Buying rentals in semi warzones???
Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes
It's seem like a lot of people that I've talked to aren't really interested in purchasing rentals in rough neighborhoods. My question is why not?
I was just looking at property that was in good condition listed for $35k with a 71k ARV. It's will probably need about 5k to get in in rental shape. If I was to purchase this I would take out a hard money loan for 35k and put my own money 5k in it for repairs. After 12moths I would do a cash out refinance. The total rents for this property is $1200 a month, this is a duplex.
What do you guys think?
With risk comes reward. However, sometimes the risk is too high and the reward is too low.
I cut my rental teeth working for my cousins with their Class D properties. Nearly all (all but two) were in war zones. One was in a semi-warzone / "transitional neighborhood."
Sure, the numbers look good. But I like to call the return a "theoretical return." Here are examples of what I encountered:
1. Stolen garage door. Yup, the tenants stole and scrapped out the overhead garage door.
2. Broken windows and doors. Okay, I see you yawning. But we replaced at least 1/4 of the windows in EVERY dwelling unit yearly due to ill-behaved children, rocks, bricks, gun fire, etc. That adds up. Doors get kicked in, locks get ruined, and entire door frames get splintered. FYI, screen doors are nothing but a waste and WILL get trashed in VERY short order.
3. Bad applicants. I'm not just talking bad credit. I'm talking horrible credit with multiple evictions, no to grossly unstable work history, long and violent rap sheets, sex offenders, drug abusers/manufacturers/dealers.....
4. Stupidity. So one of our tenant's stoves dies. They call at 5:00 pm when the maintenance guy is eating supper. The next call at 6:15 pm was from the fire department. The tenant dragged a Weber charcoal grill into the LIVING ROOM and decided to cook "out"... Indoors. Unfortunately, the were stoned out of their mind, passed out, and the building caught fire.
5. Property used for illegal purposes. I'm not talking about someone quietly fixing neighborhood cars for cash in the garage in violation of zoning ordinances. I'm talking discovering that tear gas from SWAT gas grenades is IMPOSSIBLE to clean out of drywall.
6. Disgusting. Ever come upon the remains of a dog that was cooked in your tub by a bunch of squatters? Or people using the shower as a toilet?
7. Trashed places. How many dumpsters will you need when you need to do a complete clean-out including ALL flooring, carpeting, cabinets, counter tops, and trash? You might be surprised...
8. Copper and aluminum siding theft. As Josh said and as our garage door proves, scrap's worth money. We eventually cut out the copper ourselves and replaced it with that new poly-whatever hosing. It's not as nice but now the tenants don't take a stolen sawzall to our plumbing. (We show EVERY new tenant how we "upgraded the plumbing" by getting rid of that "old cruddy copper" and replacing it with "better plastic." You should see the long faces when they realize what we did!) Aluminum siding is another one. We're switching over to vinyl whenever our aluminum gets stolen.
9. Do-gooders. Bless their hearts, they have NO clue as to what REALLY goes on. Worse yet, they try to "fix" things based upon a worldview that doesn't exist. While their hearts are in the right place, they took leave of their brains in their first sociology class. These types generally find ways to be troublesome and are best avoided. (Ever have a tenant advocate show up in eviction court to argue that it was okay for the tenant not to pay rent because they were trying to give their children "a good Christmas?" Or have them file a complaint with building services that your building doesn't have siding - when the TENANT was later found to be the one stealing and scrapping out your aluminum siding?)
10. Safety. This covers everything from very aggressive panhandlers to prostitution to drug dealing to robbery to poor race relations to rape to murder. You're going to have to collect rent, and your tenants may not qualify for a checking account. Expect to be paid in cash and weird money orders from the corner bodega. And expect that people will know when you leave with lots of rent money in your pockets. And you'll be collecting after dark because that's when the tenants are awake (or less commonly, around because they're home from work). I advise taking a firearms training course that covers your state's laws and toting a quality RELIABLE firearm.
FYI, I now refuse to handle anything worse than a Class B property.
You've got the possibility to earn a solid amount of money with Class D properties. But man, you're going to earn EVERY CENT.
