Need advice on possible investment in rough area

88 Replies

I would like some opinions about an upcoming possibility. I apologize for the wall of text but I want to provide accurate detail for best advice.

I’m one of the millions struggling hard against a massive student debt that currently requires 1/2 of everything I make. Money is scarce even working 2 jobs.

Real estate is the only way I will ever escape. The rat race, while I am paid semi-decently, can never get me out of 12-15% interest student loans of 100k.

Paying off my loans aren’t really an option. I would need to massively increase my salary to even pay the loan down with that interest rate. Let alone pay it off.

All that is to say ... I’m dying to get into real estate, but saving up to buy isn’t practical. It would take me 60 years to save that kind of cash. So I need to use the magic of OPM (other peoples money).

Now, I have great credit and can probably get some solid loans, including from family. But I want to be very cautious from overextending myself. As such, higher price properties are ... frightening to me.

An older relative has just moved out of a 3/1 in a very rough neighborhood. I would probably consider it C/D class. She built the house in the 60s and has lived there till recently. I believe I could get the house for probably 10-15k. She is only expecting pennies for it. My ideal would be to Section 8 the house.

However, I would love y’alls opinion.

What costs would you all warn me about? Will I need to redo electrical and such due to the age of the house to make it housing compliant? What would you budget for that?

Would a rough area stop you from considering a deal like this? I see dollar signs with a 700-800$ section 8 rent with nearly no overhead if I can get this thing with 10,000$, but I don’t know what dangers and problems to expect down the line.

Please illuminate me to what you would look for! I originally wrote the house off due to expected repair costs but ... a friend who flips for an investor insisted it may be worth it if I can cover those with private loans .... unless the area itself would make this a no-go.

This is near Birmingham AL in a higher crime area in case that helps.

Here's the issue; even if you get a loan for the house you're not going to be able to cover any expenses that come up. Not having reserves is a recipe for disaster. If you can get a loan for more than the purchase price so you have some money tucked away for a rainy day, then it could be doable. Properties in these types of areas generally require more maintenance and a "hands on" approach. I hope you have some time between your 2 jobs to deal with this. 

Also is there no way to refinance those student loans? 12-15% seems very high... 

Originally posted by @Adam Britt :

I would like some opinions about an upcoming possibility. I apologize for the wall of text but I want to provide accurate detail for best advice.

I’m one of the millions struggling hard against a massive student debt that currently requires 1/2 of everything I make. Money is scarce even working 2 jobs.

Real estate is the only way I will ever escape. The rat race, while I am paid semi-decently, can never get me out of 12-15% interest student loans of 100k.

Paying off my loans aren’t really an option. I would need to massively increase my salary to even pay the loan down with that interest rate. Let alone pay it off.

All that is to say ... I’m dying to get into real estate, but saving up to buy isn’t practical. It would take me 60 years to save that kind of cash. So I need to use the magic of OPM (other peoples money).

Now, I have great credit and can probably get some solid loans, including from family. But I want to be very cautious from overextending myself. As such, higher price properties are ... frightening to me.

An older relative has just moved out of a 3/1 in a very rough neighborhood. I would probably consider it C/D class. She built the house in the 60s and has lived there till recently. I believe I could get the house for probably 10-15k. She is only expecting pennies for it. My ideal would be to Section 8 the house.

However, I would love y’alls opinion.

What costs would you all warn me about? Will I need to redo electrical and such due to the age of the house to make it housing compliant? What would you budget for that?

Would a rough area stop you from considering a deal like this? I see dollar signs with a 700-800$ section 8 rent with nearly no overhead if I can get this thing with 10,000$, but I don’t know what dangers and problems to expect down the line.

Please illuminate me to what you would look for! I originally wrote the house off due to expected repair costs but ... a friend who flips for an investor insisted it may be worth it if I can cover those with private loans .... unless the area itself would make this a no-go.

This is near Birmingham AL in a higher crime area in case that helps.

Adam,

I've done bad areas. In fact, that's how I re-started (I went through bankruptcy). I became really good at managing properties in D and even F (war zones) areas.

