Best plan for $1mil liquidity: Buy apartments in the slums?

10 Replies

Hi all!

My wife Danielle and I are new to property investment. We currently have one rental property in Aurora, Colorado and are currently renting a home, ourselves, in Colorado Springs (due to the fact that she works in Denver and I work in Pueblo--so we're at a halfway point until we can figure something better out). 

Anyway, we want to continue buying rental properties. Our ultimate goal is to have around $1mil liquidity to be able to purchase our own land, build our own home, and still have a little bit of a buffer, while also having rental properties for our passive income.

I know we could fairly quickly get to $1mil buy buying and selling but I wanted to know what you all thought about what a good roadmap might be regarding that (how many properties to buy and rent vs sell, etc).

I have a friend who is very active in these forums who originally lived in Los Angeles and his first properties were basically in the ghetto of the middle of the US.

Would a good route be to purchase apartments in the ghetto and be a slumlord for a while to launch our empire? I know it worked very well for my friend because he owns hundreds of properties now.

Thank you all for your guidance on this. Danielle and I really appreciate it!

-Andrew

not sure I would recommend ghetto rentals.. your friend is an outlier if he made those work.

I for one would say that being a slumlord is never an appropriate goal for anyone who is a moral person. No matter what class the property is you should be providing a clean, safe home in good repair. The difference comes in the finish. Are you doing tile floors in the bathrooms and kitchen or laminate/vinyl? Formica Countertops instead of granite that sort of thing.

Generally it is said the lower the class of property the more hands on and better skilled the manager will need to be. If you’re paying for property management in a D class area they need to be specialists. The cash flow on that end of the spectrum will win all day long but you will generally spend more on repairs, evictions and time than on an A class.

@Andrew Rinne Would you enjoy being a slumlord? If so, go for it !!! 
Your road map really depends on you (and your wife). Some people want to take a few months off to travel the world while they are young. Others want to have work life balance ... others are ok to work 24 hours/day. Others want to have a family, which becomes their highest priority ... etc.

If I were in your shoes, I would sit down with the wife and write down the goals with actual numbers and dates and run them by your friend or some other folks here...There are tons of strategies in real estate, some more lucrative than others, but require some level of expertise, which you can only build once you get in the game more seriously.

Year 0: Skills: Basic RE Education. Income: $1000 via SFR rentals.

Year 1: Skills: Advanced RE Education. Income: $2,500 via SFR Rentals, Flips, ...

Year 3: Skills: Advanced RE Education: Mobile Homes. Income: $3500 via SFR Rentals, Flips, Notes, ...

...

Year 5:Skills: Syndication. Income: $100,000  via Multi family, Mobile homes,  Notes, ... 

Good Luck !!!

@Andrew Rinne so you made one statement that has me wondering. "I know we could fairly quickly get to $1 mil..." What is your definition of "fairly quickly"? The fact of the mater, I think it would take a minimum of 5 years of consistent persistent focused action as well as a measure of luck to come up with $1M when starting with little to nothing and working part time. 

Now for your questions. No I don't think it's a good route go after "the ghetto" with little to no experience. When you friend bought, the market was in a very different place. I don't think this is a good time get into apartments no matter where you are investing. I don't think that your friend could replicate his success starting today and going forward over the same time span.

There is no one path to real estate riches. You need to find the path that works for you based on your skills and abilities. Leverage those to make your own way.

Originally posted by @Jonathan Holmes :

I for one would say that being a slumlord is never an appropriate goal for anyone who is a moral person. No matter what class the property is you should be providing a clean, safe home in good repair. The difference comes in the finish. Are you doing tile floors in the bathrooms and kitchen or laminate/vinyl? Formica Countertops instead of granite that sort of thing.

Generally it is said the lower the class of property the more hands on and better skilled the manager will need to be. If you’re paying for property management in a D class area they need to be specialists. The cash flow on that end of the spectrum will win all day long but you will generally spend more on repairs, evictions and time than on an A class.

I may not even know what a slumlord is, then. My friend has property managers/a company that handles all his properties, I just know that he said his first many properties were in very low-income areas.

Thank you for your reply!

Originally posted by @Henri Meli :

@Andrew Rinne Would you enjoy being a slumlord? If so, go for it !!! 
Your road map really depends on you (and your wife). Some people want to take a few months off to travel the world while they are young. Others want to have work life balance ... others are ok to work 24 hours/day. Others want to have a family, which becomes their highest priority ... etc.

If I were in your shoes, I would sit down with the wife and write down the goals with actual numbers and dates and run them by your friend or some other folks here...There are tons of strategies in real estate, some more lucrative than others, but require some level of expertise, which you can only build once you get in the game more seriously.

