investing in low income strategy?
Rockford, IL · Member since 2017 · 4 posts · 1 vote
JESSE - I jumped into the "low end" world 13 yeas ago because I refused to borrow ANY money - and now I am a Private Money lender (ironic - eh?). Your observations are spot on. Middle class neighborhoods simply will NOT give you a solid ROI. As you slide into the ghetto (joke), you will find properties which will blow your mind as to how cheap they are.
As long as you are doing a realistic ARV (After Rehab Value) for a Flip and solid rent analysis (as your backup plan) in case you go over budget and have to rent it out, then you should be OK.
We rely on you to do that local market research and make sure it is accurate. If the neighborhood has too much crime and therefore NO purchase is really justified because you need 24/7 security on guard during the rehab and before the Flip sale (or before the rental starts with a Buy/Hold), then you might just need to move on to the Middle-lower class neighborhood. Bottom line, however, is that if you do a solid market analysis and can present that o a Lender, you can get into a property with ZERO down and low interest or a taste of the Flip. The money will follow a good deal. :-)
JESSE - I jumped into the "low end" world 13 yeas ago because I refused to borrow ANY money - and now I am a Private Money lender (ironic - eh?). Your observations are spot on. Middle class neighborhoods simply will NOT give you a solid ROI. As you slide into the ghetto (joke), you will find properties which will blow your mind as to how cheap they are.
As long as you are doing a realistic ARV (After Rehab Value) for a Flip and solid rent analysis (as your backup plan) in case you go over budget and have to rent it out, then you should be OK.
We rely on you to do that local market research and make sure it is accurate. If the neighborhood has too much crime and therefore NO purchase is really justified because you need 24/7 security on guard during the rehab and before the Flip sale (or before the rental starts with a Buy/Hold), then you might just need to move on to the Middle-lower class neighborhood. Bottom line, however, is that if you do a solid market analysis and can present that o a Lender, you can get into a property with ZERO down and low interest or a taste of the Flip. The money will follow a good deal. :-)
Hi Jesse,
I am considering doing the same thing as you. Barry - that is why I'm looking into these areas also, I would rather not try to borrow any money, or at least not any more than my bank will extend me as a small personal line of credit for some repairs on the home.
Barry - are there any modifications you would recommend as far as doing a rent analysis for properties like these? I went and looked at one the other day and quickly figured out the property was priced too high for the risk for me, but I'm not as sure where to start with the numbers on a deal like this, which doesn't necessarily fit the typical formulas. I don't intend to be flipping these homes. The market is dead where I'm at, which is another reason they're priced so low, so I don't think that's applicable to me. I would intend to rent them out and probably eventually try to do some rent-to-owns until I get rid of them in 30 years.
Thanks!
@Rachel Fazio I'm new at this myself. I am investing into the cheaper homes because I can pay cash for them. I am in this for the long term strategy of this. I plan to use the profits to put towards buying another one, and so on. I really look at the cash on cash investment and try to have my money back from rent in less than four years. When those numbers meet the criteria (for me in my market) then I become interested.
We sign the contract and have the home inspected on our first one scheduled for Monday. We are thinking of buying two as the opportunity to buy the next one will be cut down to around 1-1.5 years if we did this.
I love the "low income" properties. I look for properties that need light rehab, which can be hard to find. I also seek properties on a good block, with good tenants who are taking care of their houses. Don't over pay and don't over rehab. Then screen for the best tenants.
I agree with everyone's comments here. Rachel - as to your original Q on assessing rental analysis on low end, the others have provided solid comments and I have little to add except I did NOT enjoy 2-4 years to get asset acquisition recoup. I bought stuff which took about 8-10 years to "net" enough to buy another one (presuming available at the same price). That comes out to about a 12% Cash-on-Cash (COC) return - same as ROI in my book (since there's no debt service).
