Are you a slum lord?
John S LewisPro Member
Jackson, NJ · Member since 2017 · 167 posts · 48 votesSo, since I've started as a pro member here on BP, a lot of the properties in my price range are all in run down neighborhoods with high crime. Does anyone have experience with these types of rentals? Is it just a no-brainer to stay away?
@John S Lewis
I don't think you've quite understood how money is made in actual slumlording in war zones. BiggerPockets.com doesn't do webinars on that sort of thing.
1. Slumlords receive rents in cash through third parties and hide the income.
2. Slumlords buy property and drive it further into the ground in the hopes that it will become part of a government-sponsored urban renewal scheme.
3. Slumlords do not keep up their tax payments, especially in judicial foreclosure states, knowing that it will be years before the courts do anything about it, and consciously plan to sell just before foreclosure after using up every blocking tactic available to them. Sometimes they just plain abandon the property after exhausting every possible illegal tactic to make money out of it.
4. Slumlords knowingly rent to tenants who are not real occupants of the property, but are rather fronts for wanted fugitives or illegal aliens. These are the types of people who will willingly stay in the house or apartment as it's driven into the ground. The slumlord often helps find the front who rents the property.
5. Slumlords have links to organized crime gangs that allow them to intimidate their tenants.
6. Slumlords aid and abet defrauders of assistance programs to steal benefit payments from the government and their fellow taxpayers.
Don't do these things, and you're not a slumlord. You're instead the last guy who's giving people with extremely limited options a chance. You're the guy whose hand they're grasping to stay out of the abyss.
I think you'd really be surprised how much the most hardened police officers and child welfare caseworkers will typically respect the difference between a responsible landlord of low-cost properties and a slumlord.
@Joe Splitrock thx. Can u describe what you mean about managing the property and being able to deal with it? As I'm new I just want to make sure I understand your definitions.
@John S Lewis It's not that it's a "no-brainer" to stay away, but it is (personally) for me. When you look at those areas it's best to stay away if you're a.) an out-of-state investor (like me) and/or b.) under the illusion that real estate is a "passive" way to make money.
That aside, owning in a bad area doesn't automatically make you a slum lord. Having something be livable for a low rent amount is different that using plywood to cover a broken window.
Yep, much higher returns but much more work dealing with problem tenants (although when you're looking at returns you have to factor in that the properties will likely not appreciate much and may even depreciate). I've seen some areas around Buffalo where properties lost almost half their value over 20+ years.
A lot of it depends on what you prefer. I have two properties near my house in good school districts and I enjoy managing them and working on them. When you put money into it, it actually increases the value. And every month that rent comes in, it takes 100s of dollars off the principal on the mortgage.
On the other hand, I bought a duplex in a run down part of the city with two great, long term tenants paying a total of $610 a month for $12.5k property that needed very little work. The returns were great but I just didn't prefer having that property and sold it for 19.5K.
If I got several of those I could pretty much quit my job or go part time, but I just don't want to do it.
@John S Lewis I have 3 houses in Memphis that I purchased for under 22K, and only one of them required light rehab where I now have 28K into it (total). Rents are 550, 600, and 700 / month. I have an owner financed note on 2 of them, totaling 250 a month in mortgage payments for all 3. Property management in place, and rent comes in like clockwork on the 1st. The only downside i've experienced in these neighborhoods is vandalism of vacant properties. A good security system, boarding up windows, steel security doors are definitely worth it. Would I buy more? Absolutely. With 10 of these owned free and clear, you would be set for life, albeit a modest one. I Don't expect them to appreciate, ever, and sooner or later most investors make a switch from strictly cash flow investing to higher asset classes that will appreciate. Of course there are 1000 different strategies and everybody has different goals, but big cash flows with class c/d properties aren't a bad way to get started!
I know slumlords and I own property close to some of them. I buy in these areas, I bring the property up to living standards and then continue to improve the properties. It has worked well for me. I have a duplex that I put in new electrical, new kitchen, and one new bathroom. Later, I put in new vinyl windows and they have c/ha. I have folks wanting my properties. Does it still need a new siding job? Yes Does the yard need some landscaping? Yes.
I do contract my tenants to do certain small projects, but it is never taken off the rent. I pay them for their work and I expect them to pay their rent. I have one individual that turned down work because he had already received over $500 this year. He knew that if he gets to $600 I issue a 1099.
You do not have to be a slumlord to rent in the area. You do have to be firm, and if you are improving the property, they will pay a little more and be willing to stay longer.
The kicker is are you willing to do the extra work for the return. You can have empathy for them but it is still a business and they must pay to stay.