Mike
My education in war zones is that theres a difference between "rough" neighbohoods that many investors happily deal in, and neighborhoods that are filled with gangs and drugs, where investors will never actually see a profit because of vandalism, tenant, gang and drug problems etc.
One of the main problems I see in this topic is when a neighborhood looks fine to invest in, only to find that there are many vacant properties due to people not wanting to live there, and is much less safe to invest in than had originally thought.
The two best pieces of advice I have recieved are check out past police reports on the property, and check properties around the potential investment to see if they are actually occupied or not. Minneapolis, like many cities, has many different neighborhoods, S. Minneapolis differentiates block by block. One Lawyer that I know who happily invests in areas that other investors wouldn't usually touch had the problem of gangs expanding in the neighborhood. The vandalism was moving towards his block and eventually hitting his properites...he sold right away and was able to recoup his money through taxes...
Not to sound doom and gloom however....Many people invest in "rough" neighborhoods and life becomes much easier when you can figure between 5 and 8 percent of NOI for a solid property management company Who has experience managing in these areas, and very knowledgeable on current tenant landlord laws.
I am not a buy and hold kind of guy. But, I have worked in what I consider a marginal neighborhood and have currntly upgraded to a nice one. While entertaining, the marginal neighborhood was a little scary for me. Although I was never directly involved with any threatening situations, the atmosphere always changed when the sun went down. That is when all of the gunshots and noise associated with fighting would start. I advise to visit the place in the night time to see if you think you can work there. I do think you will eventually be collecting rent or unstopping a toilet at night. This might help you with your decision. This property is a bargain for a reason. I suspect it could be closer to the warzone than you realize.
Don
Some downsides I've experienced investing in warzones:
- Quality of tenant - Finding great tenant to rent a warzone property is not easy. Evictions and problem tenants are typically the norm. Dealing with police, angry neighbors, drug issues are common occurrences.
- Theft - I've had to cage my A/C units on properties in tough neighborhoods because I've had more than one stolen before. I've also had vacant units broken into and copper stolen from inside the walls.
- Safety - If you don't feel safe walking around somewhere at night, do you think it is a good place to own property? If you don't feel safe, what about your tenants?
- Make ready / repairs - Often times you're going to deal with tenants who do not take good care of the property. This will lead to higher costs during make-ready periods.
I've learned through personal experience that I'm not interested in the headaches that come with these kinds of properties. They can certainly bring good returns if everything goes right, but that rarely happens.
For the same reason a lot of people aren't interested in hitting their thumbs with a hammer.
This is the biggest deterrent of the "semi war zones" for me. Being forced to take people with horrible credit or who own certain dog breeds that I don't want is a big turn off for me.
For the same reason a lot of people aren't interested in hitting their thumbs with a hammer.
That was a great laugh for the day lol...
Now when I say "semi" warzone, what I really mean is that the neighborhood isn't all that bad. It's just in close proximity to the actual "warzone".
Yeah Mike I usually refer to those as "transitional neighborhoods". The areas that transition into better neighborhoods but aren't actually the better neighborhoods.
If you haven't yet, you probably need to actually landlord in one of these areas to truly understand. Once you've been a landlord in a nice neighborhood vs. a rough one you'll never go back. Read Josh' post above. It speaks volumues.
Mike -
I think a semi-warzone is one with the potential to become a warzone in short order. I owned a property that was in a semi-warzone and had to bail as it quickly fell into becoming a warzone. I actually think that these are the potentially the most dangerous places to invest, because of how quickly they can turn. Remember, you could have a great property in a semi-decent neighborhood, but if 2 or 3 properties around yours fall into the wrong hands, you're screwed.
Thanks Josh, I guess you have a point. I'll stay away from these properties and look for better areas.
Mike - At least starting out, I think it is always better to aim for the bread and butter blue-collar areas. Once you gain experience, you're going to be in a better position to try things out like owning in tougher areas.
Josh - the only reason why I was thinking about investing in theses area would be because the initial investment. Let's say if I didn't use hard money and I would like to put 20% down for a 35k property, that's a big difference from 20% on a 150k property.
