Anyone own rentals in the ghetto?

76 Replies

I recently came across a small duplex that is FSBO in a ghetto. I've heard about the strong cash flow properties in low income areas can produce but I'm also aware of the downfalls of investing in not so favorable areas of town. Thoughts?

If you are thinking of investing in a "D" class area, make sure you check out PM companies BEFORE you buy, if you're not going to be self-managing.  I understand that PMs for "D" class areas are hard to come by.

Hi, Shaun.

And how do you define the ghetto?  My rental focus area is called the ghetto by people, but I don't really think it is.  It is low income, it has more crime and graffiti, it has drug houses and activity, has a high proportion of pitbulls, and I don't feel safe there alone after dark.  But it doesn't have frequent shootings, gang hostilities, properties won't be stripped when they are vacant, and I don't need a gun to be there in daylight.

You may want to listen to my podcast and read my user blog.  It can be higher cash flow, does have a lower cost of entry, but it will wear you out with all the drama.

Be careful. I bought one & had to put metal bars on windows & doors for extra security & pay several ppl to remove trash that was illegally dumped in back. Check with the local police dept to see how bad crime is in area as you don't want a place that will not attract quality tenants.

I will never buy in a bad location again.  I did a couple of times but the issues were too severe.

My manager was hit over the head with a fire extinguisher after he served a notice to vacate.  Same manager was attacked by a machete wielding person who broke through our large glass window to get at him.  He was a vagrant that did not like being kicked out of the vacant apartment that he had broken into the night before.  The maintenance person found a person dead on his living room floor.  The police came in and took a chainsaw to our kitchen cabinets for some odd reason.  They said they were looking for "stuff". 

On another property I felt a need to drop to the floor when the red shirts started shooting at the blue shirts.  My property was on the news for an ice cream truck driver that was shot to death in our parking lot.  Turns out he was selling drugs.

It took me three months to evict a group that was selling drugs out of their window.  The police told us they could not do anything without proof.  We had lots of proof but no one would accept it coming from us.

That was early in my apartment career.  I only buy in decent to excellent locations now.

@Shaun Caldwell  

I would recommend against investing in anything you would personally refer to as the ghetto.  The high level of crime in an area is a serious deterrent to having solid tenants.  Most people just want to pay their rent and be left alone by everyone, including their landlord, the cops and annoying neighbors.

We often refer to places as A, B, C and D neighborhoods.  D = scary, nasty, crime invested, low income, low motivation areas in my book.  I stay out of those areas if at all possible.  

My places are in what I would call a C area.  Low income, low motivation, not scary, clean streets, playgrounds with new paint and happy children.  I see 20% Cash on Cash returns on both of my places with a minimum amount of tenant drama.

Ultimately you'd like to grab a duplex in an area that is "up and coming." You could make 20% CoC for 10 years AND sell it for 2x what you paid for it. I'd check with your local government to see what kind of programs they have for improving neighborhoods. Find the local action groups. Which areas have citizens that care (high motivation) about the appearance of their neighborhood. Those are the areas that might be on the way up.

Originally posted by @Michele Fischer :

Hi, Shaun.

And how do you define the ghetto?  My rental focus area is called the ghetto by people, but I don't really think it is.  It is low income, it has more crime and graffiti, it has drug houses and activity, has a high proportion of pitbulls, and I don't feel safe there alone after dark.  But it doesn't have frequent shootings, gang hostilities, properties won't be stripped when they are vacant, and I don't need a gun to be there in daylight.

You may want to listen to my podcast and read my user blog.  It can be higher cash flow, does have a lower cost of entry, but it will wear you out with all the drama.

We own 2 of these kinds of properties, and would add everything Michele said hers has, and almost everything she said they dont ;) I've gone there alone many times during the day and felt safe. The neighborhood is somewhat stable and our tenants have been mostly good, but undesirables are nearby and often visit the area. We stopped after 2 purchases there. Like she said, there are benefits, but we don't want the drama.

The cash flow can definitely be better but not recommended for the novice, get an experience PM first.

If you refer to if as the ghetto is that really where you want to tie yourself to? To own a property in a particular location is a commitment to visit and engage there (in my opinion). If I have a negative connotation about a neighborhood that's enough of a gut check for me to stay away.

We only have 2...& they are gold mines!!!

A duplex I couldn't resist 13 years ago for $13,500 & sold it 'rent to own' $827/month & all maintenance is their resp. They just paid for the installation of new sewer lines & plan a new roof this spring. They have 2 years left & it's theirs. 

The other was a mixed use commercial we 'stole' for $50k cash, It has 3-4 apts, offices, a warehouse, a paved lot for 8 trucks, 8ft fencing complete with barbwire. I bought it at the request of a contractor friend who moved in his workman & their families. He maintains the property @ his expense & pays $1800/mo plus taxes, ins, water, trash, etc etc. There are several pitbulls that roam the complex.

I would NEVER go there....

That's where all mine are situated. It has pros and cons but I wouldn't suggest it for a newbie. Personally my next buy and hold will be above that. Key factor is, if you are afraid of it or don't have respect for the people there, I sincerely suggest not doing it.

