Would you buy in a "sketchy" area with positive cashflow?
San Diego, CA · Member since 2015 · 15 posts · 9 votes
Would you buy in a "sketchy" area with positive cashflow?
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1,000% I would. I own and lived in a duplex in one of the “sketchiest” areas in San Diego, Logan Heights, with a wife and a newborn baby so I could get my foot in the door of the market. That was 2 1/2 years ago and now I have $120k + equity, and I break even WITH a property manager managing both my units. I could probably squeeze a little more rent out too. I’ve sold homes in the nicest and worst areas of San a diego and the simple truth is that the “Sketchy” neighborhoods are simply working class people and as long as you are nice to everyone and are not trying to sell drugs they will love you and welcome Nice people. This market is only going up at least for the next 5 years or so, I’m looking at acquiring my next property within the next 12 months. I’m willing to deploy capital here and this is all I do 24/7.
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Keep in mind the issues that arise from renting to low income tenants. California is not a landlord friendly state. If the tenants stop paying, it may take months to get them out of your property. Also, they won't care about their credit or rent-worthiness, so there is little recourse for a landlord. Are you going to manage the property yourself?
- San Diego, CA · Member since 2015 · 15 posts · 9 votes8y
@Olena M. Thanks for the reply!
I would plan to manage the property myself. I'm not totally familiar with the eviction laws here so that is definitely something I need to do more research on- thank you!
Through tenant screening, do you feel it's possible to mitigate that risk?
- Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes8y
Hello fellow San Diegan.
I would personally pass if the numbers don't work unless you self-manage.
Is there a reason you pick this area as opposed to other similarly priced secondary markets such as Clairemont or Lemon Grove? You say you're not banking on appreciation, but you are making a similar bet on gentrification.
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes8y
Originally posted by @Mia Trasolini:
Any and all opinions are much appreciated!!
So here's the situation...I'm an aspiring investor looking to make my first deal, focusing on multi unit properties (mostly duplexes). ... I live in San Diego. Prices and competition are through the roof so breaking into this area as a new investor is challenging.
The only properties I've found so far that cashflow in my price range are in areas that are "sketchy" aka high crime, gang presence, etc. However, they are improving (crime is declining and rents are increasing). And for those not from San Diego, these areas southeast of the city are a 10min drive to the heart of downtown.
The same was said about similar neighborhoods like North Park and Normal Heights 5 years ago. Now, the areas are booming and 400k properties back then are now selling for upwards of 600k.
I'm tempted to make the leap of faith knowing the financials work and I would be very strict with tenant screening. To reiterate, I'm NOT banking on appreciation (although it would be nice). This is real rental cash flow.
What do you think??
I have made a hell of a lot more money from investing in sketchy areas that were ripe for gentrification than I ever could have from cash flow alone.
If you have some positive cash flow, and you're OK with holding onto the property for awhile, and you're able to invest in your local area so you avoid the concerns about out-of-area investing (and you're in freakin' San Diego! It's not like people are gonna quit wanting to live there!), then that seems like a much better investment than trying to invest in Omaha or someplace to get a slightly higher monthly cash flow.
- San Diego, CA · Member since 2015 · 15 posts · 9 votes8y
@Frank Jiang Hello :)
The numbers do work on paper- thats the tempting part! It's the risk of investing in an area with high crime that worries me.
I would love to invest in Clairemont. However, I haven't found any properties that cash flow there. There are also far fewer multi unit properties in that neighborhood. I'm not as familiar with Lemon Grove- I'll have to look into that! Thank you for the suggestion.
Yes, fair enough to say I'm "betting" on gentrification ;) However, I am not relying on it from a financial standpoint. I think it is safe to say this area will EVENTUALLY appreciate given it's proximity to the city. The question is... 5 years, 10 years, 30? You never know.
1,000% I would. I own and lived in a duplex in one of the “sketchiest” areas in San Diego, Logan Heights, with a wife and a newborn baby so I could get my foot in the door of the market. That was 2 1/2 years ago and now I have $120k + equity, and I break even WITH a property manager managing both my units. I could probably squeeze a little more rent out too. I’ve sold homes in the nicest and worst areas of San a diego and the simple truth is that the “Sketchy” neighborhoods are simply working class people and as long as you are nice to everyone and are not trying to sell drugs they will love you and welcome Nice people. This market is only going up at least for the next 5 years or so, I’m looking at acquiring my next property within the next 12 months. I’m willing to deploy capital here and this is all I do 24/7.
- San Diego, CA · Member since 2015 · 15 posts · 9 votes8y
@Michael Hayworth I love the optimism, thank you :) And congrats on your successes! If you don't mind sharing, what are the main challenges you've run into investing in sketchy areas?