Having said that, it's a LOT of work. It's a LOT of headaches. And literally, I could have been shot or stabbed and good that none of those happened to me. 

One time, an 8-unit property was practically given to me so I jumped on it.  The property took so much of my time that I didn't have time for anything else. To be honest, I regretted the decision because if I handled properties in better areas, I could have done MORE properties, with less headaches and actually make MORE money.

So my advice: DO NOT DO A WAR ZONE property as your first deal.

The property, its tenants, and the headaches will ROB of your time (which in turn robs of you of opportunities to do more deals), your sanity and your peace of mind. You're working 2 jobs as it is and a property in a bad area is ANOTHER JOB. Think of it this way: that $700/month, even if we assume that's all cashflow (which it is not) - is what you're going to get paid for 10 hours/week of work (because that's what it could take for a house in a bad area). So do the math:

$700 divide by (10 hours/week x 4 weeks) = $17.50/hour

Now the reality is - the real cashflow from this property will be around half of that number ($350/month) because something always go wrong. You can have a tenant who does not pay for the month or something bad (like a fine from the city for a broken window that the tenant did but does not want to pay for).

So really, you will end up making less than $9/hour.

There are better deals out there. Just wholesale the deal to a landlord who knows what they're doing (and get paid a quick $3,000 wholesale fee, working 10 hours total to find a buyer: now that is $300/hour which is way better).

@Nick C.

Yes sir, I could borrow more money than required to have a rainy day fund but even that frightens me.

As for that % interest student loan ... very long story. Short side: The majority of the debt is in my wife’s name. Her credit is probably in the negatives. Only way to refinance favorably would be to put it all in my name ... which could cripple me in credit forever. Currently her debts aren’t considered in any of my loans or credit etc.

I would LOVE LOVE LOVE an answer to that situation but even bankruptcy doesn’t eliminate student loans ...

@Michael Ealy

Hmmm yes great advice. And I think you are spot on. I may consider the wholesale rout ... not my area of interest but a quick dollar is better than no dollar.

Thanks for sharing your expertise in this market. It’s encouraging to me that you CAN make it work but I can see how it may be more problem than it’s worth.

A lot to think about. I was certainly planning on not making that full 700$. In fact I was planning to put 100% proceeds aside for repairs and or future investment.

Crime is another problem in rough areas. You can't let them sit vacant in Birmingham neighborhoods.  I've learned that the hard way. Just got a call this morning and they stripped one of ours of everything - kitchen cabinets, sink everything, we had a bunch of doors in there they took all of them. They even cut the incoming electrical cable and ripped the electrical box off the wall. Everything was taken out of the crawlspace too - furnace, ductwork, everything gone. 

@Adam Britt ,

One thing you gotta remember, is that everyone is going to try and make the absolute most amount of money they can.    Your family member might be cutting you a deal, but chances are you have a lot of deferred maintenance.    If it's more of a D area, I'd immediately factor in that HVAC and  plumbing is likely stolen ($$$).

I would strongly recommend hiring a contractor/home inspector, to go through the house and let you know what's wrong with it-- before you buy it.      If you're comfortable with the potential expenses, get a personal loan through Lending Club/Prosper, for say+$3K  over the purchase/renovation cost, so you can be ready. 

@Linda S.

Actually this family member is staunch that they don’t want me to buy it. She thinks it is in terrible condition. But I think she exaggerates. I would have to make an anonymous purchase offer through an agent to get it because she doesn’t want me buying it. I just happen to know what she would sell it for. I would 1000% get it inspected before I did ANYTHING. I just didn’t want to spend $300 on an inspection if the theory itself is stupid and I should run from this area.

You feel that with 3k over cost that would be enough? That’s doable actually ...

@Jason Carter

Now that is my greatest fear realized right there. The house has been vacant a while now. We have been very lucky that she never had an issue. A single old lady living there for the last 70 years and not a single spot of trouble ... very lucky.

I would be afraid of theft as you describe though ... one of those heavy risks I need to consider before making any outreach to get the property.

Yeah, I've been told it's more of a problem with vacant properties. And that's been my experience. When the neighbors know no one is living there.... 

