slumlord??

Question

Hey guys, Ive been reading large amounts of posts, and came across the term slumlords, something I never heard before. Does owning rental property in low income areas make you a slumlord? Or is it when you let the property deteriorate without giving a damn. I am looking into buying rental properties in lower income areas because of the positive cash flow and affordablitity, not to take advantage of anyone. The term sounds kind of bad lol. Is it true people in low income areas are against abesntee rental property owners and consider them slumlords. Just want to get a heads up. Thanks

Michael Rossi · Answer

mc2000,

I agree with Scott about the terminology.  However, be aware that if you own low income rentals, you will be frequently called a "slumlord".  In fact, just about anytime the tenant decides to do something stupid (like not pay the rent), it will be YOUR fault - the slumlord.

The tenant spends the rent on a pitbull and you're going to evict them  -  YOU'RE A SLUMLORD.

The tenant is involved in a drug bust and you're going to evict them  -  YOU'RE A SLUMLORD.

The tenant is a pig with dirty dishes and uneaten food everywhere.  They have roaches  -  YOU'RE A SLUMLORD!

In low income areas, my goal is to make the rentals safe and clean.  Painted floors (no carpet), cheap miniblinds, used appliances are the standard.  These people are low income tenants because they don't know how to act like the rest of us.

I've got one loser that I'm evicting this month.  She's a drunk and spent her rent money on drugs and alcohol.  That's obviously my fault because I'm a slumlord.

Slumlord  -  get used to it!

Mike

Michael Rossi · Answer

gkimmer,

Actually, as I suspected, this property will NOT cash flow.  With gross rents of $650 per month, the operating expenses will be about $325, leaving the NOI at $325.  If the mortgage is $290, you will lose about $65 per month.

Mike

Frank Adams · Answer

I always laugh at the term "slumlord", (BTW, I am slumlord*** -my real first name---on another non REI website) because it was once jokingly applied to me, by a good friend. At the time I had 14 or so rentals, about 1/2 of which were NICER, BIGGER, AT LEAST AS GOOD OF NEIGHBORHOODS as where I lived.

One day after returning from a round of golf and enjoying a beer or 5 two of my DEADBEAT tenants brought their rent (and late charges) over to me. They were about 15 minutes apart, one drove his year old Lexus, the other drove his (leased but soon gone) Jaguar.

My buddies asked me what kind of word these two deadbeats did to afford such nice cars and such nice houses (one was in my former, golf course frontage) house. I told my buds that one was a big hitter for (large, Houston based computer company) and the other was a software designer for (big, Houston based software company) and while both had excellent taste in homes and cars neither knew jack about handling money.

My buddy said; "well, you may be a slumlord, but at least your slums are on golf courses". I've jokingly called myself that quite often ever since.

BTW, I no longer have rentals, sold them all and selelr financed. One buyer (white collar, good paying job, wife is IIRC a surgical nurse at one of the heart surgery places in Houston) bought the golf course house in '01. Here's how that has worked out:

Couldn't come up with the full $5K downstroke, asked me to take $3500, I did for an extra 1/2% interest/month on the loan.

He took the $1500 and ripped out the TOP OF THE LINE 10 year old applicances and put in BUILDER'S GRADE, SCRATCH AND DENT STUFF, from one of the rip off appliance places. I took the dishwasher, sink, disposal and cooktop and resold and/or used them over the next 2 years.

He has NEVER PAID ON TIME, resulting in a $93.50/month late charge for the last 6 1/2 years.

When he got two months behind once I told him to either re-fi or I'd foreclose. I re-fi'd him at an extra 1/2%/month, and rolled his closing costs and missed two months onto the principle. The upshot is that he now owes more than he borrowed.

It's a nice house, in a nice neighborhood, not slummy, but they are. I'm pretty sure that just like every tenant I ever had he has nicer TVs, better cable and internet and newer cars than I do.

all cash

Grand Wally · Answer

MikeOH:  Points well taken.

Running the numbers say that even with nothing down the mortgage on this house will be about $390 while the payment (section 8) is set at $650.  How can that not cash flow assuming the tenants screen out OK?  Yes I will screen them.  The lease was just signed as a coincidence.