I started with a duplex in this neighborhood and now have an additional triplex, and 2 single family homes all relatively close, (within 2 blocks). Now some of the other more reputable landlords are joining me here. Paying more than I am willing to pay. i have enjoyed seeing this stagnant part of our community begin to turn around and it is most definitely profitable.
My approach was to buy into a neighborhood in Dayton, Ohio that had a lot of vacancies and low rents, but first researched the area and found one that the city planners had in their sites set for rejuvenation. The city had big money for demolitions and I worked closely with them (and bought two houses off of them) to investigate the vacancies. I ended up buying everything I could along a particular street that would be when fixed up and once was very beautiful. The houses were built in the 1950s and 1960s with far superior construction standards than are common today. I made these places really nice by polishing, painting, repairs, and landscaping. I then charged well above market rates which priced out section 8 and others. Its really amazing how much the north riverdale area has improved. Along this 6 block street, Kathleen ave, the city has torn down five houses and I have rehabbed and rent out three more. The rents in the area are up 40 percent over the last five years and a lot of other investors are now buying! I am not interested in selling, but if I were, the returns would go from over 25% to something astronomical.
Really key to success is
1 - make them distinguished (beautiful retro look in my case)
2 - tenant screening - get people with jobs who can afford the rent and actually want to buy the place
3 - choose your neighborhood wisely.
4 - buy houses in close proximity so you can keep an eye on them, but also so you can improve the neighborhood over time by your own work!
5 - good luck! you may be needing it
there was a biggerpockets show with a couple who invests in the rough part of the neighborhood. While far from slumlords, they rehab their homes well and provide a great service to the community and try to improve the area... I'll see if I can find the specific episode.
We normally do full rehabs to places within 2 months, but we do have 1 unit where we inherited the tenant who has lived there for the past 10 years. We have fixed things immediately when he let us know, and have replaced some major neglected issues internally (new plumbing, structure issues) , but while you might look at the place is say "slumlord" what you don't see, is the long term plan to do improvements each year and raise rent gradually. All improvements I'm talking about are cosmetic, it's an ugly place, especially compared to the full renovations we do! Could we kick him out next month, and do the full rehab? legally, yes, but if he's used to living in a not-aesthetically pleasing place for so long, why fix something that isn't broke? We increase rent each year, and improve the unit each year.
I guess my point is, if you find a place that is cheap and ugly, and verify everything works and is decent condition, some people prefer lower rents and are fine with a place that's not updated. If you find a $20K place, and tell someone that it's as-is now, but plan to fix it up each year, it can be a win-win!
Josh, you should check out the show "The Super". I believe it's on Netflix. It's a great example of the day to day operations of an investor who manages the kind of properties you're talking about. It's interesting how he deals with the lowest end of society but manages to withhold his integrity and credibility as a landlord.
Anyone who tries to provide a safe, livable place for renters is not a slumlord! Intention is the real kicker.
Do you intend to defraud tenants by promising a nice place, but then watch the unit collapse around them from your lack of maintenance? Do you purposefully charge high rent, but then not provide even the minimum of care or concern for their living conditions? Do you hound tenants for rent, but never answer their calls when something needs fixing? Is your only purpose to extort as much money as quickly as you can before you quietly bail out on the tenants and your obligations as an owner? If so, you may be a slumlord!
Or do you provide nice fixtures and appliances, only to watch the tenants destroy them? Do you provide pest control, but the tenants refuse to even attempt to keep the unit clean? Do you offer tenants breaks when they need one, but they hold your feet to the fire for the most miniscule issues? Do you pay for water, sewer, and trash, only to have the tenant report you to the health department because the pilot light accidently went out on the water heater? Do you consistently ask the tenants if there are any issues they need you to handle, to which they always reply 'no', but receive a registered letter complaining that the water has been leaking under the cabinet for months and the light fixture sparks at night? If so, you are NOT a slumlord!
You are simply a landlord trying his best to create decent, livable space and make a fair profit, while trying to be reasonable with sometimes, unreasonable people. You are not a slumlord, you are a landlord, just like me. Welcome to the team!!
I recommend Show 72 also.
https://www.biggerpockets.com/renewsblog/2014/05/2...
Originally posted by @Pablo Mendez:I know slumlords and I own property close to some of them. I buy in these areas, I bring the property up to living standards and then continue to improve the properties. It has worked well for me. I have a duplex that I put in new electrical, new kitchen, and one new bathroom. Later, I put in new vinyl windows and they have c/ha. I have folks wanting my properties. Does it still need a new siding job? Yes Does the yard need some landscaping? Yes.
I do contract my tenants to do certain small projects, but it is never taken off the rent. I pay them for their work and I expect them to pay their rent. I have one individual that turned down work because he had already received over $500 this year. He knew that if he gets to $600 I issue a 1099.