We buy and own properties in Detroit, Michigan, stay out of war zones or semi war zones, stick to the more stable neighborhoods. But that doesn't mean "nice" neighborhoods.
Vandalism of vacant properties is something you have to deal with in any area in this day and age, just too many desperate or unscrupulous people out there. I see it happen in bad neighborhoods and in 500K+ home neighborhoods.
Where are you located? $35k sounds like a lot for a semi war zone.
Can you find something in a better area that needs work for maybe 40K -50K? Those could potentially still cash flow.
I'm located in Richmond, VA I think it will be possible to get a home that's not in a warzone after rehab for around 60-70k.
With risk comes reward. However, sometimes the risk is too high and the reward is too low.
I cut my rental teeth working for my cousins with their Class D properties. Nearly all (all but two) were in war zones. One was in a semi-warzone / "transitional neighborhood."
Sure, the numbers look good. But I like to call the return a "theoretical return." Here are examples of what I encountered:
1. Stolen garage door. Yup, the tenants stole and scrapped out the overhead garage door.
2. Broken windows and doors. Okay, I see you yawning. But we replaced at least 1/4 of the windows in EVERY dwelling unit yearly due to ill-behaved children, rocks, bricks, gun fire, etc. That adds up. Doors get kicked in, locks get ruined, and entire door frames get splintered. FYI, screen doors are nothing but a waste and WILL get trashed in VERY short order.
3. Bad applicants. I'm not just talking bad credit. I'm talking horrible credit with multiple evictions, no to grossly unstable work history, long and violent rap sheets, sex offenders, drug abusers/manufacturers/dealers.....
4. Stupidity. So one of our tenant's stoves dies. They call at 5:00 pm when the maintenance guy is eating supper. The next call at 6:15 pm was from the fire department. The tenant dragged a Weber charcoal grill into the LIVING ROOM and decided to cook "out"... Indoors. Unfortunately, the were stoned out of their mind, passed out, and the building caught fire.
5. Property used for illegal purposes. I'm not talking about someone quietly fixing neighborhood cars for cash in the garage in violation of zoning ordinances. I'm talking discovering that tear gas from SWAT gas grenades is IMPOSSIBLE to clean out of drywall.
6. Disgusting. Ever come upon the remains of a dog that was cooked in your tub by a bunch of squatters? Or people using the shower as a toilet?
7. Trashed places. How many dumpsters will you need when you need to do a complete clean-out including ALL flooring, carpeting, cabinets, counter tops, and trash? You might be surprised...
8. Copper and aluminum siding theft. As Josh said and as our garage door proves, scrap's worth money. We eventually cut out the copper ourselves and replaced it with that new poly-whatever hosing. It's not as nice but now the tenants don't take a stolen sawzall to our plumbing. (We show EVERY new tenant how we "upgraded the plumbing" by getting rid of that "old cruddy copper" and replacing it with "better plastic." You should see the long faces when they realize what we did!) Aluminum siding is another one. We're switching over to vinyl whenever our aluminum gets stolen.
9. Do-gooders. Bless their hearts, they have NO clue as to what REALLY goes on. Worse yet, they try to "fix" things based upon a worldview that doesn't exist. While their hearts are in the right place, they took leave of their brains in their first sociology class. These types generally find ways to be troublesome and are best avoided. (Ever have a tenant advocate show up in eviction court to argue that it was okay for the tenant not to pay rent because they were trying to give their children "a good Christmas?" Or have them file a complaint with building services that your building doesn't have siding - when the TENANT was later found to be the one stealing and scrapping out your aluminum siding?)
10. Safety. This covers everything from very aggressive panhandlers to prostitution to drug dealing to robbery to poor race relations to rape to murder. You're going to have to collect rent, and your tenants may not qualify for a checking account. Expect to be paid in cash and weird money orders from the corner bodega. And expect that people will know when you leave with lots of rent money in your pockets. And you'll be collecting after dark because that's when the tenants are awake (or less commonly, around because they're home from work). I advise taking a firearms training course that covers your state's laws and toting a quality RELIABLE firearm.