If Derek is finding stuff which will pay for itself in 2 years, that's a 50% Cash-on-Cash return and that is SICK - I want to partner up on those deals - let's get 10 more !! ;-)
Hi Jesse,
I am considering doing the same thing as you. Barry - that is why I'm looking into these areas also, I would rather not try to borrow any money, or at least not any more than my bank will extend me as a small personal line of credit for some repairs on the home.
Barry - are there any modifications you would recommend as far as doing a rent analysis for properties like these? I went and looked at one the other day and quickly figured out the property was priced too high for the risk for me, but I'm not as sure where to start with the numbers on a deal like this, which doesn't necessarily fit the typical formulas. I don't intend to be flipping these homes. The market is dead where I'm at, which is another reason they're priced so low, so I don't think that's applicable to me. I would intend to rent them out and probably eventually try to do some rent-to-owns until I get rid of them in 30 years.
Thanks!
Modify analysis to include the following issues with low income, slumlord properties;
Budget for building compliance, building and fire codes;
Increase vacancy rates, tenants walk off.
Legal fees, not just for evictions and collections, but for government matters with violations.
You're more likely to have law suits as well, legal aid is free for low income folks, and generally if they bring suit you'll lose, even if you win, you don't really win.
Factor in the economic aspect of your ROI, the additional time, effort, hand holding and counselling required with low income tenants, don't forget police calls.
You will need to consider the the socio-economic aspects of your tenant base, common issues are job loss, no money today, wrecked or broken car, house guests that move in, unstable family environments, I think you get the picture.
Understand you won't be dealing with tenants whose elevator goes to the top floor very easily, many in the low income area have mental problems and/or lack education, no fault of theirs, but there are reasons why some are in the low income spectrum. Deal with that as well.
I also suggest you leave low income housing to the pros, it's the Public Housing Authority, they have a staff of babysitters, security folks, social workers and maintenance folks to ensure safe and affordable housing is available to this "needs" group.
Now, for your predatory slip up, doing rent to own and later when you sell in 30 years, you need to back up in your thinking of being a crook, selling but not really trying to sell, rent, rinse and repeat types.....not to mention that rent to own will put you in violation of Dodd-Frank, federal law!
Poorly maintained properties and depressed areas are on the radar scope of planners, economic development, building regulations, the fire department, tax collectors and other municipal/county officials who, be it known, really want you out of business and properties changed, I know because I worked with them. They don't like slumlords or poor housing conditions. That how these types get a bigger return on investment, they don't really improve or maintain housing.
Now, to do better, move up to moderate income properties, qualify tenants, be fair, provide safe and affordable units, make repairs and stay on the good side in your community. And forget rent to own with residential tenants!
Good luck :)
@Barry H. The deal I just signed is all in of around $32,500 after closing costs and stuff.
3BR/1BA, unfinished basement, corner lot directly across from the day care. Will rent for $800, but I'm going to start off asking $850.
$800 x 12 is $9,600.
$9600 x.3 is $2,880 (For expenses)
$9600 - $2,880 is $6,720. (Profit minus expenses.)
$6,720/$32,500 is a cash on cash investment of .206%
Please tell me if I have been doing this wrong because that is very possible.
Deals right at the 3 year mark or even down into the 2 years and some odd months are available in my market from time to time.
@Account Closed
If you going to buy in the low income and very cheap properties do a lot of research. You will find people who have done very well in these area but these are very savvy investors and still it can be a huge pain. Yet a handful of people do well.
We absolutely don't use this strategy but build your model after some of the investors that are already successful and more importantly have long term investment history. Do not emulate someone who has just scaled up. You might be just looking at a shooting start before it runs out of steam. Longitivity and staying power while investing matter a lot.
