Hello again good people!
I wanted to get input from you on investing in lower income urban neighborhoods. Some call these places "the hood", "the ghetto" or "war zones". In Lansing, we really don't have ghettos or war-zones to that degree. But I grew up in urban Detroit, so my frame of reference is a bit different than others! :)
Anyway, are there any of you out there that currently invest in these types of areas here in Lansing? I know the cheaper $10-$40k houses tend to work better for landlords & rental/cash flow rather than re-habbers. Using the wholesaling strategy, we are getting solid leads on available houses consistently. Some are nice and need little work and some are beat to death and would need major repair work.
What are your thoughts??
Frame of reference doesn't matter. Just because you are more familiar with a bad investment, doesn't make it a better one. It just means you should be more familiar with the reasons not to invest there.
Wholesaling is a lot more work than it is made out to be. You can't make very much money on low cost housing if you're wholesaling since the starting point is so low. If you want to make $5k on a deal, and the actual cost of the deal is $40k vs. $10k, which one do you think you are more likely to be able to make work?
This would be my advise, it doesn't matter what the price of the house is because your buyers list will be held with buy and hold people and flippers. For flipping sometimes it works in high price neighborhoods and the profits are much better with lower risk. I would use the 70% rule as a rule of thumb. For example, 100k house you need to buy for 70k all in, which means that you need to get that house for 70k - Rehab cost (get to know a good contract with a middle of the road price point so that you are not telling people you can do a whole house for 5 grand) and then subtract the fee that you want to make on the house and that should be the target. Generally that works for most people. I wouldn't touch a flip for less than a 20k profit (even that seems risky depending on the scope of work) so after closing cost (10%) those numbers work (they are at least close).
On cheaper properties (ARV=60k) you need to be under 70% because the closing cost and stuff like this will not change much. But at ARV=200k there is more meat on the bone etc.
Every house has a price that it is valued at, but some of them are not even worth a dollar in their current state because of what the area can support for an ARV.
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