First Deal - Good Cash Flow/Bad Neighborhood

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First Deal - Good Cash Flow/Bad Neighborhood

Kyle M.
Wayne, PA · Member since 2012 · 144 posts · 24 votes

I am evaluating a listing that has good cash flow but is located in a bad area. My current situation is that I have never owned a property before and currently rent an apartment. I am 25 and have a net of around $50k and an income around $50k/year, so enough money behind where the 20% down wouldn't kill me and I would have enough backing to pay for repairs etc. I am NOT looking to move into this property as it is in a bad area.

Duplex
List Price: $80k
Projected Rent: $1500

- Renting for ~1.9% of list price
- Cash Flow of ~$370/month
- Property is in A+ condition

Obviously this is a good deal. But I am looking for advice on how much work this would take considering likely tenants that are not cooperative and myself having virtually no experience. I have full time job working 50+ hours a week. However, I have the confidence in myself that I could make this work. What are your thoughts on renting in bad neighborhoods, especially for the first time investor? Any advice would be appreciated, thanks!

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David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y

A+ condition in a bad neighborhood? Is this a turnkey flip? Bad neighborhoods require 3x the due diligence, on vacancy rates, expected turnover, crime/sex offender rates, gang activity, potential deterioration in surrounding properties, possible exit strategies, on and on. In decent areas, you don't have to worry about alot of this. For a first investment especially, I'd go with the decent area and more stable returns.

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  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    13y

    80k for 1,500 in rent with a property that is in A+ condition. Thats a winner right there. Take it down and take the money. If you can use the yellow pages, you can fix any problems that come up. Just find a good handyman and you're good to go.

    You may need a plumber or electrician in there for something at some point too but they're in phone book too.

    Managing homes is not that tough. The area is a bit of a concern though. Bad area usually means a more difficult tenant pool to deal with. i.e. rent collections. How are the landlord laws in that county? Does it take 2 mos for an eviction or 5?

    That would be the one thing I would want to know before I bought a home in a rough area.

    But at 25, you'd be getting a home that probably won't appreciate much but will likely give off some great cash flow for a lifetime. And the principal paydown will eventually allow you to sell it if you want to and use the equity to buy something in a nicer area.

    The key is that with that kind of cash flow, you're getting a ton of cushion for any issues that do come up. It would be really difficult not to make money.....

    One other key thing you left out is what would the house appraise out for? Buying for 80k, do you think it will appraise out at 120k? 100k? Thats one other key factor in the decision process as well.

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  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    Kyle M. - in my opinion, I'd pass. $370 / mo is decent CF, but one bad eviction / damage / loss of rent could easily exceed $5k, wiping out your annual profit and then some. Plus it may not appreciate, but actually could depreciate if it's a really bad area. I remember people paying $80k in Detroit, and now I've heard places going for $20-30k.

    - Tom

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    A+ condition in a bad neighborhood? Is this a turnkey flip? Bad neighborhoods require 3x the due diligence, on vacancy rates, expected turnover, crime/sex offender rates, gang activity, potential deterioration in surrounding properties, possible exit strategies, on and on. In decent areas, you don't have to worry about alot of this. For a first investment especially, I'd go with the decent area and more stable returns.

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Kyle, what do you mean by bad neighborhood? Are we talking like, not as pretty and the schools have a bunch of thugs? Or are we talking you wouldn't dare walk down the street or you could lose your wallet, belongings, and dignity?

    I am the biggest advocate ever of only investing in better areas. I've learned first hand how expensive it is when a tenant stops paying and bounces. Also, what state is this in? If you are buying in a tenant-friendly state that could cost you triple as much. I also wonder who is actually going to pay $1500 in rent in a bad area. You have to be careful when rents are high, sometimes they can be too high and you don't end up collecting.

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  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    13y

    My advice would be to pass on this one. You're looking at a HUGE learning curve, not just in LLing but also in just owning a property and management ect. I'm not sure you want to cut your teeth on this one.

    That being said you do have one big positive going for you, you are willing to listen to advice that is given by those more experienced. The biggest thing that jumped out at me is your $370/mo cash flow. Not because it was special but because it what I get from my napkin 50% rule math. That is something that is usually a fight over why the numbers are good when they're really not anytime someone posts something like this, so it looks like you're on the right path there at least so if you're confident then maybe you can do it. With it being a rougher area I would try to get a little better return out of it though.

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  • Marco Santarelli
    Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    13y

    Hi Kyle M.,

    David Beard is right about the issues associated with bad neighborhoods. You're better off with the "ugly duckling" in a good neighborhood than the other way around because you can bring the ugly property up to the neighborhood standards. You couldn't do that with the area, and that will end up costing time, money and a lot of stress!

    You should have a top-down approach. Start with the city/metro and make sure the economics make sense, and the housing market is healthy. Next you want to find good desirable areas within that market. Finally, you will find yourself a good property within that area that makes sense (condition, cash flow, ROI), etc.

    Hope that make sense. If not, post your question.

    Continued success!

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  • Kyle M.
    OP
    Wayne, PA · Member since 2012 · 144 posts · 24 votes
    13y

    I am going to pass on this investment and look for a listing that is in a nicer neighborhood. This is a really bad area so I think investing in a nicer area would be a better idea. Thanks for your replies and giving me a better perspective on this deal!

    2Reply
  • Marco Santarelli
    Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    13y

    Kyle M.: Good decision! :-)

    0Reply
  • Loren Whitney
    Investor · North Idaho · Member since 2011 · 332 posts · 107 votes
    12y

    @Kyle M. 

    What did you end up doing Kyle? If you did buy, what's your experience been so far?

    How in the world did an $80k purchase price and $1500 in rents only provide a $3xx cash flow? We're you figuring 20% vacancies? Haha

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