That doesn't sound like "low income" that is moderate income, qualifying with over 32K a year! (You're not in Caliland) :)
@Derrick E. I would say that is an excellent acquisition. I don't know your area, but based upon your calcs (approx 20% ROI), is a 5 year timeline to purchasing a 2nd unit ONLY with your net profits. That's about double what I have ever been able to do. However, in reading some additional comments from
@Andrew Holmes and @Bill Gulley
I would say my properties have been more in moderate neighborhoods. My tenants are indeed "poor" by most standards, but good honest people. Tenant screening is very much a crap shoot, especially when you are just starting out. Some Buy/Holders love having Section 8 Tenants because you can get 120% of market rent. I can't stand them because they have no work ethic, feel they are entitled and I just get a bad vibe. Hard workin poor folks are often a bit messy because they live hand to mouth, but they are honest. Finding them?? Welllll......that's not a science, but after a few losers, you start to see and feel the signs during screening processes: Difficult to verify income despite alleged long term employment, previously lived with parents for 5 years (unless they got a killer job, what has changed?), young unmarried couples with a kid (I am 0 for 3 in taking a chance on them), asking if they can split the security deposit into 2-3 months....etc. There are lots of warning signs and they don't always apply in every case- but if 2 or 3 exist with an applicant, even though you need that rent.....wait.
OK - done ramblin' on this one. I hope you find something that will work for you and don't be afraid to dip into your profits by using a LOCAL property manager who understands your market. I don't use them, but a good one is worthwhile, especially if you are just starting out. If you kinda watch how they operate, you start to learn through osmosis. :-)
Hey Bill,
Regarding what you called a "predatory slip up," I was just referring to the exit strategy in Chapter 8 of the Ultimate Beginner's Guide. It talks there about how few people ever exercise their purchase options, and I believe they covered that in one of the podcasts I listened to as well. If somebody actually does, GREAT! Seriously, congrats to them. On the other hand, given the conversion rates discussed, I just wouldn't bet on it happening often, and houses depreciate for 27.5 years if I remember correctly, so that's the exit date I would be looking at if it didn't happen before then.
If I've gotten any of this wrong, please do correct my thinking. I mean, I've started looking at properties and don't want to make a mistake before I even make an offer :) I'm actually a doctor in a helping profession, so the last thing I want to do is be "predatory." From the phrasing in that chapter, a lease option is only bad if you make it outrageous and con people into it. I don't intend to do that, but would like to get the benefits they talked about in the chapter in terms of having better, more invested tenants more than anything.
I noticed in your calculations you're allowing 30% for expenses. Can I ask where you got that number from? I know that 50% is a debatable but commonly used amount for expenses, and I would think it would be nearer to 50% given the higher turnover, etc. in these types of properties. Also, are you using a property management company or planning to do it yourself?
Your tax advantages begin to drop in 12 to 14 years, you shouldn't be waiting until they disappear, gear your exit around 15 years. This may be in sync with your maintenance schedule, you might get by without ever replacing a roof!
While it is true that not all options are taken, that does not mean load up unqualified buyers with options, that is predatory dealing and predatory lending when credit is given toward a purchase price.
No, your actions or deals do not need to be outrageous and you don't need to lie and con your buyer to be predatory or deal illegally. Most of the violators are simply unknowing, much of that comes from the guru hype you're reading on BP and elsewhere.
The "slip up" shows an attitude, profit from the failure of your buyer, when you are the one who is responsible (in real estate) as an operator, dealer, investor to ensure your deals are more than reasonably able to be successful and close as agreed. That comes` out by the insinuations made in that book you're holding as some holy grail, it's guru stuff and does not teach real estate, fair or ethical dealing or legal implications of being an operator in real estate.
You can be held responsible for the situation you put other people into, any financial loss they suffer because of your actions or lack of actions when you should have known as a dealer-operator or investor! You don't have to be outrageous or con anyone.
These issues are compounded dealing with low income people, might as well look at these "buyers" as a protected class, they are seen as the most vulnerable, least educated or business wise who may be the easiest to take advantage of, just a fact. It's kinda like pick on someone your own size.
