Buying in a rougher neighborhood

Multi-Family and Apartment Investing
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Buying in a rougher neighborhood

David Fischer
Rental Property Investor · Amarillo, TX · Member since 2019 · 9 posts · 0 votes

Hey y’all,

I’m looking at purchasing a 6 unit apartment complex in a rough side of town. This side of town is known for higher crime rates and is just plain rough. I don’t live in the area so I had a family member drive by and tell me what she thought. Her description was the building was scary and made her feel pretty uncomfortable. There were windows boarded up and an eviction notice on one of the doors.

The sellers realtor tells me the property is being managed by a professional property management company- which I’ve tried to call but haven’t been able to get ahold of them.

The property has been on the market for awhile and I believe I can get it under contract for a good price. After running the numbers I’m looking at an 18% cash on cash return and a 27% total return.

What do y’all look out for when investing in the sketchier neighborhoods.. what risk do you take on.. and what do y’all do to reduce the risks? Or would you avoid this even if the numbers make sense?

Thanks in advance!

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Greg Kasmer
Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes
4y

David - If I were you I'd call around to 5-7 property management companies and get their opinion on the building and basically ask if they would manage the property for you. Their reaction should go a long ways to informing your decision. (i.e. "We don't manage there" or "Sure, we can do it"). I would also share with them your approach to improving the building (i.e. business plan) to see if they feel confident they can execute the plan for you. Additionally, they should also be willing to help you refine your underwriting and assumptions to see if your returns are reasonable. If you get 2-3 property management companies that are capable, I think that would be a good sign. If you get 0 or only 1, I would be hesitant. At the end of the day, they're going to manage it and their feedback speaks volumes. 

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    4y
    Originally posted by @David Fischer:

    Hey y’all,

    I’m looking at purchasing a 6 unit apartment complex in a rough side of town. This side of town is known for higher crime rates and is just plain rough. I don’t live in the area so I had a family member drive by and tell me what she thought. Her description was the building was scary and made her feel pretty uncomfortable. There were windows boarded up and an eviction notice on one of the doors.

    The sellers realtor tells me the property is being managed by a professional property management company- which I’ve tried to call but haven’t been able to get ahold of them.

    The property has been on the market for awhile and I believe I can get it under contract for a good price. After running the numbers I’m looking at an 18% cash on cash return and a 27% total return.

    What do y’all look out for when investing in the sketchier neighborhoods.. what risk do you take on.. and what do y’all do to reduce the risks? Or would you avoid this even if the numbers make sense?  Thanks in advance!

    Buildings get a reputation. So, you have to be able to root out the trouble makers, upgrade the apartments and rebrand the building. It works, but it takes time and costs money. 

    If your plan is to simply fix windows and put machinegun turrets on the top, then you are probably better off looking for a different project. 

    How far away is the builiding? Can you drive there in a couple of hours or is it a long way?

    1Reply
  • David Fischer
    OP
    Rental Property Investor · Amarillo, TX · Member since 2019 · 9 posts · 0 votes
    4y

    @Mike Hern hey Mike it’s not to far away, about a 3.5 hour drive!

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  • Greg Kasmer
    Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes
    4y

    David - If I were you I'd call around to 5-7 property management companies and get their opinion on the building and basically ask if they would manage the property for you. Their reaction should go a long ways to informing your decision. (i.e. "We don't manage there" or "Sure, we can do it"). I would also share with them your approach to improving the building (i.e. business plan) to see if they feel confident they can execute the plan for you. Additionally, they should also be willing to help you refine your underwriting and assumptions to see if your returns are reasonable. If you get 2-3 property management companies that are capable, I think that would be a good sign. If you get 0 or only 1, I would be hesitant. At the end of the day, they're going to manage it and their feedback speaks volumes. 

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    4y
    Originally posted by @David Fischer:

    @Mike Hern hey Mike it’s not to far away, about a 3.5 hour drive!

    Then I'd make the drive and check out the building myself. If it's the building that is a problem and the neighborhood is fine, I'd go for it. If the entire area is bad, I'd look for a better location.

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  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    4y

    @Greg Kasmer - well said!