Also...the very first question I asked was "why is he getting rid of the house".  I met the gentleman.  His wife just passed and he is about 85 yrs old.  Just said he doesn't want to worry about being a landlord anymore.

Could this be a bad deal, yes...but if any deal would cash flow for me, I think this one would.

Again, points well taken and I do appreciate your feedback & knowledge!!

Michael Rossi · Answer

That statement from the owner of a rental property sets off alarm bells for me.  Most rentals are sold to newbies at retail.  When you buy a rental at retail, it will not cash flow.  Successful owners of rental property businesses know these facts.  Therefore, if this owner was a successful landlord, why would he sell this property to at a big enough discount that it will cash flow when he could simply sell it to a newbie at retail and maximize his profit for retirement?

More alarm bells.  A successful investor would not be selling his rental at a discount when he is retiring.  Why is there a tenant on a new lease?  Just coincidence or is he filling the rentals with just anyone so that he can sell them?  As REI said, I would definitely screen this tenant yourself.

Until you screen the tenant, you won't know what you have.  Personally, I would take a vacant property anyday over a bad tenant that an owner put in a unit to sell it.  The cost or having a vacant unit is MUCH less than having a bad tenant.  By the time you evict a bad tenant; have at least a couple of months of vacancy during the eviction; pay court costs and legal fees; repair all the damage; advertise for a new tenant; etc, it is much more expensive to have a bad tenant than a vacant unit.

At any rate, all I'm saying is that a thorough screening of the tenant and cash flow analysis of the property is warranted.

Mike

Grand Wally · Answer

Just my take on this...I'm pursuing a section 8 prop that is rented out now on a new lease.  The owner just wants to retire.  It's a GREAT feeling knowing I don't have to a) spend money to advertise b) take a chance at waiting a long time for a prospective tenant and c) possibly carry that mortgage without rental revenue to help me.

Assuming it's a good overall deal financially & otherwise, I look at a presently occupied rental as a good thing.

Mikey Cas · Answer

thanks for the responses....do you think it would be less risky investing in an already occupied property where the crime is not too high yet lower income? Does any1 have trouble finding renters in vacant properties. THANKS

Account Closed · Answer

If you buy a property and there is a tenant you are buying the prior landlord's screening process. Though you might not have a vacancy immediately you do not know how the person was screened. Maybe they are a great tenant or maybe they are the reason the landlord is selling.

If you buy and the place is vacant then you are depending on your ability to screen tenants. If you are crap then you will have a problem immediately. If you are really good at finding tenants then you would not be concerned about a vacant unit at the time of purchase.

If you buy with a tenant then get the tenant to sign an estoppel letter before you become the owner. You want to know what the tenant believes they have agreed to and which lease is the correct lease. Some of the time landlords, tenants or both will cook the books when it comes to what has been agreed. You want to know going in what the deal is with the tenant (rent amount, payment date, deposits, specials agreed, assumptions about who lives there, and other things like cars in the front yard or motor repairs in the kitchen).

John Corey

Michael Rossi · Answer

I'm afraid that I wouldn't do that.  I live in a very nice house that is spotless.  It was a brand new house 15 years ago when we bought it and still has a lot of the original carpet which looks absolutely new (even though we've raised 2 kids and have a dog).  By contract, tenants can and do absolutely trash an apartment and ruin the carpet in a year or two.

I work hard and have earned the right to live in a nice house.  Many low income tenants are too lazy to work and don't even deserve the apartment they have.  "Take care of the property as if I lived there"  -  NOT HARDLY!

If they haven't paid the tenant portion by 5pm on the 4th, I evict the deadbeats and make sure that their Section 8 is terminated!

Mike

Scott Ficek · Answer

Mike-
Great post.  I had to chuckle.  I own property in some lower income areas and it is always your fault!

The other one is that some tenants seem to take in every niece, nephew, and cousin.  They have money to support 10 extra relatives that are even bigger money pits than your tenants, but don't have the $150 that section 8 requires them to pay (of their $1000 rent)!

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