I’ve never heard of anyone having success investing in a war zone

57 Replies

I’m reading the book on long distance investing and it’s on the part about warzones and I’ve never heard of anyone having a great experience investing or managing property in those areas. I read the section 8 bible book last year and that may be the closest thing to hearing someone have success, but even then I’m not sure if that was warzone or just low income . What has been you guys/gals experience? Let’s talk about it . 

I am sure some have.. but I am also sure that most don't have any success and the inventory just gets recycled to the next greater fool who thinks they somehow have the magic to make those work

@Jay Hinrichs that’s what I’m learning in my research, he said that most likely if a Pm will jump on the opportunity to manage a area like that , it means it’s possible they are desperate & not doing  so well because it would a waste of time if they had other better performing areas and properties, more profit & less hassle.

Originally posted by @Robert Collins :

@Jay Hinrichs that’s what I’m learning in my research, he said that most likely if a Pm will jump on the opportunity to manage a area like that , it means it’s possible they are desperate & not doing  so well because it would a waste of time if they had other better performing areas and properties, more profit & less hassle.

 Yea more or less the lower the quality of neighborhood the lower the quality of companies willing to operate in it. This is another factor in investors failing in these neighborhoods. They just assume that they'll be able to hire any property management company that they want, doesn't work that way.

@Robert Collins - I view war zone properties like high-yield stocks or bonds. The market is flashing a warning sign when cap rates(theoretical cap rates) are very high. When you're right about the high-yield stock and it soars, you do very well, but when you're wrong, you get clobbered. Being right about a war zone property usually means that the neighborhood is improving. If you're right about that, and you can hang in there through the tough times, you can reap a solid reward. But if you're wrong, it's just years of misery before you sell it at a loss or a small gain.

I've moved on from the war zones as I've become a more conservative investor. I probably should've never wasted time on the war zones earlier in my career, though I'm not complaining(see: Hudson, Buffalo, and Troy, NY.)

@Robert Collins

Robert, you really have to define war zone. I’m in tough areas but even i have my limits. I can tell you there is plenty of money to be made but you will def work for it. My tenants are tougher on the properties and my maintenance percentages are higher than normal. You have to buy right and know how to renovate for this.

I currently own almost 60 properties. I am also in the middle of my operations every day and live about 30 minutes from the bulk of my properties which are all in very close proximity to each other. 30 percent of my tenants are section 8. I deal with the local housing authority, have a great handyman, and also amazing contractors that do all of my work. This is not a long distance type of business. I have to inspect and see everything. You must be involved. Now, that being said, my returns per door are incredible but by no means “passive”.

Originally posted by @Alan G. :

@Robert Collins

Robert, you really have to define war zone. I’m in tough areas but even i have my limits. I can tell you there is plenty of money to be made but you will def work for it. My tenants are tougher on the properties and my maintenance percentages are higher than normal. You have to buy right and know how to renovate for this.

I currently own almost 60 properties. I am also in the middle of my operations every day and live about 30 minutes from the bulk of my properties which are all in very close proximity to each other. 30 percent of my tenants are section 8. I deal with the local housing authority, have a great handyman, and also amazing contractors that do all of my work. This is not a long distance type of business. I have to inspect and see everything. You must be involved. Now, that being said, my returns per door are incredible but by no means “passive”. 

Very nice post..  its just a shame that there is this thought process that goes on in real estate and perpetuated by gurus and on sites like this that owning rental real estate is passive endeavor.. owing a few maybe.. owning A class or strong B class with rents in the top 20% of the entire market ya I get that.. But when you get down to rents in the lower 50% of market rents and C class and below.. its simply a job if you want to do it right.. and maximize your return.. Now granted most of the folks that are all excited and spout that they left the cube and are now living on rental real estate I get their excitement they are now self employed.. but we don't want to mistake self employed landlords with Hey just buy these and the money rolls in..  in my day job I fund a lot of lower end rentals in about 10 markets.. so I see the HUDS I see people every day either from a foreign country or their address is no where near the property IE west coast  and selling these homes for 1/2 or less of what they paid for them in the last 5 years.. most cant even make it to 5 years and they are burnt out.. those folks don't post on BP or social media.. but when you look at the sellers that's at least half of the inventory.. its burnt out abused landlords who just had no idea how tough it is to really do this right.

I have other clients that own 20 50 100 200 and its like you said they live there and put in their 40 plus hours a week managing their assets.. So if you know that going in you can set your company up for success.. but thinking it can run on auto pilot or in the very low end some manager is going to save the day..  YUP that's just playing Russian Roulette.. 

 

I guess the term war zone is relative . There is a crime committed weekly on the one street I have an apartment house on . No one has been shot there lately but just down the road there was a shooting the other night but thankfully they did not die ! I think one mans war zone is another mans nice neighborhood. Whatever It’s called that I do I can attest it isn’t passive or easy in fact I get my gonads kicked up into my throat quite often if I do say so myself. If I didn’t live fairly close I’m certain I would fail to manage them and it would all fall apart . How anyone could do this remotely is beyond me 

@Alan G. thanks, that makes a lot of sense. I definitely want to really focus on being more passive more than anything , I want to build a system where I don’t have to involve in the day to day operations, so this really does help me know that it would be for me . I’ve been reading @David Greene long distance book & im very interested in running my operation like that, even in my own backyard

Originally posted by @Dennis M. :

I guess the term war zone is relative . There is a crime committed weekly on the one street I have an apartment house on . No one has been shot there lately but just down the road there was a shooting the other night but thankfully they did not die ! I think one mans war zone is another mans nice neighborhood. Whatever It’s called that I do I can attest it isn’t passive or easy in fact I get my gonads kicked up into my throat quite often if I do say so myself. If I didn’t live fairly close I’m certain I would fail to manage them and it would all fall apart . How anyone could do this remotely is beyond me 

 You ever have a shooting death at one of your properties? Very messy.