Had another in Bessemer I almost bought, had contractor walk through it again two days before closing and someone had just broke in and pulled all the copper out. Tore out drywall and sinks and tub surrounds to get at the copper. It's a good thing we sent him back through there. I was able to back out. 

If you do it, just make sure you or someone walks it right before closing. And then get moving on it ASAP. Make sure it's clear that people are going to be there and the situation is changing. 

Well, this has been a fun read.

"...Paying off my loans aren't really an option..."

"...I’m dying to get into real estate..."

 "...My ideal would be to Section 8 the house..."

"...Will I need to redo electrical.." 

 "...I would LOVE LOVE LOVE an answer to that situation but even bankruptcy doesn’t eliminate student loans..."

If you are really here for advice, here's mine. You're not ready, on multiple levels, not even close.

The other piece of advice is don't borrow money you can't pay back, and that goes 1000 times from a loved one. 

Keep diggin' and good luck.

In addition I would do a bit more research to how section 8 works in your area. People get kicked off section 8 all the time, their portion changes etc. In addition you usually need decent amounts of money to keep the house passing annual section 8 inspections and make sure the house dosent go into abatement. 

@Nick C. +100 to this advice. 

@Merritt S.

All suggestions welcome. And I agree. Following this line of thought is exactly why I haven’t made a move.

It is also why I’m 4 years in the exact same situation, and why I will continue to be in the exact same situation until I die. Literally. Short of finding a way to multiply my income drastically, we will never touch these student loans. Thus my interest in generating income via real estate.

Any advice then for the more pressing issue at hand? Maybe I need to post in a different area about those student loans ...

The student loans are a tough one. On one hand, if you took on that debt into your name jointly you could probably reduce the interest rate. On the other hand you want to keep your good credit. 

Is it possible to rebuild your wife's credit over the course of the next year? Then you could jump on those student loans with her and get the interest rate down. That will make a huge difference in your bottom line each month. The more money you keep in your pocket each month, the more money you have to invest. 

I keep hearing you say your afraid . Well I can tell you That’s not going to work in real estate investing . You have to be absolutely bold and take risks to be successful at this game . You will regret buying that house and will make big mistakes if you are unprepared, which you clearly are. Do some research save some money and learn how this is properly done before you put your a$$ in a sling

Originally posted by @Adam Britt :

@Merritt S.

All suggestions welcome. And I agree. Following this line of thought is exactly why I haven’t made a move.

It is also why I’m 4 years in the exact same situation, and why I will continue to be in the exact same situation until I die. Literally. Short of finding a way to multiply my income drastically, we will never touch these student loans. Thus my interest in generating income via real estate.

Any advice then for the more pressing issue at hand? Maybe I need to post in a different area about those student loans ...

 So, I don't know if it is still going on, but a bit back there was a thing if you worked in a certain sort of industry for a certain amount of time, you could get the government to pay off your student debt. Details are fuzzy...but I think you had to do something that helps people and it takes like ten years?

So, I cannot believe this is even going to come out of my type, but wholesaling might be an option. In the simplest of terms, with numerous caveats, it's like a finders fee without having a RE license. I might just recommend you get a license for all that, but many others will have a different take on it. It's not my thing, but is the most often referred to path when you hear people claim a person can get into real estate with no money and no credit.

But seriously, I think you need a few Zen moments. I'm not even kidding. You are allowing what you perceive to be a hopeless situation really clog your mind. Free your mind and better things will follow, I promise. You are alive, you live in the United States, you have your youth and health, you have a wife, and I'll bet, I'll just bet, you have a roof and food. Count your blessings first my friend, and work it on up from there. Real estate is not going anywhere, nor is it the only game in town.

Next time you go to the home improvement store, look for the plastic drain snake you can buy for $2-$3. It's a slim piece of plastic, with a few barbs on it, and people use it to pull hair out of the sink drain. That thing probably cost $0.10 to produce. Then ask yourself a simple question, could I have thought of this?

People do real estate because it is familiar and accessible. That's the truth not told with a $20,000 guru education.

