WAR ZONES

26 Replies

Looking for advice on war zones. I am looking at some low income apartment deals some are section 8.  My questions:

1. Is it worth the return?

2. If you have on site management and separate yourself from the day to day does this work?

3. What size is ideal?

4. Can you do a value add and rehab the property?

5. Is there any issues with insurances?

6. What is the downside ?

7. What is the upside?

Any help is greatly appreciated as I am ready to pull the trigger but want to avoid any fatal mistakes. 

Thank you

Glen Stygar

@Glen S.  

baptism by fire literally... I have had two close friends from Oregon buy these types of units. one in Memphis one in Oaklahoma city.

Memphis one paid 400k for 80 doors put 600k in it expected to exit at 1.5 mil.. got it up to about 80% occ.. but things deteriorated quicker then they could keep up. It slid back down hill sold it for 600k and lost 400k and felt lucky.. .Next victim who thinks they can turn around war zone bought it.

Oak city... bought 300 units  4 mil  within first 12 months the amount of theft by management put them in risk of losing it.. they ended up moving to the property from Portland lived there for 4 years finally got it back up to where they could sell and break even sold came back to PDX bought some solid  a and b units and life is good once again.

don't try to be a cowboy. Stick with something that works.  Unless you live there and manage the ace alog with a qualified pm you won't stand a chance. 

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

@Glen S.  lots of investors will warn you against war zones

the guys that run my rei club all invest in low income areas and they cash flow like crazy

1-absolutely  

2-yes most in my group do self management( i prefer property management}i dont want another job 

3-in my area any size works well

4-if you rehab house just rehab to rent standards for the area,i was taught that even low income tenants want a descent place to live 

5-i have never had any issues with insurance 

6-high turnover and some tenants will damage property

7-these properties if bought right will cash flow like crazy

good luck to you 

seek out investors in your area that buy in low income areas and take them out for coffee

good ones with get you on the right path 

as with landlording in any income level learn the laws and protect yourself 

good luck

Old saying: If you don't have a headache,  don't give yourself one. I would run away from it. 

how do you qualify a war zone?

The issue I take is that many people have different ideas of war zones.  I grew up in an area that someone on BP called a war zone.  I was thinking "warzone?".  It seems to be all about where you are from or what you know/fear.

@Sean T.  

  My definition of war zone would be like the Memphis property my buddy bought.

within 12 months of trying to turn it around and blowing through 500k... he had 2 murders on property... a few rapes... too many calls to cops to quell family baby daddy type disputes.

He also thought the reason he could turn it around is the previous owners did not care so he put in new B ball hoop  BBQ's etc etc.. B ball destroyed in one week.. BBQs stolen in a few days...

My friend with the Oaklahoma units it was more theft from within.. and changing from largely section 8 to market renters that saved her.

What pool of tenants do you have in bad areas?? Mostly bad tenants.

Any quality tenants will not live there or are working to get out of the place to move somewhere else nicer.

I will keep saying this over and over again. You find the crappiest building in the best area for value add deals. Something that has fallen in disrepair but in a good area. People left because the place was run down but not because of a bad area.

When I look at value add I look at demographics and the crime going on. If high crime all around the complex then if you rehab it crappy tenants will move in again and abuse the units and you will have a big loss.

If you look at a nice area and this one complex just has bad tenants or is rundown you can then repair and clean it up and get the bad element out and now have a great property to own.

The complex will generally hold it's land value as well in better areas. An older complex on large land is great as well. You can sell out later down the road to build higher density there yourself or let another developer do it.

I want to buy properties to ADD VALUE but in smart ways where I wouldn't be buying in a sh**hole area just for high cash flow. You get a big headache, the cash flow year over year isn't what you thought, and you have no appreciation and generally very little rent increases as the tenants are living hand to mouth.

I think inflation coming will stifle many of these lower income areas as the tenants have less and less to live on.

I am not a big fan of these properties and never will be. Do not be disillusioned and think a PM company will run your crap hole for an 8% fee. The companies that specialize in this stuff charge a mint to run them usually 12% or more for the BS they put up with. The rents per door are low and headache is high so they charge for it.

So a common mistake on analyzing the buy side is allocating low for a PM company to make your numbers look better. Run absolutely horrible worst case numbers possible so if it does do that you still come out okay. If not you do better than you thought you did.

Way more experienced  investors on here than me but 11 years hard knocks in real estate learning through trial by fire.   

Do you really truly mean war zones?  My investment neighborhood too terrible for Section 8 to want, and still not war zone.

We only have issues with insurance when the units have issues that make them considered inhabitable' like broken windows, cracked porch, etc.  They can get on our case about uncut lawn and mossy roof, but we can work through that,  Sometimes we get higher cost insurance to get over the hump then shop it to a better policy in a year.

@Michele Fischer  

  I think I have mentioned this before but we don't have ANY WAR ZONES in our market here.. yes there is bad or not so good.. But it is nothing on a level of a mid west upper east coast war zone... NOTHING like it here...