Year 0: Skills: Basic RE Education. Income: $1000 via SFR rentals.

Year 1: Skills: Advanced RE Education. Income: $2,500 via SFR Rentals, Flips, ...

Year 3: Skills: Advanced RE Education: Mobile Homes. Income: $3500 via SFR Rentals, Flips, Notes, ...

...

Year 5:Skills: Syndication. Income: $100,000  via Multi family, Mobile homes,  Notes, ... 

Good Luck !!!

Thank you! I'd rather not be a slumlord. My friend just had his first properties in very low-income areas. Not sure if that makes him a slumlord or not.

Originally posted by @Bill S. :

@Andrew Rinne so you made one statement that has me wondering. "I know we could fairly quickly get to $1 mil..." What is your definition of "fairly quickly"? The fact of the mater, I think it would take a minimum of 5 years of consistent persistent focused action as well as a measure of luck to come up with $1M when starting with little to nothing and working part time. 

Now for your questions. No I don't think it's a good route go after "the ghetto" with little to no experience. When you friend bought, the market was in a very different place. I don't think this is a good time get into apartments no matter where you are investing. I don't think that your friend could replicate his success starting today and going forward over the same time span.

There is no one path to real estate riches. You need to find the path that works for you based on your skills and abilities. Leverage those to make your own way.

 Five years would be VERY quick. I was thinking less than ten years would be ideal. Why would apartments be a bad decision right now? What else might you suggest? Thanks for your repy!

@Andrew Rinne In my opinion, buying apartments now is buying at the top of the market. In most markets, rents are at all time highs. Cap Rates are at all time lows (that is, purchase prices are at all time highs). Interest rates are at all time lows and we know (the FED has said) they are moving higher. Generally speaking, increased interest rates means increased Cap Rates which means lower relative prices. From a big picture perspective, would you purchase any other business when every business metric is at an all time high in favor of the business? Probably not. Sure there are deals to be had but every deal is going to be facing the headwinds of change in the wrong way.

El Paso County is the fastest growing area in Colorado at the moment.  Houses in Pueblo are cheap and there are opportunities - Pueblo West is a good area as well.  Stay west of I-25 if you can.  East of I-25 has opportunities but they won't flourish for quite a few years - there aren't any jobs out there yet.  Stay away from the Superfund site.

I would like to buy land as well.  Wiggins and Dear Trail (East of Aurora) are what I was seeing in Elizabeth and Parker 10 years ago.  You can still find a decent house on 20-40 acres for $350 - $400k.  Yoder (east of Colorado Springs) still has 40 acre lots (without a structure) for under $100k...it's because you can't get the water rights for commercial farming or agriculture.  I saw water rights (no land) for sale on 40 acres near Greeley being sold for $1.6 million earlier this week.

Folks don't agree with me, but Denver Metro is tough to make money on at the moment - it's like squeezing blood from a turnip.

I bought a house about two years ago in Fort Morgan - bank foreclosure for $22,500.  I put about another $22,500 into it.  At the time, I wasn't sure if I wanted to flip it or rent it.  I rented it at $725/month after renovation...my tenant gave notice he's moving out May 5.  The house next door just went on the market for $190/sq ft.  I talked to my property manager/real estate agent this afternoon and we're going to list mine for sale as well - listing price will be around $115,000. (NO ADVERTISEMENT INTENDED OR IMPLIED IN THIS RESPONSE)

I have two others in "in the middle of the country".  One I bought for $7,000 and put about another $10,000 into and another that I paid $4,000 for and put about another $40,000 into.  Both are rented - one at $600 and the other at $795.  The first house is valued at $48,000 and the second is valued at $65,000.  I will more than likely take the money from the house that's for sale and buy two or three more for the cash flow.

You can buy decent homes in places like Indiana, Ohio, Kentucky, and Tennessee for under $50k all day long and cash flow well after repairs/reserves. If you have $1 mil liquid cash, I would look to the Midwest and PAY CASH for those homes. Stay away from the homes in Memphis that are listed for $6,000 - $7,000 on the MLS and that are currently rented at $190 per month. You may be able to buy these homes cheap, but the rent won't cover your expenses over the long term.

I am not a fan of multi-family or commercial.  I like single family because they are more liquid and there are more buyers (especially during a downturn).

I want to echo Ed E.'s Pueblo recommendation. I've been working in the area purchasing ag properties for my employer the last few years. I'm just now looking for my first opportunity out there as a personal investor. Good luck!

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