When looking for an invenstment property, do you consider location?

Question

Ok, I know the thread title seems like a no brainer, but allow me to elaborate.

I am following REOs closely and trying to zone in on exactly where I would like to make a purchase for my first invenstment property. Naturally, all of the most affordable properties are popping up in what most would consider a "spotty" or "ghetto" neighborhood.

I know the old wisdom of "location, location, location" when it comes to real estate, but does this also apply when it comes to investments? The issue is that I simply cannot afford buying investment properties in the best areas of Phx. (i.e. Biltmore, Scottsdale, Fountain Hills, Ocotillo, Tempe etc) On top of them being out of my budget in those neighborhoods, the 50% rule seems much more difficult to apply to a $250k+ property, as opposed to a $30-$40k property. Plus, it's not like I will be living in said property anyway, so I don't have to deal with the day-to-day living in that particular area.

What are your guys thoughts and strategies on location when it comes to buying a buy-and-hold rental? Are "bad" areas ok, or would you avoid them? If the recomendation is to avoid them, then is Phx possibly not the best area to buy rentals?

Thanks!

Mitch Kronowit · Answer

No, but you'll be dealing with the tenants, their family and friends, and the neighbors that live in that area. Some landlords have good luck buying in the "slums" and collecting their rents in cash while carrying a gun. Sorry, not my cup of tea.

Of course, the numbers "work" better in lower-class neighbor "hoods" because the housing prices are so low (they're low for a reason), but those areas will never appreciate in value (unless there's some government sponsored urban renewal of sorts) and, IMHO, you'll be working your a$$ off for the next 30 years trying to earn that $100/door.

But I guess somebody has to provide housing to the underworld, it just won't be me. I prefer rentals in middle working-class neighborhoods where the cash flow may not be so hot, but the appreciation in the long-run will dwarf whatever monthly scratch I'm receiving from the rent.

Kevin Perk · Answer

"When looking for an invenstment property, do you consider location?"

Yes!  Location, Location, Location applies to investment properties.

Steve M. · Answer

haha .... that's right about par for where I am too ... older model ranches with ARVs in the $100k - 120k range.  $900 - $1,100 respectively as rentals :)  haha

The return isn't as great, but believe you me, better quality tenants and less headaches if you stay out of the warzones.

Steve M. · Answer

this is the most popular answer you will find, and I agree.

If I myself wouldn't feel comfortable there at night, I won't do it.

You can find houses left and right under $30k in memphis making you $600-$800/month, but not in my wildest dreams would I ever want to spend a night there.

So now, I am content with searching around me (middle TN)  Deals are few and far between compared to Memphis real estate but they are out there.  Patience, Persistence, and LUCK are all virtues in RE.

Nate Worcester · Answer

My test for if a neighborhood is too "bad": would I be comfortable sending my wife there at night?

If the answer is no, I don't even consider it.

I also prefer to invest in middle class working neighborhoods. In my area, this equates to houses where the ARV is around 100k and the rents are around $1,000/mo.

Eric Tomlinson · Answer

Scott-

Yes location matters. It depends on what you are trying to accomplish and what you want to add to your portfolio. Mitch makes a good point about the lack of appreciation in the 'hood'. I see an area as having about 5 sections: 'slums', lower middle working class, middle working, upper middle, upper class homes.

I personally would stay out of the 'slum' areas. I like the lower middle class for rentals and that are relatively inexpensive to buy and offer a good ARV. You will still probably have some issues, but it fits my portfolio, and I have a management co to deal with those issues that do arise. Keep an eye open and try to mix in a few middle class homes where most are OO as they will appreciate better IMO.

Good Luck.

Jonathan H. · Answer

Im really happy I found this thread.

I started another one very similar about '80K doors vs $25K doors'.

This is the kind of info I was searching.

On paper, these lower cost units seem so appealing that it makes it difficult to even look at more expensive ones with lower returns.

On my side, Im leaning towards starting with an easier to maintain property ( prob more expensive), but as I learn more about REI, gain thicker skin, will hopefully be able to handle lower cost, higher turn-over, less appreciation etc. properties.

Scott E. · Answer

Yeah.. its a sad be real realization for me I think.

It just sounds so appealing when I hear of people buying up 4-plex's for well under $100k, putting $20-$25k into them, then rent them out at $450-$500 a unit.

Those types of numbers, which apparantly is very plausible in Phoenix, have been hard to ignore.

But then I guess you're stuck with 4 poor tenants as opposed to 1.

I'll be moving on to look in some more decent neighborhoods.

Steve M. · Answer

Yeah ... That would be a no go for me.  I try for average middle class neighborhoods.  The lower you go, the more problems you have.

Scott E. · Answer

Some great responses.

Mitch - I hadn't thought about the appreciation over time. My mind was only thinking in the short term, when this would be a long term investment. Probably not the best mentality for me to be having. I agree that most of these slums will not see much or any appreciation.

Eric - I'd prefer to be in the "lower middle working class" as well. Now the goal is just finding that niche in Phx.

Nate/Steve - The areas I have been considering werent so bad that I would be afraid to go there at night... but my girlfriend on the other hand.. wouldnt want her walking around there after dark.

When looking for an invenstment property, do you consider location?

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