Nothing like the War zones in California either... This is why we have one of the best rental markets in the country. and why our prices are where they are at... Price to Risk is what drives those values in the mid west and war zone areas. WE just don't have the same risk. Granted we have WT tweakers to deal with.. But its such a small part of the population as to be insignificant.

http://www.biggerpockets.com/forums/12/topics/1642...

Many areas in LA

were former war zones. If you can identify those types of investments you can do great I imagine. Locals who know how to interpret gang graffiti and migration have many opportunities available. Some hoods where the wheels have completely fallen off might be great too...um...in the next century. Check this related post above regarding low priced rentals. I posted a recent bullet hole pic.

While the term war zone is relative, in summary I view it as a pretty bad or undesirable place to live. You could buy a property, fixed it up, install property management all day long but the one thing I feel you cannot control alone are the factors that make the area a war zone in the first place. In my opinion, war zones are created over time by a number of negative factors, (primarily negative social and economic factors IMO). If these factors are not improving in a positive way, I would imagine a property could simply become a part of the war zone. After all, it will be occupied by people of the war zone.

@Jay Hinrichs  I would expand war zone to be a bit wider than that. There are many areas in Memphis I refer to as war zones that are not literally shoot em up bang bang streets but they are simply unmanageable areas.

The reasons for this include:

Backs on to a large run down multifamily.

Street has lots of boarded up or burnt out homes.

Street is a known target for copper thieves

Street has many duplexes all built together.

There is a really bad area within walking distance.

THe list goes on but they are all war zones in the sense that if you bought there you would be at war with your wallet because you can never get the rent paid. Obviously guys like @Derrick Craig  who live here and self manage can make them work, although I still question why you would bother, but for non local investors forget [email protected]!

(901) 264-8674
Originally posted by @Glen S. :

Looking for advice on war zones. I am looking at some low income apartment deals some are section 8.  My questions:

1. Is it worth the return?

2. If you have on site management and separate yourself from the day to day does this work?

3. What size is ideal?

4. Can you do a value add and rehab the property?

5. Is there any issues with insurances?

6. What is the downside ?

7. What is the upside?

Any help is greatly appreciated as I am ready to pull the trigger but want to avoid any fatal mistakes. 

Thank you

Glen Stygar

If the area truly is a "warzone" there is no guarantee you will achieve the return you are expecting. There is no 50% rule that can predict what can and can not happen in an area like that.

Investing in areas were the homes look like this one pictured below can be profitable. 

Low income but generally pretty safe. Most of the homes will eventually need pex or pvc plumbing because a long vacancy will lead to a break in. In these types of areas the damage is very minimal and once you no longer have copper plumbing your pretty safe from further damage. There will be bumps in the road, there will be evictions/non pay etc. but you can do very well with your portfolio in these areas. You must take the good with the bad. There are trade offs.

 As Sean Troy pointed out there is a varying definition of what a warzone is. Some people may be shocked by the fact that empty homes getting the copper stolen is commonplace. I do not consider that to be outlandish, just part of the game. Nature of the beast.

 What a true warzone is an area where total loss is a real possibility. Where good people will not live. When a home is empty & it will be empty a lot because folks that pay rent do not live in these areas. These areas are dangerous. You will have a hard time finding a PM that will even work the area for you.

An empty home will be stripped down to the bones. In the above example you have thieves going in and getting out as fast as possible to avoid being caught. In these areas it's going to be done in the open. They will take EVERYTHING. Hot water tanks, furnaces, gutters, downspouts, even the aluminum siding will be stripped. After it's all said and done you have a house that fully rehabbed is worth 15k but you need about 30k to put it back together.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

@Dean Letfus  

war zone

  • n.noun
    1. An area in which military combat takes place.
    2. An area at sea in which ships are prone to being attacked during a war.

or

Definition of WAR ZONE

1

: a zone in which belligerents are waging war; broadly : an area marked by extreme violence

2

: a designated area especially on the high seas within which rights of neutrals are not respected by a belligerent nation in time of war

I live in Memphis and none of my properties are in areas that I consider "WAR ZONES" if you say "socially and economically underprivileged areas" I would agree with you but definitely NOT "War Zones"..

See below... If these are so called "war zones" in your eyes please send me more of them!! PLEASE PLEASE PLEASE send all of them!!!!! LOL!!

24 West Colorado Memphis TN 38106

16 unit apartment complex rented $325 a month= $5200

1615 Humber Memphis TN 38106

Rented Section 8 $575 a month

2975 Kirby M'Liss Cove

Rented Section 8 $850 a Month

I invest in a somewhat gentrification process area that you could say is pushing the war further away. They are not corporate tenets mostly work in bars ,restruants ,or musicians I. The New Orleans area. In 2 years I have never had any issues with my tenets sometimes late but never had to evict.

(504) 228-1389

I have bought in both.  Much more money has been made on good locations.  Why in the **** would anyone want more hassle and less money?  Oh yeah, I almost forgot, some people only care about cashflow...

I had bought a property many years ago in a city where my sister lived.  She went in with me and wanted to manage it.  The first day one of the residents marched into the office demanding more protection.  I told him that other residents had already pointed him out as a drug dealer.  He told us that he was and that is why he wanted more protection.  Unreal....