    [email protected]248-209-6824
    Logical Property Management4.9458 Reviews
    WebsiteView Page
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  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    4y

    @David Fischer Jobs? Other boarded up multiunits? Buy in Amarillo. You've got the lowest unemployment in the state. Why saddle yourself with a headache 3.5 hours away?

    1Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    4y

    Sounds like a war zone to me. I would stay away from this type of investment until you have a few under your belt. I bought one in the hood a few years ago that looked like a home run on paper when I ran the numbers. The first year was a disaster after I dropped 50k on a rehab. Three drive by shootings that lit up my windows and front door, a big swat team bust, over 15 times the cops had to come out to deal with tenants and an eviction during the moratorium, I got them out. It’s been great ever since, but areas with high crime, can be a handful to deal with for noobs.

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  • Allen McGlashing
    Investor · Cambridge, MA · Member since 2017 · 195 posts · 106 votes
    4y

    @David Fischer

    I would suggest bumping the numbers up on expenses such as Cap Ex, Repairs, vacancy. Usually in rougher neighborhoods the tenants don’t really take care of the property and you’ll see higher vacancies. It sounds like to me what also needs to be done is find another PM cause the one that is managing that property isn’t doing even a decent job from your description. If the numbers still work after you over expense all those categories then why not jump in and try it.

    The worst case is you learn from it.

    0Reply
  • David Fischer
    OP
    Rental Property Investor · Amarillo, TX · Member since 2019 · 9 posts · 0 votes
    4y

    @Allen McGlashing yeah that’s good advice. I appreciate it.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    4y

    @David Fischer properties like this have a high return because they are high risk. You will have tons of problems. Higher than normal repairs, drugs/crime, more tenant payment issues and more evictions. There are people who make lots of money investing in these type of properties, but it requires a special skill set. I would also ask if the neighborhood has signs of revitalization. Drive down the street and see if you some of the properties are being fixed up. If every property is as bad or worse than the one you are considering, that is a bad sign. 

    @Greg Kasmer had a great suggestion about calling local property management companies to see if they are interested in managing it. Of course some will say yes, but pay attention to those who say no. The best property managers will avoid troublesome properties or locations. They may also say "yes but we will charge a higher fee". 

    As others mentioned, plug in higher expenses in deal calculators. I have noticed in my market that these run down properties are being dumped by investors and many are being purchased by new or out of state investors, who don't understand the risks.

    I have said it before, but there is only one thing you can't change about a property, which is location. If you buy in a good location, any real estate investment will do good over time. If you buy in a bad location, no amount of money can fix that.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    4y

    You are at the beginning of the tenant selection process every time you buy a property. The demographics of the area surrounding the property are going to be very similar to the demographics of the tenant pool.

    If you don’t find the surrounding area attractive, then your tenant candidates coming from that area will be mostly just like that - not attractive. But if that is the kind of tenant that you are prepared to deal with, then you know what to expect.


    Regarding 3.5 hours distance. I just returned from a funeral that was 3.25 hours drive one way; that’s a big chunk of the day to spend driving, leaving not so much time to perform any real work there. If you own the place, you will want to get there periodically to inspect things, to make certain that things are going as you expect; so you should have a plan for how you will be performing such inspection visits.

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  • Chris Levarek
    Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    4y

    @David Fischer One man's trash is another man's treasure. But sometimes...it's also not worth the hassle.

    Some great recommendations about speaking multiple PM's. This is a good way to get a feel for it. You actually should depend on your PM to tell you. If the good pm's with good reviews are saying no, take heed. If the pm's with no reviews or mediocre reviews are saying yes, take heed.

    In the end also, it will be your cross to bear. So, understand if it's worth it to you. Add in the expense margin to justify concessions and non payments, in other words set the "economic vacancy" high, 12-15% should be expected.

    1Reply
  • Tyler McDonald
    Suffolk, VA · Member since 2021 · 54 posts · 33 votes
    4y

    Several people have advised me to use the "if you wouldn't want to go there at night, don't buy in that area" way of thinking.  I'm still in a learning phase while looking for my second deal but enough people I trust have told me this so I'm following their lead.

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