title says it all i have a fourplex under contract and upon seeing the location was not thrilled to see that it was in kindof a ghetto area and kinda run down. However the numbers and cashflow are very good. The already in place tenants seem fine but i know that tenants come and go. I just keep going back and fourth, I'm curious to know everyones experience in this area. Thank you all!
Read my thread....pretty active discussion on lower income properties.
Make sure you do your due diligence. I have had great success in class c areas. You need to fully understand what you are getting yourself into and have realistic expectations. Do not go off of projections.
If you have to ask, it's likely a problem and the true cash flow may not be as expected. Ghetto areas are for hands-on, local investors with processes and contractors.
@Josh Carroll , I personally don't care how good the numbers are, if it's in a rough area- I wouldn't bother to move forward. No matter how much money you put into the property you won't be able to change the demographics in the area. In most cases deals in bad areas will produce high yields. You can easily be blinded by the high yields, but yet don't take into account the amount of headaches and stress dealing with low quality tenants in a low quality area
Without knowing more, walk away. There are plenty of cashflowing opportunities that are not in ghetto areas.
As @Mike Dymski mentioned you need boots on the ground and established processes and systems for dealing with these properties. Let's say your rents are 700/unit (just guessing for sake of example). One unit not paying for 3 months is $2,100 of lost profits plus the management/attorney costs, and then another few grand to turn the property over. Then once you're ready for a tennant, if you have a PM they will take half months of the first rent after a month of showings (vacancy). Your cashflow probably doesn't account for this 10k cost.
Also, what's the upside of this area? Cashflow is a necessity, but it's not just solely about cashflow. The property's value and your overall turnover/expenses play a very large role in your IRR. You don't buy betting on appreciation, but you'd be wise to give yourself a chance for appreciation to turn that average/good investment into a great investment over the long-haul.
@John Teachout when my realtor first sent me the listing I was out of town on a work trip and it seemed like a really good opportunity so I put in an offer and got it under contract so i wouldn't loose it.This is all really good input, I was really only looking at the cashflow as my ONLY upside and now realizing the the good does not outweigh the bad. Its sounding a lot like I need to go with my initial gut after seeing the neighborhood. Thanks guys and gal!
@Josh Carroll High returns indicate higher volatility. You have to gauge your risk tolerance. Make sure you have the right manager in place, buckle up, and enjoy the ride.
@Josh Carroll How well do you know the market? I own & operate low income housing in my market, but there are a whole bunch of areas in my market area where I don't buy. I suggest that before you buy a property in a 'ghetto' area that you get to know your market very, very well: spend a whole bunch of quality time with local police report website if it is available in your area, drive throught the neighborhoods you are considering at different times of the day (and night). Check the meth lab list if one is maintained for your county. Don't buy anywhere the local pizza places won't deliver. I like my low income properties, they cash flow well, I have great tenants, and I think at least a couple of the areas might improve and appreciate--- but there are places in my market that are being run into the ground-- where I believe all the houses will eventually have negative value and be demolished.
The cash flows numbers look awesome because of the RISK involved with these. It unquestionably can be a big cash cow...... but mostly for seasoned local investors that have a strong system in place and can be very hands on to the process needed to keep these profitable.
The turnover is often high, evictions common and regular damage to the property is the "norm"....... if you "get lucky" and those variables don't play a role for you, then they make good $$.
Appreciation is often low, if at all....unless you get an "up and coming" area
Can be done....but not for the faint of heart.....
When I look at potential properties I think about if my wife, mother, or daughter would feel comfortable collecting rent there or even jogging in the area. If I get an uneasy feeling or am unsure I back out. Sometimes you have to go with your gut instinct.
@Josh Carroll I'm not saying don't invest in a C or D area, but I had experience in (1) multi-family deal I did in a C- area and it was a rough process. Lots of drug issues, graffiti, security issues and car break-ins which lead a lot of the residents to break leases. I only invest in Class B assets these days (personal preference obviously) but yes, the #'s typically are better in C and D because it's often more work and more risk. Best of luck!