Didn't say this "class" was dumb, they can be very clever, they know they have legal aid and you don't. And who do you think cries out "poor me, please help me", the person with a decent job making money and paying their way or the financially troubled type without means? There are many organizations out there that serve this population and they can cause you grief if they even think you're screwing their client.
This is also true in the moderate income levels to a lesser extent but still needs to be understood.
Contrary to investor/dealer thinking, everyone is not fit to own a home!
If someone lacks home ownership skills and the financial ability to buy and maintain real estate, then forget them as a buyer, rent to them and I would suggest Section 8, let the PHA deal with the financial and social matters.
I've been around this stuff for more than 50 years, I've worn many hats in this business and low-mod housing is not for newbies trying to sell homes.
My BS Meter blasts off when I hear some unqualified type say they are trying to help others in home ownership, total BS, they aren't running a charity operation, their goal is to profit. Secondly, I know that they understand this lower income group is easier to deal with, they can be naive, trusting and simply lack business sophistication, that means they see them selves dealing with an advantage, if they deny that, they are lying to me and probably themselves, either that or they are really ignorant.
Learn real estate, learn basic business operations, before reading guru wheeler dealer junk on the internet thinking you're getting an education.......not! :)
Your tax advantages begin to drop in 12 to 14 years, you shouldn't be waiting until they disappear, gear your exit around 15 years. This may be in sync with your maintenance schedule, you might get by without ever replacing a roof!
While it is true that not all options are taken, that does not mean load up unqualified buyers with options, that is predatory dealing and predatory lending when credit is given toward a purchase price.
No, your actions or deals do not need to be outrageous and you don't need to lie and con your buyer to be predatory or deal illegally. Most of the violators are simply unknowing, much of that comes from the guru hype you're reading on BP and elsewhere.
The "slip up" shows an attitude, profit from the failure of your buyer, when you are the one who is responsible (in real estate) as an operator, dealer, investor to ensure your deals are more than reasonably able to be successful and close as agreed. That comes` out by the insinuations made in that book you're holding as some holy grail, it's guru stuff and does not teach real estate, fair or ethical dealing or legal implications of being an operator in real estate.
You can be held responsible for the situation you put other people into, any financial loss they suffer because of your actions or lack of actions when you should have known as a dealer-operator or investor! You don't have to be outrageous or con anyone.
These issues are compounded dealing with low income people, might as well look at these "buyers" as a protected class, they are seen as the most vulnerable, least educated or business wise who may be the easiest to take advantage of, just a fact. It's kinda like pick on someone your own size.
Didn't say this "class" was dumb, they can be very clever, they know they have legal aid and you don't. And who do you think cries out "poor me, please help me", the person with a decent job making money and paying their way or the financially troubled type without means? There are many organizations out there that serve this population and they can cause you grief if they even think you're screwing their client.
This is also true in the moderate income levels to a lesser extent but still needs to be understood.
Contrary to investor/dealer thinking, everyone is not fit to own a home!
If someone lacks home ownership skills and the financial ability to buy and maintain real estate, then forget them as a buyer, rent to them and I would suggest Section 8, let the PHA deal with the financial and social matters.
I've been around this stuff for more than 50 years, I've worn many hats in this business and low-mod housing is not for newbies trying to sell homes.
My BS Meter blasts off when I hear some unqualified type say they are trying to help others in home ownership, total BS, they aren't running a charity operation, their goal is to profit. Secondly, I know that they understand this lower income group is easier to deal with, they can be naive, trusting and simply lack business sophistication, that means they see them selves dealing with an advantage, if they deny that, they are lying to me and probably themselves, either that or they are really ignorant.