FYI, I now refuse to handle anything worse than a Class B property.
You've got the possibility to earn a solid amount of money with Class D properties. But man, you're going to earn EVERY CENT.
Mike
You could look at the rents in the area and see if they meet the 50% rule (or come close), with a after repair cost of 60-70K...
Are you certain you will be able to get conventional financing for a rental property after a year, though? The lenders are pretty strict these days, and it would suck to pay for the hard money and then not be able to get a conventional mortgage.
@Mike - Thanks for sharing your experiences. I could write a short book with mine . . .
@Joshua, those are only the ones that came to mind immediately. You and I could probably put out a collection of books.
I've also been offered 40 blowjobs in exchange for rent (I give the lady credit for knowing math- 40 blowjobs at $10.00 each does equal $400.00 in monthly rent), some pretty good size crack rocks in exchange for rent, three spinners for rent (but why THREE?), two purposefully starved but very alive pit bulls left in a basement as a "parting gift" for an eviction, I dealt with buildings where coming with two people was still too few for "safety in numbers," had issues with squatters breaking in...
Squatters: We had an 8-plex with eight storage units in the basement. One day I noticed a DirecTV bill addressed to the property, unit #BASEMENT.
Unit #Basement??!
So I went downstairs. A squatter was living in one of the storage units! Not just a mattress and box spring, but he tapped into the electric and had a TV/DVD combo with DirecTV! He actually installed a %$#@! dish on the roof, ran a cable down through the basement window (he drilled a hole through the wood window frame for the cable), and had DirecTV in his storage unit!
Mike
Are semi- warzones the same as lower income neighborhoods?
WOW!!! Mike that was a good read, I definitely will take all of that into consideration.
@Shanequa - I wouldn't necessarily say it's a lower income neighborhood, they have working class people it's just that their neighborhood just so happens to be within .90 miles away from a war zone.
Mike K., hilarious stories!! Not so funny when they happen to you, but they make for great reading.
I have 2 rentals in Trenton, NJ. Our state's capital, but most people don't associate it with politics. My properties are in OK areas, not war zones, but my one tenant told me that she is the only one on the block with a job. My other property also has a working couple in it, but prior to these tenants, all previous one were on rental assistance. I had no issues with going to the properties during daylight and even met a few of the neighbors (heck, they were always home, no jobs). I wouldn't go there at night although my tenants never had problems.
My contractor grew up there and when I'm considering a purchase in a specific area, he'll tell me if he will or won't go there to do repairs - at any time. Before buying in any marginal neighborhood, try to find out from local service providers (plumbers, HVAC repairers, furniture stores) what their take on the 'hood is.
I now own properties in Florida, in good middle class areas, and my local contractor has no problem going to any of them at any time. Cash flow is better than in Trenton, and the properties will appreciate with time. Not so in Trenton, or most war zones. At least probably not in your lifetime.
I always thought the best cash flow was supposed to be in the bad neighborhoods. But reading some of these posts I suppose that may be more theoretical cash flow in the best of all possible worlds, as opposed to the reality of actually trying to get someone to fork up the full rent amount on time each month.
I will stick with working class neighorhoods in the suburbs. With the recent RE crash, there are great properties in neighorhoods where going to eviction court is not considered a necessary social rite of passage.
The rule of buying only where you would live is a good one. I personally would only live in a neighborhood where I don't stick out racially or economically. So I stick with vanilla suburbs. Red states, red counties, red municipalities is optimal. But that is just me. I currently own in SouthBend/Mishawaka IN, Detroit suburbs, and (unfortunately) Memphis.
Phil Gainey,
Chairman, "Shut up and Pay the Freaking Rent" Party.
Mike,
War zone rentals are great!! I have done them for years, but here is the lynch pin to selling them. You gotta ad management in on the deal. People do not wanna deal with the headaches that come with them, to be honest, they are just scared.
As far as the duplex you described, WAY too much for being in a war zone. Plus a duplex is a lot more management to deal with. :mrgreen: