We had a conversation with a guy today and it went something like this:
"Hey I saw you hauling some lumber the other day. Whatcha building?"
"We bought a rental house and I was fixing a safety hazard." (Concrete step at entry. 6" tread, 9" risers)
"Ah. I don't do repairs at my rentals."
"Really?"
"Yeah, I rent to druggies. Whatever is there is what they live with. They don't complain."
I just can't wrap my head around it. Renting to druggies is his plan. And he's proud of it.
Being a "slum lord" has very little to do with cash flow. The lowest class properties generally have the highest cash flow in the industry. The reason they do not waste money on upkeep is because the tenants generally destroy everything nice. Minimum repair to meet code keeps the money flowing and the class of tenants have little grounds to complain... or choice..
Outstanding!!! (major sarcasm here)
I just saw on my news feed that a "we buy ugly houses" franchisee admitted to running a Ponzi scheme......
and we wonder why we get a bad name?
You should have gotten that guy's business card so in a few years when he is losing the property you can "offer him a solution to his problem".
I was listening to some of the older podcasts recently and the guest was talking about a blog post he wrote for BP about what to say to someone when they say "your an investor? you must be a slumlord". Think I need to go find that post!
@Mike Koprowski, Concerning alleged "We Buy Ugly Houses" franchise:
I totally agree, everyone needs a place to live and that's why our investment vehicle stands the test of time when done smartly. This country is quickly becoming a renter-nation, much like Europe.
Think of this, the younger millennials will see two RE crashes in the first 20-25 years of their lives, the first one they watched their parents live and struggle though and the one that fast is approaching. They will always rent, they are just one of many client bases.
My issue is with the landlords that willfully neglect their properties because of the client base they service, we should strive to maintain a safe and clean property for all our tenants (which I believe the majority does). if you don't have the cashflow to set aside for repairs and cap-ex, your probably bought a bad deal.
But hey, its all good, those are the guys on my mailing list! :)
Being a "slum lord" has very little to do with cash flow. The lowest class properties generally have the highest cash flow in the industry. The reason they do not waste money on upkeep is because the tenants generally destroy everything nice. Minimum repair to meet code keeps the money flowing and the class of tenants have little grounds to complain... or choice..
Even druggies need and want a place to live. If a investor can make a buck off druggies, section 8, students, what difference does it make. It's just a different client base.
Well, to me, that's kind of like saying, "I can make more money selling meth. I'm a retailer, and it's just another product, right? They have to buy their drugs somewhere, might as well be me that gets their money."
Being a "slum lord" has very little to do with cash flow. The lowest class properties generally have the highest cash flow in the industry. The reason they do not waste money on upkeep is because the tenants generally destroy everything nice. Minimum repair to meet code keeps the money flowing and the class of tenants have little grounds to complain... or choice..
Yes, but this guy I'm talking about doesn't even do minimum repairs. If something breaks, too bad. If the tenants make their own repairs and end up burning the house down, oh well, that's what insurance is for.
@Cody L. I understand what you're saying, but I'm not sure you're getting the full picture. It's not just that the houses aren't "nice". There may be holes in the floor, walls, ceilings, and/or roof. Water heater doesn't work. No heat. Broken/missing windows. Doors that won't lock. Etc.
When we were just finishing up the rehab on our second rental property a young couple with a newborn moved into one such not-so-nice house. It was mid-December and very cold. There was no propane in the tank, so no heat. It got so cold in the house overnight that the baby died.
I believe that every landlord has both a legal and moral obligation to provide a safe and secure unit to his tenant. It doesn't have to be fancy, or even "nice" but it does need to be safe.
Sylvia B. Not the same thing at all. One is a low end product for people unable or unwilling to pay market rent for a "nice" (to you or my standards) place.
It's not for us to judge what people are willing to accept for their living conditions.
I've seen the city come in like some "protector" of the poor taken advantage of tenant. They force an order to do xyz or sell. That happens. The property is cleaned up. The neighbors cheer. The rents are raised. And guess what. Those tenants who were living there (which was their best option as proof by the fact that's where they chose to spend their rent) are now homelsss or off to find something worse.
Maybe it's some left wing mindset (sorry to generalize) where good intentions never have unintended negative consequences
100% Truth. As much as we'd like to be "socially responsible", the reality is that certain groups of tenants don't appreciate improvements - they are looking for somewhere to sleep and store their things as well as a rent level that reflects just that.
Further, after having been personally attacked by various anti-gentrification groups, I've come to realization that you are damned if you do, damned if you don't. Fix up a property and charge a rent that reflects the improvement so it at least pays itself off, and you are bad for raising rents. Leave a property in a condition that reflects the rent level, and you are attacked for "forcing" people to live in those conditions. Those of us who understand 6th grade economics understand that someone has to pay for it - why should it be me considering I'm not the end consumer of such improvements? Best plan is to fit your property to your tenant base and plan your improvements around what they are willing to pay for.
@Cody L. I understand what you're saying, but I'm not sure you're getting the full picture. It's not just that the houses aren't "nice". There may be holes in the floor, walls, ceilings, and/or roof. Water heater doesn't work. No heat. Broken/missing windows. Doors that won't lock. Etc.
When we were just finishing up the rehab on our second rental property a young couple with a newborn moved into one such not-so-nice house. It was mid-December and very cold. There was no propane in the tank, so no heat. It got so cold in the house overnight that the baby died.
I believe that every landlord has both a legal and moral obligation to provide a safe and secure unit to his tenant. It doesn't have to be fancy, or even "nice" but it does need to be safe.
That's admirable - provide housing that is "safe" within your extended definition. But who is going to pay for that? What if a tenant, who doesn't appreciate or need such a condition, can't pay that rent level? Where do they go?
I'm no advocate of "slums", nor is that my business model, but the reality is that there are people out there who's definition of "safe" and "nice" and "fancy" are way way below what we think of. They've got to stay somewhere, and they are perfectly happy with an apartment that only costs $200/month even though the ceiling is rotted out and they have to flush the toilet with a bucket. Its priorities and standards, and everyone has their own.
Sylvia B. Not the same thing at all. One is a low end product for people unable or unwilling to pay market rent for a "nice" (to you or my standards) place.
It's not for us to judge what people are willing to accept for their living conditions.
I've seen the city come in like some "protector" of the poor taken advantage of tenant. They force an order to do xyz or sell. That happens. The property is cleaned up. The neighbors cheer. The rents are raised. And guess what. Those tenants who were living there (which was their best option as proof by the fact that's where they chose to spend their rent) are now homelsss or off to find something worse.
Maybe it's some left wing mindset (sorry to generalize) where good intentions never have unintended negative consequences
That is a really libertarian attitude. I have found it is super popular right up the point we're the warehouse burns down, the house collapses, the family suffocates on CO, or pick any of the other tragedies that have lead to building and fire codes.
I have been GOP my entire life, but there is a real need for building codes, because without them some people will race to the bottom. So,yes, it is for us to judge, there are minimum standards and they should be enforced
I agree with @John Nachtigall the term slum landlord gives the whole industry a black eye. Is it that difficult to provide decent housing. Its a business and we should all treat it as such. Re-invest in your business. The reason we have building codes is the slum landlord. Its a shame we need to have oversight. Its the landlords who think its good enough as long as they don't live there. Its your reputation. If you think its ok to be a slum landlord. Go ahead. I'll keep my strategy by keeping the properties in decent condition and being able to select better quality tenants.
Good Luck Everyone.
@John Nachtigall What is the minimum though - and who should decide where the ultimate bottom is? What your local gov't decides? The standard you are used to living in? Building codes in Chicago are much tougher than those in rural SC, does that make SC a slum? The ultra socialists will argue everyone should have granite countertops as a matter of right, while the opposite side will say that kitchens aren't even necessary. I say let the market decide.
@Kenneth Garrett I think we're talking apples and oranges. Its not so much a case of someone refusing to keep a property up to the condition demanded by the tenant base and community, but rather meeting the most basic needs of their tenant base, as minimal as those may be. If I rent a home in Round Lake, would you expect it to have the same standards a Glencoe? The term "slum lord" gets tossed around so loosely, when in reality there are in fact people who are fine with what they receive in these "slums" in exchange for low rent. It sounds like that type of property is not your cup of tea, and its not mine either, hence why we don't invest in those types of properties. Take it a step further though, and realize there are folks who would never even think of investing in a property as lowly and nasty as ours (yes, I am making certain assumptions here, so correct me if I'm wrong), despite our properties being clean, decent, and something we can hold our heads proud to call our own.
That is an easy answer, we live in a democracy. And as a bonus building codes are ultimately decided by the local community. So Chicago can have a different standard to rural SC. But codes they have.