Learn real estate, learn basic business operations, before reading guru wheeler dealer junk on the internet thinking you're getting an education.......not! :)
Actually, tax benefits on anything of decent size begin to dwindle after 4 years and level off at 6/7. Of course, the depreciation is unlocked with cost segregation, which does not make sense on anything too small. But, an exit of 5-7 years is best as it relates to tax benefits :)
Your tax advantages begin to drop in 12 to 14 years, you shouldn't be waiting until they disappear, gear your exit around 15 years. This may be in sync with your maintenance schedule, you might get by without ever replacing a roof!
Actually, tax benefits on anything of decent size begin to dwindle after 4 years and level off at 6/7. Of course, the depreciation is unlocked with cost segregation, which does not make sense on anything too small. But, an exit of 5-7 years is best as it relates to tax benefits :)
True, my exit was usually at 7 years, the max holding period could be longer, each property and tax obligation is different, just need to run the numbers. By 15 years, most any investment begins to turn red. Get while the gett'n is good!
I do have another saying, "if it don't eat any hay let it graze". Depreciation is the nature of the tax beast, it's not always the driving force in a portfolio. :)
@Rachel Fazio I'm paying all cash for my properties and all of the income from these properties will be going to purchase more all cash properties. I'm planning to manage all the properties myself until I get around 6-8 that have already paid for themselves.
I am now going to be extra picky if I decide to purchase another one this year. I'm looking at some 1 BRs right now. Would like to get one for $15,000 or less and rent it out for around $450-$550 per month. Those are hard deals to find, but I am patient for the most part. Most of these were built back in the 1920s, the $32,500 home was built in 1954 which is why I was willing to pay a little extra for it.
I will also be honest with you and tell you that I only have two rental units right now so I'm still very new. I'm always excited to learn. I'm more of a hands on learner so I decided to stop reading and just get started lol.
Your tax advantages begin to drop in 12 to 14 years, you shouldn't be waiting until they disappear, gear your exit around 15 years. This may be in sync with your maintenance schedule, you might get by without ever replacing a roof!
Actually, tax benefits on anything of decent size begin to dwindle after 4 years and level off at 6/7. Of course, the depreciation is unlocked with cost segregation, which does not make sense on anything too small. But, an exit of 5-7 years is best as it relates to tax benefits :)
True, my exit was usually at 7 years, the max holding period could be longer, each property and tax obligation is different, just need to run the numbers. By 15 years, most any investment begins to turn red. Get while the gett'n is good!
I do have another saying, "if it don't eat any hay let it graze". Depreciation is the nature of the tax beast, it's not always the driving force in a portfolio. :)
Well - when it makes the effective rate "0" it's kinda hard to ignore :)
@Ben Leybovich - Crazy to see you on this thread BTW! I just listened to the BP podcast episode you were on yesterday. Even though I'm in Arkansas right now, I'm originally from an area near Dayton, Ohio, and thought about moving into that market eventually. I think there are some good low-to-mid-income property deals in that area as well!
I really enjoyed the podcast episode; you are an excellent speaker. And being a neuropsychologist myself, I dug your personal story because I know what kind of challenges you potentially face.
@Ben Leybovich - Crazy to see you on this thread BTW! I just listened to the BP podcast episode you were on yesterday. Even though I'm in Arkansas right now, I'm originally from an area near Dayton, Ohio, and thought about moving into that market eventually. I think there are some good low-to-mid-income property deals in that area as well!
I really enjoyed the podcast episode; you are an excellent speaker. And being a neuropsychologist myself, I dug your personal story because I know what kind of challenges you potentially face.
It's my pleasure to help, Rachel!
@Account Closed,
We focus on low income properties, and there's a direct correlation between risk/reward. The returns we get, are crazy and we take a lot of pride in making the area better and bringing good people into the area... however.. it's SIGNIFICANTLY more stressful than middle class. It's not everyone's cup of tea, and you gotta understand you aren't in the nicest areas, if you leave tools out, expect things to be stolen, and expect borders to be tested... . It's really a comfort level thing. I'd suggest visiting local low income areas where you are looking, take a few walks around the block, do you feel comfortable coming back collect rent, or make a repair?
