Why investors dump their Milwaukee low end rental properties?

Tacoma, WA · Member since 2015 · 29 posts · 5 votes

I have done a lot of studies of listed Milwaukee properties, particularly those listed below $50k. I am surprised to see a couple of investors are unloading their properties by selling in bundles. Their properties are still all fully rented out, and with good cash flow in my opinion.

What are the reasons for their unloading?

(1) do they see bad future?

(2) do they have too much hidden costs that make the cash flow much worse than it looks?

(3) Did they find better opportunities elsewhere?

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James R.

Investor · Member since 2015 · 222 posts · 173 votes

10y

I think Milwaukee gets a bad rap for being labeled as a "segregated" city. Milwaukee is very unique in that it is a city of neighborhoods, with each neighborhood holding on to its unique identity due to the people who live there. I personally like that. What I don't like is the poverty in the underprivileged neighborhoods, which sometimes can be perpetuated by landlords. NPR had a report on how the "system" can work against poor people when it comes to evictions. The landlord buys a pig and doesn't maintain it. Instead, he/she pockets the cash flow. When the tenants refuse to pay rent because the landlord is not maintaining the property, the landlord files for eviction. There are numerous cases where the poor are continually victimized by these true to form "slumlords". These same landlords are now trying to unload their pigs to out-of-town investors as cash cows.

The City of Milwaukee is 63% non-white. The problems started when people seeking jobs and a better life (often from Chicago) came to the neighborhoods left behind during white flight. When the manufacturing jobs evaporated, these new residents were left with no options.

The Wal-Mart in the Northside of Milwaukee, which is predominately black, just closed due to lack of profits. Many in that neighborhood are now unemployed due to its closure. When will corporations do something good for a change, instead of putting profits before people?

@Dawn Anastasi I believe your success is due to the fact that you self-manage your properties and you also care. If more landlords were like you, they would be part of the solution to providing decent housing to people in poorer neighborhoods. Kudos!