We are not talking about granite contertops, that is not in any code. But we are taking about copper wiring, and no breaks in wires in the walls (because hoses burned) and 2 exits in every bedroom (because people die trapped in houses) and non lead paint and no asbestos etc.
This is not new, there have been building codes since well before Christ was born. And they always grew out of tragedy. In this area society has decided that the market is not a good way to set the bottom, because every time it has resulted in tragedy. Now go back and watch the people in the London fire burn to death because they saved a dollar a tile on siding and tell me that the market can set adequete safety standards by themselves.
As others have noted there are moral, ethical and building code issues. However, also it could be a very short sighted attitude. What will happen when one of those drug users hides their stash in his wall and the cops have to put holes in the wall to find it? What about when high on drugs his tenant does major damage or kills someone making the house a crime scene? What about when he wants to collect rent and they get violent? Like most risky activities just because it hasn't happened yet doesn't mean it won't soon.
Shelter is a basic necessity and even those who abuse drugs need a place to live. I personally would prefer to avoid this tenant population. However, if someone is able to successfully collect rents I say go for it.
He is providing service. I think we sometimes start with a picture that people are great, they care for your stuff and are proud to be your tenants. Thou this is true for some it's not always the case. The more you grow your portfolio you see that tenants don't care about you, when SH$T hits the fan for them your the last person they think about but they are in your home! They make every excuse to not pay and want empathy when really they are stealing. Living rent free and wishing to not get evicted.
Least this guy is honest, his accepted his clientele and I'm sure it comes with his own issues. I've rented to people who wanted a second chance, its come to back to bite me, but others have been my best tenants.
Offering a quality product at a fair price is the only long term model. If you are a short term player, then a drug house may be a solid model. However, It is not sustainable. Eventually, the property is going to be seized or destroyed. There is enough margin to do well with out scamming or taking advantage. The goal is get the best tenants paying the highest rent for the best value in the neighborhood.
They only exist because there is a demand for it. Some people with very low incomes, whether druggies, or low level poverty, can only afford minimum amounts of rent, and pick a cheap/crappy house with low rent over a nicer, more expensive one. I personally couldn't do it, but again it exists because there's a demand! Everyone needs shelter! I don't see anything wrong with it, although I agree with most that the properties are likely neglected and in horrible condition. As long as the landlord is providing habitable conditions per the state code, for each their own!
We buy a lot of these places in bulk, clean them up, and raise rents, you all know the game... people in the region love of us for it, our investors love us for it.... Things getting a lot nicer... The people that rented before we took over, are now without a home, looking for the next ghetto as they can't afford the nicer version of where they lived before.. or have something wrong with their background or their loved one's background.
After years of doing this, I started look at some of these properties from another view point... holes in the walls/floors, roaches running in herds like cattle.. yet people continue to rent them, no background checks, no income requirements, just deposit and first, maybe last months rent... whoever shows up with an application and money in hand, is in.
If they stop paying, the LL evicts for less than what it cost to take his family to dinner, trash out and move onto the next tenant willing to move in. In Virginia, one can get two people evicted for around $72 within 30 days no problem, trash out for sub $250. Maybe a repair to cover up something... in all, your out of pocket for $500 or less, when your renting for $600-$900 per month in these slummed properties, compared to market of 1.1k - 1.3k for cleaned up versions that cost you 10-30k, and a long year of whipping the neighborhood into shape. After all that, turnover still runs 1k-3k just to turnover and reset things to perfect.
At some point the property hits a bottom, not totally sure what point that is, lots of times its because the LL retiring and just don't want to deal with owning them anymore. The only thing I have noticed beyond the condition, is most these tenants have been renting for 10-30 years from the same LL, in the same unit. That's when it starts to sink in, take the lower rents, plug holes with tenants till you get one that stays for life, and only do the absolute minimum to get it rented again at sub market rents, never fix anything. Downside is your chasing tenants non-stop.... However, even if you buy these places to clean them up, your still dumping large cash to clean them up, and your still chasing tenants for rent. Makes you go hmmm after a while.. but still, not my style.
I guess what gets to me about this particular guy is that this is his plan. He knows he can get away with not providing habitable conditions because his tenants don't want to draw the attention of anyone in authority to themselves.
I know that some landlords get in a position where they cannot maintain their properties anymore due to old age, sickness, financial troubles, or other circumstances, and I find that very sad. But the guy this thread is about is absolutely despicable. He is preying on the weakness of others.