I will warn you, if you're getting a house dirt cheap, it's b/c that's what it's worth, expect a lot higher repair bills, and expect a lot more problems.. most of the ones we've bought have thousands of dollars of repairs needed, and it's obvious the prior landlord went the cheapest/easiest way always, so I'd go into it with that mentality.. it's not a deal, you're just not paying for all the stuff needed in the initial cost of the house, you'll pay that after. Hope this helps!
@Account Closed,
We focus on low income properties, and there's a direct correlation between risk/reward. The returns we get, are crazy and we take a lot of pride in making the area better and bringing good people into the area... however.. it's SIGNIFICANTLY more stressful than middle class. It's not everyone's cup of tea, and you gotta understand you aren't in the nicest areas, if you leave tools out, expect things to be stolen, and expect borders to be tested... . It's really a comfort level thing. I'd suggest visiting local low income areas where you are looking, take a few walks around the block, do you feel comfortable coming back collect rent, or make a repair?
I will warn you, if you're getting a house dirt cheap, it's b/c that's what it's worth, expect a lot higher repair bills, and expect a lot more problems.. most of the ones we've bought have thousands of dollars of repairs needed, and it's obvious the prior landlord went the cheapest/easiest way always, so I'd go into it with that mentality.. it's not a deal, you're just not paying for all the stuff needed in the initial cost of the house, you'll pay that after. Hope this helps!
This may very well be the first intellectually honest post in BP history relative to this particular subject.
The sentence that makes sense is "if you're buying a cheap house, it's because that's what it is.."
The big issue with these houses is the CapEx. Sure - you'll buy it and rehab it. Where it is and what it is the house will attract specific type of tenant base. Ask yourself - how long will this rehab I just did hold?
And here's the issue - when it's time to put more money into the house (which is still the same house that you bought, where it is and what it is), are you going to be willing to throw more good money after bad...?
Economic losses are a real killer in this asset class. If you are there, and very proficient, you can do it. But it's nothing but work :)
Okay, here's the deal I'm looking at tomorrow:
1536 sqft, 3 bed, 1 bath home - class C neighborhood
Foreclosed in August, bought by an investment company in December, exterior is in same condition, interior completely remodeled. I would probably need to replace the fascia on the front, they look crappy and kind of pull the place down.
They bought it for $6k. Currently asking 22k. I would like to offer 18k.
I think the rent the market can bear for this one is $650/month. Zillow (I know, I know...but we'll see) is saying $750, I think mostly based on the sqft. It's one of the bigger homes in the area.
The way I see this, it's a 3% cap rate, maybe more. Even if I lose 50% to expenses, at the end of a year (cash purchase):
$650 * 12 = 7800 * .5 = $3900
$3900/$20,000 (if I can't get it for 18k) = 19.5%
Also, property taxes run about $50/month. Minimum property management fees around here are $75 a month. No insurance to replace it, I literally cannot find an ACV policy that goes this low. If anyone knows of a company who'll do it, please clue me in :)
So what am I missing here?
I just put in an offer for a 1BR/1BA older home in a C neighborhood. Its decent size at over 700 square feet.
Biggest thing it needs is the bathroom needs completely remodeled. The biggest upgrade I want to make is moving the washer and dryer hook ups into the back room area. Right now, tenants have to walk outside and down the steps to the basement to use the washer and dryer. I think moving that up into the back room would add a lot of value to it as a renter.
It also has a 20'x20' detached two car garage which is in really good shape. Long term plan would be to remodel it into either a studio apartment or a small 1 BR Apt.
I offered $10,000 for it. I will probably have to pay around $12-14,000 for it, but I always start low. After fixing the bathroom and moving washer and dryer inside, I could probably rent this property for $500-$550/month, and I will hopefully have less than $18,000 all in.
Maybe, actually being able collect the rent? Threats of violence?