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Nicholas Retsak
Professional · Milwaukee, WI · Member since 2016 · 6 posts · 3 votes
10y
All of the above but i believe the number one reason is that the numbers are not what they expected. Without a good pm that knows the streets and how to properly manage Milwaukee c/d properties you will fail. Those that self manage, quickly realize that Milwaukee hood investments are not cake walk...
1 Reply
Adam Slipher
Flipper/Rehabber · Milwaukee, WI · Member since 2013 · 42 posts · 13 votes
10y
Hi Lei. Depending on where you are in the city, crime, turnover and management to minimize those effects is key. Rents here are steady and taxes under 50k price point are digestible. I'd be interested to hear others' experience as well.
0 Reply
Rebecca KnoxBusiness Member
Specialist · Milwaukee, WI · Member since 2014 · 1k+ posts · 1k+ votes
10y
Speculating and based off many seller conversations, I would say tenant problems and poor management. It's important, especially if you're not local, to qualify your property management.
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Lei Pan
OP
Tacoma, WA · Member since 2015 · 29 posts · 5 votes
10y
One more reason is that they picked the properties during 2009 to 2013, and already can make money selling them. Some of those investors obviously have owned the properties for years. Maybe they do not like the downhill trend of the market.
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Erik Johnson
Rental Property Investor · Ripon, WI - US · Member since 2015 · 70 posts · 16 votes
10y
Could also be that those properties take a lot of attention and the investors are changing their strategy and looking to move into different assets.
0 Reply
Erik Johnson
Rental Property Investor · Ripon, WI - US · Member since 2015 · 70 posts · 16 votes
10y
These properties might be good for cash flow but not for building wealth and equity as they have very low value. The low end homes might have been the only place that the investors could afford to get started.
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Lei Pan
OP
Tacoma, WA · Member since 2015 · 29 posts · 5 votes
10y
Thanks, all the points you guys made are very helpful!!!
Hope they are unloading just because they have more money to attach higher end, so I am glad to take over because I have very limited cash to start with.
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
10y
I also see a lot of investors sell in bulk because they want to get into bigger stuff. Some get into bigger properties or other businesses down the road and want to sell off their smaller stuff
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Robert Taylor
Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes
10y
Everyone I've known locally who's invested successfully in lower end rentals around here and in any sort of volume has treated it as a full time enterprise, whether they start out that way or I think more often, start out doing it part time, usually in addition to full time work, or as an addition to a career as a real estate agent or similar, rather flexible career where they aren't locked into a 9 to 5, 8 to 4, etc type job and IF their rentals prove to be a successful endeavor, they'll then jump into it as a full time business. Some people have done fairly well at this, however I can't think of any "smashing success stories" off of the top of my head doing this.
While I'm all for encouraging investment in our city (assuming of course it isn't slumlord type investment, we don't need any more of that) you're talking about what is most likely a full time endeavor and as far as long term appreciation, unless you hit it just right and hit an area that has a big gentrification component down the road, long term appreciation of any substantial amount is unlikely, so you're left with cash flow and when you're normally talking about older to just plain OLD housing stock, thus higher or much higher annual maintenance costs to keep a safe and habitable rental property and keep you off of the city's "slumlord radar" which you DO NOT want to get onto, combined with tenants who are often a real crap shoot (yes, you CAN find great tenants who care about keeping a decent home even in the poorest parts of town, we have decent people in all parts of this city who are trying to build a better life for themselves and their families, yet you will also run into many who don't care, who bring unforeseen issues which seem to ALWAYS=extra, unforeseen costs to the landlord, whether you're here on the ground fixing the issue yourself or DIY plus pro help when necessary, or long distance via a PM (always going to likely cost much more)) and the wonderful looking cash flow component, which due to the very likely lack of any appreciation component, is all that's left for profit potential, also can quickly vaporize in front of you!
2 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Lei Pan This is probably not exclusive to Milwaukee. These type of properties get dump by investors nationwide. And if you see seller financing sometimes that translates to lowest of the low. I imagine every reason under the sun is potentially why.
Good luck!
2 Reply
Lei Pan
OP
Tacoma, WA · Member since 2015 · 29 posts · 5 votes
10y
Right, that is not exclusive to Milwaukee. I also saw this in some other cities. I specifically mentioned Milwaukee because that is where I wanted to invest. I do not want to get into the situation that I buy them now, and just find out three months later that I also become one of the sellers who want to dump them quickly and cheaply.
2 Reply
Charles Worth
Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
10y
As other ppl mentioned this could be anywhere in the Midwest I think.
A large number of reasons but here are some:
1) That below $50K used to be below $30K. Considering prices are up because of investor demand and not economic factors in many areas many people want out while the going is good. No one wants to be the sucker holding the bag esp. if they were that person in 2007 - 2008.
2) If their networth went up that $50 - $100 a month may seem great to do but with the problems it comes with it may not be worth it if that same person also bought better inventory or larger multis. Its simply not worth the headace for many ppl.
3) Could very easily be problems that are a full-time job and/or that have major issues in management of the units
4) That person could be moving or their PM could have moved and/or gone our of business. Few people can manage their properties esp not from far away.
2 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Relative short term holds, less than 8 years. Operate with deferred maintenance, run the depreciation for this time and then 'dump' to get out.
The cost of the sale+depreciation reclaim curve will have a break-even cross over for the appreciated new sales value. Minimal taxes and maximum profits.
1 Reply
James R.
Investor · Member since 2015 · 222 posts · 173 votes
10y
I think now is the time to sell "pigs". There is a glut of pigs in the City of Milwaukee right now. It's sad to see these brick bungalows in the old German neighborhood up for sale at $30,000 when these same properties in a "good" area would go for $250,000 - $300,000. They are rundown and a lot the time at the end of their life. Any investor will have a hard time getting the cash-flow that so many brag about on this site with these pigs, so they sit on the market for sale. The City of Milwaukee has a list a mile long of houses that it is trying to dump that go for pennies on the dollar and still cannot get rid of them.
As you may have guessed, I invest in A and B class neighborhoods.
1 Reply
Cody Barrett
Phoenix, AZ · Member since 2015 · 345 posts · 138 votes
10y
Would it help if Milwaukee wasn't one of the most segregated cities in the country? I only ask because the OP asks in question number 1) "do they see a bad future?"