Glad to hear you have a conscious kid, your family is too.

Originally posted by @Merritt S. :

Well, this has been a fun read.

"...Paying off my loans aren't really an option..."

"...I’m dying to get into real estate..."

 "...My ideal would be to Section 8 the house..."

"...Will I need to redo electrical.." 

 "...I would LOVE LOVE LOVE an answer to that situation but even bankruptcy doesn’t eliminate student loans..."

If you are really here for advice, here's mine. You're not ready, on multiple levels, not even close.

The other piece of advice is don't borrow money you can't pay back, and that goes 1000 times from a loved one. 

Keep diggin' and good luck.

I don't think any of those things indicate he's not ready for getting into real estate. Sure, his financial position is not good, but he's gotta find a way out of it somehow. 

@Adam Britt - As for my thoughts - I also invest in C/C- areas. Like others have said, you're going to a suprising amount of your cash flow eaten up by repairs / capex / late or uncollectible rent (unless you can get 100% section 8 funding, like you mentioned). You can probably still cash flow ok, but keep that in mind. 

Also like others said, it's time intensive. Might not be the best choice for a first investment, especially if you are tied up with your 2 jobs. 

If you do decide to do it, make sure to borrow enough funds for all repairs plus a good chunk extra, so you don't find yourself in the whole before the checks start regularly coming in. 

If you need to borrow all of the money anyways (I'm guessing 20-25k), then why not use that as a down payment on a more expensive property in a nicer area? Maybe a duplex for 100k that you could house hack. That would help move the needle in your finances, as well as be less time intensive and less risky. 

Best of luck! Don't give up!

Originally posted by @Jason Carter :

Crime is another problem in rough areas. You can't let them sit vacant in Birmingham neighborhoods.  I've learned that the hard way. Just got a call this morning and they stripped one of ours of everything - kitchen cabinets, sink everything, we had a bunch of doors in there they took all of them. They even cut the incoming electrical cable and ripped the electrical box off the wall. Everything was taken out of the crawlspace too - furnace, ductwork, everything gone. 

 Man that is brutal, we had that happen with one of ours recently too. Like you said, vacancy breeds crime in these areas. I take it you are going to file an insurance claim?

@Adam Britt ,

If she thinks it's a POS, it's likely a POS,  and she knows all the issues and wouldn't pass all the problems on to to you.    

I'm guessing it needs probably needs a new roof, new HVAC, plumbing, structure work, windows -- standard things when buying that cheap IMO b/c it hasn't been touched in decades I'm sure.... minimum  $20K to make it a decent rental, so if you got it for $10K, I'd say you need a loan for at least +3K or more after rehab  = $33K-35K, all the sudden that $10K doesn't look so cheap.   Do you have  the ability to fund roughly $35K+?      

Reserves and the ability to pay big bills are not a joke, or something to be taken lightly, stuff goes wrong ALL THE TIME, a lot of times it's the worst and most stressful time!    Say while working on the house, plumbing gets stolen-- your can either figure it out, or be one of the many failed investors, it's pretty common to see them, especially in the cheaper housing area where people think "it's only $10K."     A lot of people see it as a small amount, so when they fail and just walk away, super common in rougher areas!

@Adam Britt - As for the student debt - any chance you consolidate through programs like Prosper / LendingTree? Or since your credit is good, apply for a bunch of 0% intro APR credit cards, pay down the student debt with those, and then find a way to pay down the credit cards before the intro apr expires. That could save you a ton in interest payments, since your current student loan rates are almost at cc rates as is.

Originally posted by @Taylor Chiu :
Originally posted by @Merritt S.:

Well, this has been a fun read.

"...Paying off my loans aren't really an option..."

"...I’m dying to get into real estate..."

 "...My ideal would be to Section 8 the house..."

"...Will I need to redo electrical.." 

 "...I would LOVE LOVE LOVE an answer to that situation but even bankruptcy doesn’t eliminate student loans..."

If you are really here for advice, here's mine. You're not ready, on multiple levels, not even close.

The other piece of advice is don't borrow money you can't pay back, and that goes 1000 times from a loved one. 

