are taking all of that for granted. Most people do not meet your qualifications.
I would hope that you would not expect a guy sitting in Miami to have the ability to jump on a plane and match your skills up there in Northern Indiana.... or do you? :lol:
Tim,
I really do not want to play the "macho beat our chest on who is right" game. We are both right to some extent.
MikeOh and I have done this on a couple of occasions, people did not really like it, and I have no desire to do it again.
MikeOh and I were able to get past it and start a good relationship, and I hope that you and I can do the same. (Especially since we are fellow Hoosiers!)
We must respectfully agree to disagree here.
- I feel your side is simply not based in the reality, and resources, of most people.
- You feel it is a pretty simple feat for the common person to accomplish with a little hard work.
Both sides have been heard, and I feel there is enough of a conversation in this thread for people to make their own decisions on what is right for them.
I hope that folks do not feel like Tim and I hijacked this thread, but at the core of our debate really is "to hood or not to hood".
So I hope that it has evolved into something people can learn from.
- Hood Investing can be profitable for backyard, hands on style investors that have a strong personality and passion for real estate.
- Hood investing can be a losing deal for out of state investors dependent on others to make it happen.
Fair enough?
Tim,
I just applied for a transfer to Indy. We'll see if I hear anything back. :)
A very intense but productive and inofrmative debate going on here. I see both side of the story and both sides have a strong position. I would say that not everyone can just pack up and move to a cash flow market. For instance, I have three children, a wife with a full time job, and the balance of my extended family here. To pack them all up to move 1,000's of miles away, removing my daughter from her Junior High and all her friends does not make it "possible" for me. In the literal sense of the word, yes, anything is possible.
As far as doing rehabs from afar, I would have to agree with Harrison on that. I have done them in Texas while living in CA. It required me to fly out twice to get the job done. It was not a fun experience and I refuse to do it again. I would say that having a home already complete for you as Harrison provides, and having to pay a bit more for it is worth the loss of the headaches and labor. For most newbies and even seasoned investors, those who want to invest without a hammer in hand can do so through sources like Harrison. Those who like the hammer can join Mike and Tim and have more profits for their efforts.
You just made my evening Dave! I fell out of my chair when I read this......... :lol:
I do feel that way sometimes when I am out an about, especially when I am walking into a vacant house right at sundown.
Dave,
The only challenge posed was whether or not a person from Manhattan could find a house close by for under 47k. Of course it's possible in areas like Newark and Trenton. The matter of whether or not it's safe, convenient or comfortable for a person to do that was not what was questioned. I wouldn't do it but have done insurance claims for white collar investors in Chicago who's owned some real war zone properties that have made the 2% / 50% rule. Heck there's parts of Chicago that have worse crime statistics than Trenton or Newark and some folks insist on investing there. To each his own I guess.
Your strategy on Buffalo and a couple other NY state areas is better though, imho. Better returns and better environments. I almost moved to Buffalo (used to hunt in Rennsellaer Falls) instead of Indiana.
Tim
I always make it a point to be "out of town by sundown". Not much scares me during the day, but night time is a whole lot different. I'm no stranger to those areas of the city (Harlem, Lower East Side, Paterson, Newark) from my misspent youth. But it's a lot different when you're 19 and look a little scraggly yourself than it is when you're 50 and don't look as comfortable in your surroundings (or run as fast) as you used to. (Of course, now I'd be trying to run TO the cops instead of FROM them, but those stories are way too far off-topic for such a public forum... :cool: )