I went to UWM and let me tell you, the topic of conversation at 2 AM was how to get back to the dorms safely or how to get 2AM Taco Bell without making a wrong turn.... Maybe those areas that you are seeing investors dump their properties in is because the market is so focussed and outlook is bleak?
1 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Two theories, and they may both be true (or not):
1) Out of state owners ... this asset class is especially tough to do remotely as they are management intensive and good PM help is hard to find. Thus the cash flow projections never materialize and they dump them. Turnkeys seem to be notorious for pushing this class of assets, since the cash flow numbers look so good on paper.
AND/OR ...
2) Different investment strategies and asset classes work better during different phases of the RE cycle. In a downturn, this class of property typically gets absolutely hammered. So, it can be a wise strategy to pick them up after they get hammered for pennies on the dollar at the trough (2010-2012) and dump or exchange them for higher quality (but lower initial cash flow) assets that are a more stable store of wealth closer to the peak (which I believe is where we are in most markets today).
0 Reply
Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
10y
There are definitely areas of Milwaukee that have really dumpy properties. I would categorize those as "D" class areas. Personally I don't invest there. If I don't feel safe being there at night, I wouldn't want a rental there.
There can be rentals under $50k that are very profitable. I know, I've done it several times over. I've been at some of my properties until 11 or 12 at night with no issues.
That being said, you put a bad tenant in a good rental, and you're going to have a bad time.
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3 Reply
Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
10y
talk to someone with local knowledge in Milwaukee. As I am sure you are seeing there are market experts on BP.
Someone selling in bulk or selling in general could be for a million different reasons. Partner with someone on the ground who can give you the Intel you need.
0 Reply
Joshua Malik
Flipper/Rehabber · Racine, WI · Member since 2016 · 41 posts · 26 votes
10y
I have to pretty much agree with the consensus here. Yesterday 2 Family Dollar stores were robbed in Milwaukee. That hardly even warranted a mention on the local news because it's run-of-the-mill. If you want to invest in these D areas, then more power to you... but the good landlords who actually care about their tenants, their properties, and their communities tend to simply stay away (as you can see from their comments - Dawn, James, etc...). I suppose that just helps perpetuate the problem.
1 Reply
John Weidner
Chicago, IL · Member since 2014 · 710 posts · 200 votes
10y
What determines a D area in Milwaukee? Is it simply crime level?
0 Reply
Ryan Cronwell
Investor · Milwaukee, WI · Member since 2015 · 12 posts · 6 votes
10y
that's one of the challenges of the Milwaukee market. The difference between a B, C, and D area can be 6 blocks.
1 Reply
Cody Barrett
Phoenix, AZ · Member since 2015 · 345 posts · 138 votes
10y
If I am a renter or a buyer and I am told that a certain area holds only 1 particular demographic, that concerns me... Which perpetuates the problem.. Milwaukee is like a cookie cutter... Which is why the difference between A,B,C,D can be 6 blocks like @Ryan Cronwell stated lol. And he is right.
Racine, 30 minutes South is similar. 5 minutes North South or East will put you in a tough area...
"Nationally, between 1970 and 2009, the proportion of poor families living in poor neighborhoods more than doubled, from 8% to 18%. And the trend shows no signs of turning around." -Milwaukee Journal Sentinel. So it makes me hesitant to buy right outside those areas because I am not sure if expansion of poor neighborhoods will continue or slow down. BUT it does not scare me away either because the right person can turn communities around.
I like what the Gov of Minnesota has been doing.... They're crushing WI in job and economic growth and he's reinvesting those gains into public education and healthcare.
"Nonetheless, Minnesota is weathering the recent global slowdown and slide in commodity prices reasonably well, a reflection of its large and diverse economic base. Job growth has remained widespread, with recent gains in education and health services, retail trade, and financial activities. Improved homebuilding activity has also meant greater need for construction tradespeople like carpenters and roofers. That broad based job growth has helped quickly absorb the underemployed and unemployed, and push down the state’s jobless rate in December to 3.5 percent, its lowest mark since the early 2000s and the lowest among states with a major metropolitan area. With the excess supply of workers rapidly diminishing, a tighter labor market is leading to some long-awaited wage acceleration." http://www.mn.gov/mmb/forecast/forecast/economic/ He won't be handing over a budget deficit after his term like some politicians do ; )
*cough* Walker *cough*
"Maybe if Governor Walker was actually in the state he was elected to represent, he would know that this budget and this state is a mess. Cutting UW System by $250 million, taking hundreds of millions of dollars from our public schools and auctioning our state parks off to the highest bidder does not equal a surplus," - http://www.prwatch.org/news/2015/06/12855/there-no...
3 Reply
Matt Morgan
Residential Agent And Investor · Scottsdale, AZ · Member since 2013 · 212 posts · 83 votes
10y
I just sold 4 properties out there in a package. All were rented and cash-flowing. I was getting hit with a lot of maintenance costs and I was suspect that my properties weren't being managed properly. Because I'm 2000 miles away, this caused a lot of anxiety and stress that I would just prefer to avoid. I was also able to make a healthy profit even though I only owned them for a year to a year and a half...had I not been able to cash out at the prices I did, I probably wouldn't have done it.
2 Reply
James R.
Investor · Member since 2015 · 222 posts · 173 votes
10y
I think Milwaukee gets a bad rap for being labeled as a "segregated" city. Milwaukee is very unique in that it is a city of neighborhoods, with each neighborhood holding on to its unique identity due to the people who live there. I personally like that. What I don't like is the poverty in the underprivileged neighborhoods, which sometimes can be perpetuated by landlords. NPR had a report on how the "system" can work against poor people when it comes to evictions. The landlord buys a pig and doesn't maintain it. Instead, he/she pockets the cash flow. When the tenants refuse to pay rent because the landlord is not maintaining the property, the landlord files for eviction. There are numerous cases where the poor are continually victimized by these true to form "slumlords". These same landlords are now trying to unload their pigs to out-of-town investors as cash cows.
The City of Milwaukee is 63% non-white. The problems started when people seeking jobs and a better life (often from Chicago) came to the neighborhoods left behind during white flight. When the manufacturing jobs evaporated, these new residents were left with no options.
The Wal-Mart in the Northside of Milwaukee, which is predominately black, just closed due to lack of profits. Many in that neighborhood are now unemployed due to its closure. When will corporations do something good for a change, instead of putting profits before people?
@Dawn Anastasi I believe your success is due to the fact that you self-manage your properties and you also care. If more landlords were like you, they would be part of the solution to providing decent housing to people in poorer neighborhoods. Kudos!
5 Reply
Randy E.
Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
10y
Interesting topic and replies.
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