I think that real estate investing being passive is mostly how the IRS views it. I consider our rentals our full time job. Self employed like mentioned above. There's nothing passive about it. So far on this second day of September, one tenant has paid their rent, one said they had a tragedy that took all their money so the rent is going to be late, and the rest we haven't heard from. Eventually it will all get paid. We have a pretty stiff late fee schedule (+$75 on the 6th and add $10 a day for every day after that.)

Overall, our tenants are pretty good and we've never lost rent or evicted anyone but we're pretty diligent in the screening process.

We don't have any "war zone" properties. The one we're rehabbing now is in a working poor neighborhood. ie, people on welfare, disability or lower paying jobs. We'll have to adjust our typical rental criteria for this property but are hoping to find a long term tenant. It's a 1/1 but about 25% of the property is going to be new construction and all the mechanicals will be new.

I think "war zone" only works if you self manage from nearby and you have to have the right personality for it. If you try it from out of state, it'll eat your lunch.

In Memphis you get Section 8 in good areas so it can be a good thing. Thousands and thousands of people lose money trying to make war zones perform. In Memphis it is local investors who are completely hands on who seem to make it work.  Otherwise go for B grade homes in nice areas. Cashflow on paper may be not as attractive but you'll actually get a better result. Our average yield achieved against spreadsheet is 78% in reasonable areas. It can be as low as 25% in bad areas. Just not worth doing.

Originally posted by @Dennis M. :

I guess the term war zone is relative . There is a crime committed weekly on the one street I have an apartment house on . No one has been shot there lately but just down the road there was a shooting the other night but thankfully they did not die ! I think one mans war zone is another mans nice neighborhood. Whatever It’s called that I do I can attest it isn’t passive or easy in fact I get my gonads kicked up into my throat quite often if I do say so myself. If I didn’t live fairly close I’m certain I would fail to manage them and it would all fall apart . How anyone could do this remotely is beyond me 

I have a multi family its actually 2 SFR's on one lot in Charleston SC on the market for 1.1 million and unfortunately there was a shooting resulting in a fatality a few doors down.. its affecting my ability to sell this property.. I sold one one block over same thing two props one parcel last year for 1.24 this is an area that went through the changes of demographic and up until 6 or 7 years ago so you have new buyers coming into the hood paying 500 to 1 mil for a house next to a house that is just about ready to fall down and is a junker its quite unique area.

 

Originally posted by @Dean Letfus :

In Memphis you get Section 8 in good areas so it can be a good thing. Thousands and thousands of people lose money trying to make war zones perform. In Memphis it is local investors who are completely hands on who seem to make it work.  Otherwise go for B grade homes in nice areas. Cashflow on paper may be not as attractive but you'll actually get a better result. Our average yield achieved against spreadsheet is 78% in reasonable areas. It can be as low as 25% in bad areas. Just not worth doing.

Like I said investors do it to them selves.. they chase paper tigers and end up with donkeys.. I have seen it over and over for the last two decades and does not matter the city.. 

 

@Alan G. Agree with your statement. I am in Baltimore City and I will admit it is difficult however the returns make it worth the hassles. Also you learn to mitigate your risks and save yourself some headaches.

Those who bought homes in East Palo Alto, CA during the trough all came out as millionaires. Paid <200K milked 1.1M is fairly common.

Those who hesitated are kicking themselves. The difference is Facebook has its headquarter just across EPA. Even schools changed from rating 2 to 9.

 Keep in mind there are just a few war zones in America that produced miracles.

@James Wise that's a weird thing to bring up but apparently you went through that. How did you handle it? What was the process? What do you wish you had done, in retrospect, and what are you glad you did? Let's dissect this crazy scenario and start an interesting conversation that might educate folks!

It can be done, but one must be very hands on. There is nothing passive about investing in a “war zone”.

If your looking for less headaches, look at Class A and B. At the end of the day you HAVE to know what your getting yourself into.

Dont be in denial and dont be naive.

My first house was a "better block" near a war zone. Lower income but not complete WarZone. Purchased cheap, has tons of equity now and Cashflow is STRONG. Both units are occupied by Section 8 Tenants. I read Section 8 Bible and Section 8 is Great. Don't buy unless Cashflow is strong because rougher areas have weak appreciation. However, I do not purchase for appreciation I purchase with the believe the market is gonna crash. If the city has population growth, Low housing inventory, strong cash flow from section 8 rents then GO FOR IT. Buy a property that is under market value, cash flows, let your tenants pay down the mortgage and you won't even care about appreciation as they are paying it all down while making money. You can also have a property manager that specializes in Section 8

Originally posted by @Dennis M. :

I guess the term war zone is relative . There is a crime committed weekly on the one street I have an apartment house on . No one has been shot there lately but just down the road there was a shooting the other night but thankfully they did not die ! I think one mans war zone is another mans nice neighborhood. Whatever It’s called that I do I can attest it isn’t passive or easy in fact I get my gonads kicked up into my throat quite often if I do say so myself. If I didn’t live fairly close I’m certain I would fail to manage them and it would all fall apart . How anyone could do this remotely is beyond me 

I completely agree. Long distance war zone is insane. I have property in rough neighborhoods. Some units are Passive some are HEADACHES. Either way all my maintenance guys (plumber, carpenter etc) that I personally know are with 10 minutes of said location 

 

@Robert Collins I think the ones that do well in this space all have 2 things in common. 1 is they are local and self manage. 2 is it’s their full time business. There is nothing passive about it. You can’t have one or two of these out of state and hire a PM.