There were shootings and a broad daylight murder on the property that got a lot of attention.  Multiple shots were fired at the property one day while I was in the office.  I went outside and some kid on a bike was riding around pointing out the hole in his shorts and the bullet nick on his bike.  He just smiled as he bragged.  I then looked at my truck and it had been "keyed" from front to rear.

I did make a few bucks off of this one.  My sister did a great job of managing it.  She is a tough person.  It was not worth the hassle.

I also had a 60 unit property in another city that seemed like such a great deal.  It was a nice property in a crappy area.  We could not keep residents in there.  We had two murders on site, another suspicious death, and two assaults on my manager.  One ended him up in the hospital.  I was sued and settled for 2K early on. 

We did daily sweeps on the property to kick out the transients.  We actually carried sticks and shovels with us.  People would break into the apartments and night and leave in the morning.  They would bust out windows or knock in the doors.  We hired a security company and that helped but did not fix the problem.

One of the transients busted through our office window swinging a machete at our manager for making him leave.

I lost money and dignity on that deal.

One thing about these types of properties is that the returns tend to look good on paper.  That is not how it is in reality.  Turnover is high and the condition that the apartments are left in can be bad.  There are other options.

Bottom line is if you already make a lot of money you don't need the headache of low income tenants and questionable areas.

If you are someone that is trying to take very little and turn it into a lot and you have endless energy and can handle the constant issues then it might be worth your time.

Not trying to put any investors into a certain category but I do see low income investors more from people that make say 40,000 a year at their job and are trying for maximum cash flow to break free and live on real estate. For them dealing with crappy tenants is better than being in a job they hate day to day. I remember a statistic that was about 80% do not have their dream jobs and just go through the motions day to day.

So for some types of investors where others see trash they see treasure. 

For me I love my life. No drama and peace and happiness. I got rid of flaky agents and flaky tenants........ : )

I think @Joel Owens  hits the nail on the head. You don't NEED a lot of money to get started investing in real estate, but it sure helps. If you're buying the $20k house, usually buying the $200k house wasn't an option. If you're looking to make real estate a career any all you've got is local knowledge and handyman skills, then I'd say the tougher neighborhoods have a lot of promise for you. If you've already got a $100k a year day job, then why buy a job? Buy a safer investment, in a nicer neighborhood, and have someone else manage it. 

I view real estate much like graduate professional degrees v. other graduate degrees. The professional degree set are essentially a cost to work X job when you're done. That is low income real estate, you're buying investments that you're going to make money off of through your efforts. Other graduate degrees (the more academic focused ones) are also a form of investment, as they'll likely also cause you to earn more, but you don't have to work X job to get the benefit, however, it also won't magically open a ton of doors that weren't already open. To me, that is mid to high income real estate, its less about cash flow and adding value through your sweat equity, and more about diversification, appreciation, etc. Now, I understand the best among us have both cash and can add a lot through their day to day efforts, and that becomes the holy grail combo, but that's never going to be the majority of investors. 

If you're from 1000 miles away and buying your first property, don't buy low income in a place you've never lived. Odds are, there's something closer that makes more sense. If you're buying in your old neighborhood and don't mind making it a job because Target is only paying you $12/hr, full steam ahead and best of luck. Buy what makes sense for you!

Speaking as someone one who has been to Baghdad, Iraq twice for a total of 26 months. Most of you people have no clue what a warzone is. To see how those people live will make the worst neighborhood in the United States look like Beverly Hills. I will have to dig through some of my pictures to post real life examples.

@Shawn Dandridge thanks for putting some perspective into this.  

I say to each his own.  I like cash flow.  I really like cash flow and appreciation. If I was looking to buy apartment complexes to own from afar I would stay out of these areas too. 

Don't think real money can't be made investing in a rough area. 

I've worked in Bed Stuy Brooklyn for ten years, when I first started there it was considered a very rough neighborhood. One of my coworkers owns 15 multifamilies in bed Stuy.  When I started he had been buying for twenty years and had paid as little as 5k for a 3200sf brownstone.  That house is worth 2.5  million today. His real estate is worth more than 30 million.  I'm sure there are many on here with 30 million.  He never had any mortgages, he was buying with cash and because no one was competing with him he paid the lowest prices.  His risk was very low-all his properties flowed cash otherwise he wouldn't buy.  Today Bed Stuy is one of the hottest real estate markets in NY.  I've seen rough neighborhoods turn into hot real estate markets many times here in NY. Gentrification is a powerful force.

The caveat is what kind of construction is the rough area. If it's 100 year old Victorians, brownstones, brick row houses and its downtown, or close to a metro area it could be worth a look.  If it's cheap housing that was built for low income keep looking   

When I bought my house shootings were not uncommon. I have the rent mailed, I don't carry cash and I keep a low profile( old truck, work clothes) I also don't get involved in landlord /tenant disputes. I think that is most important. I let the lawyers handle bad tenants if I missed one in the screening process.   

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