You do not have to be a slumlord to rent in the area. You do have to be firm, and if you are improving the property, they will pay a little more and be willing to stay longer.
The kicker is are you willing to do the extra work for the return. You can have empathy for them but it is still a business and they must pay to stay.
I started with a duplex in this neighborhood and now have an additional triplex, and 2 single family homes all relatively close, (within 2 blocks). Now some of the other more reputable landlords are joining me here. Paying more than I am willing to pay. i have enjoyed seeing this stagnant part of our community begin to turn around and it is most definitely profitable.
Great to hear you are improving an area, that would be a very satisfying aspect of owning low income property. Maybe over time you're good work will make a tangible return to you in appreciation when you sell!
I have three rentals. I can't afford to invest in A or B areas.
My recommendation, before you speak of being a "slum lord" is to go out and look at houses and opportunities. Seriously, you would be shocked at how people live. Just because a house is in a B area, doesn't mean the tenant is clean or professional. It just means the tenant can afford rent in that area. Just because a house is in a C or D area, doesn't mean that the tenant isn't clean and tidy.
When I bought my first rental, I had a furnace guy come in and give me a quote - he was also a real estate investor....we got to talking about Section 8 tenants. He said the best tenant he ever had was a Section 8 tenant. Her disability was that she was an obsessive/compulsive cleaner. I also talked about the oil & gas industry in the area - he specifically said to be careful when renting to rough necks because they aren't the cleanest group of folks. He specifically targeted teachers and nurses (this is a rural area) because he felt they were the best bet.
I have a property manager that manages my two out of state rentals. She has her own crew and she keeps on top of it. There has been some settling in expenses, but nothing over the top. I did have to question the replacement of a window pane twice over the matter of three months and I haven't seen an issue since.
My property here in Colorado - it's rented by a management trainee (24 year old kid right out of college) for the local meat packing plant. He pays his rent on time but I can pretty much count on the city inspector leaving a warning for long grass/weeds every three months...and I usually get a complaint from him about the property at that time (ant hill in the back yard, water coming through the roof, etc.)
As long as you keep on top of it and keep the places habitable to their standards, you should be OK. I remember walking through a house in an area where two prison guards were sharing a rental...the house was in absolute shambles but they were happy living in that mess. I passed on the house and took a look at a duplex that a couple miles down the road...which had weeds growing out of the gutters....
As not only a landlord but a 3rd party property manager with a $50 million dollar portfolio I find myself in the middle of tons of situations that will widely vary depending on the perspective you are looking at it from.
One of the local papers wrote an article about my company & there were two comments on the online version of the story.
The 1st one came from a tenant who claimed we were a slum lord that refused to fix up the properties in our management portfolio. The other one came from an investor who used our management services. His gripe was that we did too many repairs & charged to much.....Sometimes you just can't win ; )
Check with your local public housing authority for an inspection check list used for Section 8, then follow that to keep properties in good, safe, habitable condition. Any property that is compliant isn't a slum, it's the function, not so much the appearance or style.......but appearance is important, in any area!
It is an old saying, but not totally correct, that the first rule of RE is location, location, location.....not really, understanding the basics of RE you'll find that the key is functionality which drives desirability; which drives choice locations through our socio-economic spectrum for housing.
Past Commissioner of a "Large Public Housing Authority", Board of Directors Habitat For Humanity and Executive Director of a non-profit housing entity, I understand very well the trials and tribulations of affordable housing. It's all about attitude and social responsibility expected of property owners, the right attitude comes first, the money follows.
Just concentrating on saving a buck, or trying to make money without consideration of the economic impact to your neighbor or community isn't the way to go long term. Authorities who identify you as an irresponsible owner can change your life and wallet. The main reason real property is a different asset class is because of the social and economic aspects of a community or area.
This can be a low threshold as to maintenance, a property that is functional and compliant shouldn't have any issues with the authorities. Going into an area that is sub-standard can end up as ripe pickings for eminent domain for a fire station, park or other public use project. Be careful where you go when neighboring owners are not so civic minded.
Low-moderate income housing can be profitable, generally you have a high demand and low initial capital outlay that boosts the bottom line. Understand what predatory means and how you may be seen (by authorities or a judge) in your dealings.
All segments of our population must be served, housing is not an option and your target market will be unique. Generally, the poor tend to be under educated (formally) and some can be simple minded, you'll have to develop your social skills in dealing with those who are deprived yet may feel entitled. Be fair in pricing what you provide and keep it business like. Best of luck :)
Oh, BTW, learn the real basics of real estate before you jump in! :)