I have a similar issue here in in the Niagara Falls and Buffalo area.  It is one of the most economically depressed areas of the country.  However, there is the ability to purchase high cash flow properties for what could be considered a steal but they are not in the greatest neighborhoods.  But I look at it this way someone has to live in these properties and some one has to own them, why shouldn't it be my company.  With that being said if I feel like I have to carry a gun to pick up rent or I am afraid of going there after dark then it is not worth the risk for me or my staff.  If I will not go there I will not send an employee there.

@Michele Fischer  

  as we know Longview has some WT Tweaker type of areas as you describe. My step daughters inherited a few duplex's there so I know the challenges you talk about. . but there is NOTHING in the PDX metro area including Longview Kelso that is like a TRUE mid west or EAST coast Deep south ghetto or even Ghettos in the Bay Area or LA... whole different kettle of fish... that is a fact. Heck were we live we don't even lock our doors.. I had some clients in from Miami and we came to my home office and I walked in the front door and they were just astounded I did not turn off a security system and have to unlock my front door...  LOL...Well that's Lake Oswego but you know what I mean about Portlanida.

Ghetto investing or slum lording can and is profitable for some.. It would be a complete disaster for others especially those that are not in situ to respond real time to the daily issues.. remember the tenant base is the very bottom of the barrel so your going to have to deal with their lives and drama's constantly. Some of the more profitable and successful long term landlords I know nationwide that have more than 100 homes will have a good amount of these ghetto dogs.. that they paid 5 to 10k for or less and they just expect to get rent maybe half the year.. but hey still make money and its what they do. 

Originally posted by @Shaun Caldwell :

I recently came across a small duplex that is FSBO in a ghetto. I've heard about the strong cash flow properties in low income areas can produce but I'm also aware of the downfalls of investing in not so favorable areas of town. Thoughts?

There is a difference between a "ghetto" and "low income areas". Thanks for starting the conversation here... great comments from BPers about both. We have B & C properties and some of our tenants are low income. There are often pockets of good people living within areas dominated by people doing bad things. I imagine some folks in ghetto areas are "no income" (no work, no public assistance) and some are "high income" (drug dealing). We don't have true ghettos in the Portland Metro area. So much of what happens in a ghetto is foreign to me. Where ever you decide to invest, the characteristics of the people, the building, and the neighborhood do factor in. As well as response times for police, fire, and medical first responders. I like to see investors make a positive difference when going into tough areas of town and make safety a priority for themselves, their workers, and their tenants. Have you made a decision on this property?

@Marcia Maynard  

  In many areas that have true ghettos first responders are not a given at all.

At the risk of asking what likely may be a dumb question, but how does one define or differentiate an investment property or area as an A, B, C, or D property or neighborhood?  Does it differ per geographical location in the country or a particular city?  Is it a function of crime rate?  Price? etc  I've always thought the designation was somewhat arbitrary but Turnkey companies seem to put a lot of emphasis on this designation.  The primary reason I'm asking is that I'm presently rehabbing a house in a "transitional" area of Atlanta area code 30307 and am considering a backup exit strategy if the finished house languishes on the market too long - I may want to try to market to Turnkey companies or use as a rental investment myself.  As I consider a rent strategy, I'm wonder if I'll have a "B" property or a "C" property and how one would make that determination.

@David Begley, it's very relative in terms of assessment. You can ask person A, B, and C and get all kinds of varying perspectives. I'm not sure if any uniform definition exists. You just have to always consider the source. For some, just the make up of the demographics regardless of anything else can grant them a ghetto or low end classification as opposed to a great one. I've heard multiple inaccurate and downright disrespectful sentiments on areas I'm very familiar with.  I personally think the best way is for you to go examine yourself and utilize your own judgment.

I think the biggest mistake I see is investors wanting to create wealth but not talking about WHAT that is going to look like for them??

I can tell you what I want in my life. At 39 years of age I do not want drama. I do not want dealing with tenants and their life issues and why they can't pay rent etc.

I am only interested these days in quality stabilized properties in great areas or value add in those areas. I am targeting commercial properties.

Many people say they want extra yield but when you really analyze the depressed areas and how much time and extra work you need to do for it then many will see it's not for them.

I am just  a different spirit I suppose. I am in the get as much yield as possible with little to no headache and quality assets. Many investors on marginal incomes will buy these low income type areas because they need to try to hit equity growth and cannot afford the higher priced more affluent areas type properties. It's understandable why they have to but I find if given the option about 90% will not hold those long term. As soon as they can 1031 up into more desirable properties that are not headaches then they will do so. 

So for everyone  do not just look at the yield of something but does it really fit into what you are trying to create for yourself for investing. Some of my friends love that type of tenant stuff and see low income as a challenge and a game they enjoy. Not me and I am happy to let them have all of it.............. : )

@Joel Owens  

  what Joel said  times 2...