Keep diggin' and good luck.

I don't think any of those things indicate he's not ready for getting into real estate. Sure, his financial position is not good, but he's gotta find a way out of it somehow. 

@Adam Britt - As for my thoughts - I also invest in C/C- areas. Like others have said, you're going to a suprising amount of your cash flow eaten up by repairs / capex / late or uncollectible rent (unless you can get 100% section 8 funding, like you mentioned). You can probably still cash flow ok, but keep that in mind. 

Also like others said, it's time intensive. Might not be the best choice for a first investment, especially if you are tied up with your 2 jobs. 

If you do decide to do it, make sure to borrow enough funds for all repairs plus a good chunk extra, so you don't find yourself in the whole before the checks start regularly coming in. 

If you need to borrow all of the money anyways (I'm guessing 20-25k), then why not use that as a down payment on a more expensive property in a nicer area? Maybe a duplex for 100k that you could house hack. That would help move the needle in your finances, as well as be less time intensive and less risky. 

Best of luck! Don't give up!

Well Taylor, If you can buy a six-figure property for $500 twice in a row, then you have more figured out than me. Please, tell us all how you did that.

Originally posted by @Merritt S. :
Originally posted by @Taylor Chiu:
Originally posted by @Merritt S.:

Well, this has been a fun read.

"...Paying off my loans aren't really an option..."

"...I’m dying to get into real estate..."

 "...My ideal would be to Section 8 the house..."

"...Will I need to redo electrical.." 

 "...I would LOVE LOVE LOVE an answer to that situation but even bankruptcy doesn’t eliminate student loans..."

If you are really here for advice, here's mine. You're not ready, on multiple levels, not even close.

The other piece of advice is don't borrow money you can't pay back, and that goes 1000 times from a loved one. 

Keep diggin' and good luck.

I don't think any of those things indicate he's not ready for getting into real estate. Sure, his financial position is not good, but he's gotta find a way out of it somehow. 

@Adam Britt - As for my thoughts - I also invest in C/C- areas. Like others have said, you're going to a suprising amount of your cash flow eaten up by repairs / capex / late or uncollectible rent (unless you can get 100% section 8 funding, like you mentioned). You can probably still cash flow ok, but keep that in mind. 

Also like others said, it's time intensive. Might not be the best choice for a first investment, especially if you are tied up with your 2 jobs. 

If you do decide to do it, make sure to borrow enough funds for all repairs plus a good chunk extra, so you don't find yourself in the whole before the checks start regularly coming in. 

If you need to borrow all of the money anyways (I'm guessing 20-25k), then why not use that as a down payment on a more expensive property in a nicer area? Maybe a duplex for 100k that you could house hack. That would help move the needle in your finances, as well as be less time intensive and less risky. 

Best of luck! Don't give up!

Well Taylor, If you can buy a six-figure property for $500 twice in a row, then you have more figured out than me. Please, tell us all how you did that.

Fair enough, it's one of my favorite stories :) VA loan x 2 = great cash on cash return

My personal advice.... don’t waste your time. Focus on increasing earning potential and paying down debt. In the mean time... read books, listen to podcasts and continue frequenting BP. By some of the questions you’re asking.... you aren’t ready for a D/F property. Please don’t take offense, most people aren’t ready for them. Ever. Myself included. Don’t rush. Get yourself a nice, simple, cash flowing class C or B when the time is right.

@Adam Britt , I'm going to send you to two podcast episodes. Craig Curelop used House Hacking to pay his student loans and shares the story on Episode 35 of BiggerPockets Money. (www.biggerpockets.com/moneyshow35)

And Rich Carey invests in Alabama long distance from Korea where he is serving in the Military. He tells his story of paying cash for houses in Episode 268 of the BiggerPockets Real Estate Investing Podcast (www.biggerpockets.com/show268)

I didn't read what your profession is. We also interviewed Travis Hornsby from Student Loan Planner in an Episode titled How to pay off 6-figure debt while pursuing Financial Independence. Check out (www.biggerpockets.com/moneyshow22)

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