Good deal in a bad area....what to do??

Question

Hey guys, I'm a new investor and have been looking for my 1st rental property for about a month now, I'm targeting an area of town that I'm familiar with, good schools, middle income families, lots of jobs, steady appreciation and neighborhoods that rent very fast. During my search, I've come across several leads of properties in other parts of town that are not as appealing, higher crime rate, lower income families, not much appreciation. But when I crunch the numbers, they cash flow 10% cash on cash annually. I'm torn on what to do, I really like my target area, but the deals are hard to come by because everyone wants to be there. Do I pull the trigger on one of these properties in a bad area, or should I hold out and wait for something in my target area? I'd hate to put my money in a property that will be hard to lease, and maybe even hard to sell in the future, along with the tenant problems I might come across because of the area of town its in. Any kind of help/advice would be appreciated, like I said, I'm looking for my first rental.

Thanks

Tony Castronovo · Answer

I personally wouldn't buy in a bad area just to get the high cash flow. If you want to be a buy & hold investor then you have to play the long game. Short-term profits help you keep your business running to enable long-term wealth. But short-term profits without a sound asset won't usually pan out down the road.

Remember, you need to think about your exit strategy before you buy. How much will the home be worth in 5,7,10 years? If it's a bad area you might even take a loss when it's time to sell...especially if you over improve.

My rule of thumb: if I don't feel my wife would be safe going to the property at night without me it's a deal breaker.

Clay O. · Answer

I made this mistake.. once. Looked good on paper but couldn't keep tenants through a 1 yr lease. I had a hard time collecting rent and the turnover was pretty much paint, carpet and cleaning every time. Not worth the hassle to me so I sold it to someone else. Stick to your plans.. a deal will come along.

Raffie Mardickian · Answer

@Tony Castronovo Good way of looking at it, with it being safe enough for the wife to go alone, Thanks for the advice.

@Andrew Johnson You are right about all the good deals being in the bad areas because of the competition in the attractive areas. Thanks for replying.

Andrew Johnson · Answer

@Raffie Mardickian For what it's worth, there are always good *pro-forma* deals in bad areas. Now getting the pro-forma from a spreadsheet to cash-in-your-pocket is a little bit trickier. To overgeneralize, you end up with more challenges around rent collection, evictions, damage to the property, etc. Again, it's a bit of an unfair generalization given I don't know your area but every single time I've looked at units in bad areas where I invest (that look tempting/good on paper) condition in the units is an issue as is general upkeep of the surrounding properties.

So you're basically stuck fighting the free market. People want to invest in certain areas, which drives the price up and hurts ROI. No matter the market that you're in you'll always hit that dynamic.

Raffie Mardickian · Answer

@Christine Kankowski Thanks for the advice, Yes, Katy and Cypress are target areas for me, and you are right, the problems with the bad areas are much greater than the positive cash flow potential.

Christine Kankowski · Answer

I would stay in the better areas as a new investor. If not, you will get frustrated at how much extra work comes with bad areas- harder to rent, tenants with worse credit and income leading to late rent, evictions. More rehab generally between tenants.

Although sometimes it appears you get a better cash flow monthly, it goes away pretty quickly with a single bad tenant who damages the property or stops paying.

That being said, I have 2 in Katy and Cypress, so those ares worked out very well for me.

Good deal in a bad area....what to do??

Good deal in a bad area....what to do??

Most Popular Reply

6 Replies