From my perspective the lower end ghetto properties ( whatever a ghetto is in whatever market you want to target) is by far the most difficult to run manage and make any kind of return regardless of what is promoted .. all income and return numbers are proforma they are not actual.. As in when Joel is selling a 10 million dollar commercial property if it has history he will be able to do an ACUTAL cash flow representation to buyers.. If its not performing then its performa data that any commercial broker knows is best case and will probably not be achieved at least short term..

Where as we have the least experienced investors that have the least amount of capital and reserves buying the most challenging properties in the US. all because of the greed factor.. they are chasing the brass ring.. If they knew what they don't know many would pass before they ever invest and lose their hard earned dollars.

Ghetto or slum lording is a business and art to it... Not appropriate at all for a newbie or one that thinks the property is going to perform like a nice wholesaler or TK company that deals in that asset class talks about.

Having funded turn key guys for more than 20 years.. Many started in the lower end but now won't touch it.. Ask some of the better turn key guys on this site if they would recommend the worse locations in the city for their clients.. And that would be a resounding no I am sure.

So you have the worse or toughest management scenario in the US matched up with the someone with no experience limited funds and no real reserves  and that will = failure more times than not.. why do you think these areas are still ghettos the nice sentiment that we are going in and going to run this around and give back to the community and make things better is all nice PC sentiment but its not reality with the tenant base the asset class and those that own them.

Originally posted by @Jay Hinrichs :

@Joel Owens  

  what Joel said  times 2...

Agree!  When I started out my pseudo-mentor (from whom I got the quote in my signature line) started his own real estate investing career buying in the ghetto when he was 18.  He borrowed $5,000 from his parents and bought a duplex ... lived in one half and fixed up the other half, then rented it out.  Then he fixed up his half and lived it until he had another $5,000 saved up to buy another duplex.  He rented out his unit and repeated until he was able to move to a better area.  He owned a bunch of stuff in the "ghetto" (as he called it).  He had stories of police breaking down the door (which he then had to pay to replace) and having the tenant call him up and say "Hey Mr. Jim the dern door fell off -- you gotta come fix it!"  He eventually worked his way from D properties to a 5-bedroom million dollar house with a private lake.

I vowed that there was no way I was going to start in a warzone; I just don't want that kind of drama and headache. I'm okay with lower income because I grew up lower income but not lower class.

I just talked about this subject on my radio show this week. Maybe I'm missing something since I don't deal with real low end properties but I'm not seeing how these properties cash flow more than a higher end property. How does lower rent, higher vacancy, higher damage and turn over costs equal better cash flow? Cash flow is a function of rent and expenses not price. A property that rents for $600 MIGHT give a better ROI due to the low entry cost but it's not going to give more cash flow than a property that rents for $800. It's simple math. I hear people say that you need a good PM to manage these properties but a good property manager can only do so much. The only advantage I see is you can get in for a cheaper price but do you really want in?

Mike it just depends on the numbers. It's usually not a rent spread between $600 and $800. It's more like a person acquired 4 properties for 75k that are netting $500 each, where someone else acquired one 200k property that they are under water with (in both rent and equity).

@Mike D'Arrigo  

simple when those that don't really know any better see that a house is suppose to rent for 500 a month and they can buy it for 5k  they just assume they will always get the 500 a month.. so in THEORY it would be great.. In practice its a total roll of the dice.. with the local that own and run these having loaded dice.. and those trying to do it out of state crapping out !! is kind of what I have seen in person and experinced

@Jay Hinrichs Very true. What they don't understand though is that no matter how cheap they buy that house, it doesn't give them more cash flow. It theoretically gives a higher ROI but I always say, you take dollars to the bank, not percentages. It comes down to which is better, an investment with a 12% ROI generating $150 cash flow if you're lucky) or one with a 9% ROI generating $300 per month cash flow. Personally, I'll take the cash flow all day long.

I have been on here with others a long time.

I can remember a lot of posts talking about they just bought  a property for 30k that rents for 700 a month.

The excitement is there and everyone hops on the post with enthusiasm.

What I almost NEVER, EVER see on here is 6 months, 1 to 2 years later etc. a post on here about it was the best decision they ever made and cash flow has been great and vacancy and repairs minimal. WHY is that??

If someone was doing well they would likely want to expand on their purchase and how it has progressed into something greater. I would venture to say not all but many of these purchases the turnover has been high, damage has been high, went through many PM's, area has gotten even worse with crime etc.

I get calls a few times a month where the investors say they bought a cheap house for cash and now it's a nightmare situation. Even if the property cash flows with a rougher area and lower income tenant the question is " How much stress is it causing you? ".   

I do know investors that bought up houses for cash in 2009,2010,2011 in great areas for cheap. The strategy back then was banks would order a BPO. The comps used would sometimes be a few miles away in a bad area. That would bring the price of this property down that was in a better area with lower property taxes.

Those houses in better areas that had a minor blip have now gone up greatly in value. Finding those properties anymore now at decent pricing is almost  a magic act. Those investors where the properties have dried up have moved capital stacks into other asset classes in different periods of cycle recovery.

I think it's great that people want to invest in lower income properties. Even if not the ghetto, war zone areas the yield will still need to be worked for.

If you have substantial capital already you can just bypass that all together.

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