It is very possible that you will find a perfectly good tenant, because affordability is a real issue in San Diego. There are some neighborhoods that are turning and will probably appreciate really well in the years to come.
It all depends on your risk tolerance. I would buy a duplex in Clairemont. it is a nicer area than where I think you are looking now and it may be easier to self-manage.
@Mia Trasolini Cash flow projections, to be accurate in those class of neighborhoods, need to use different numbers than in better neighborhoods. In particular, there is often a greater need for evictions, higher turn over, higher damage, more tenant issues, increased missed/late payments, etc. As such cash flow projections should reflect this (increased vacancy rate, higher cap ex, higher maintenance, higher PM costs (evictions, notices for late or missed payment, etc.)). Often when the cash flow projections reflect the reality of the lower class neighborhood and associated class of tenants, the cash flow is not greater than better areas.
I am not saying that there are not RE investors who can thrive in these neighborhoods. However, lower class neighborhoods/tenants are best left to RE investors with significant experience and time to manage these properties.
I would stay away from locations like Logan Heights, Encanto, Paradise Hills, etc. until you have experience. I am not a fan of Normal Heights.
There are working class areas that are less central, and might not have as much potential upside, but likely make for a better place to start your RE investing. I suggest you start in one of those areas.
Good luck
- Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes8y
Originally posted by :
There are working class areas that are less central, and might not have as much potential upside, but likely make for a better place to start your RE investing. I suggest you start in one of those areas.
This.
I personally agree with the OPs assessment that those areas are ripe for gentrification, but you can invest in other neighborhoods for a similar price, where you will likely see a similar level of appreciation, and you're more likely to get a high-quality tenant. I'm thinking of the piece of Clairemont around Mesa College, the more affordable areas of Mira Mesa, etc. There are pockets of duplexes and triplexes in these neighborhoods which are filled with upstanding working class renters.
- San Diego, CA · Member since 2015 · 15 posts · 9 votes8y
@Ben Biggs Congrats on your successes (including becoming a Dad!) :)
It's really awesome to hear local stories like this. Is there anything you look for in particular when deciding on the property in these working class areas? Other than cashflow, of course. For example, proximity to a school, single family homes in the neighborhood, the "starbucks effect", etc. Alternatively, anything you avoid??
- San Diego, CA · Member since 2015 · 15 posts · 9 votes8y
Agreed, higher expenses is definitely something to consider in the cash flow calculations! Thank you for the tip. Something less central like Escondido could also be promising with maybe less upside but also less headache :)
I will keep my eye out in Clairemont and Mira Mesa, although I haven't seen anything that will work there yet.
Really appreciate the 2 cents!
@Mia Trasolini thank you!! Yes it’s been a great couple of years.
IMO what it really comes down to is feel for an area. It almost comes down to block by block in these up and coming areas. Some streets are obviously not ideal and one street up is all flipped homes with friendly people. In general San Diego is a pretty safe city. I would recommend Logan Heights, Encanto, Lemon Grove, Paradise Hills, City Heights, National City, parts of Spring Valley, Lakeside, El Cajon, etc for up and coming areas with potential.
Data Points - be aware that the market has gone up 7.7% over the last year and is predicted to go up 30% over the next 5 years. Don’t get priced out. Rents never go down here, they either plateau or increase. So if you get your 30 year interest rate locked in that’s payment stability while the rents climb. Interest rates are going up too. It’s slowly transitioning to a higher price point market. Look at LA.
All the best!
-Ben
"IMO what it really comes down to is feel for an area. It almost comes down to block by block in these up and coming areas"
I agree with you on that one. We often ride bikes with my husband to get a feel for the neighborhoods. I also use crime mapping (available online) to evaluate the neighborhoods for safety.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes8y
WTF does "sketchy" mean? The fact you call an area that scares me for you. First lesson in REI - learn your market. If you have to come on here and ask for advice about an area, you don't know enough about that area. That's red flag number one for someone looking to do their first deal.
I would not advise going into high crime areas as a first deal, unless you come from there or have some serious hood cred. There is just so much to learn, so much that has nothing to do with the quality of the neighborhood, so much you can only learn through experience, that taking on the additional challenge of the hood is not advisable by me.
Do you even know what you are looking at when you look at the house? I would advise you start with learning about the house before you try to tackle much else. That means looking in safer neighborhoods. O wait, you can't afford that right? Can you afford the house repairs in the hood? Do you even know what to look for and what repairs cost? Ever wonder why the houses are so cheap? It aint all because of the area.
I'm not trying to discourage you or be negative, but the host of go girl comments on here needs some balance and you need to eat some reality pie if you are to succeed.
Baby steps. Take care and good luck.
@Mia Trasolini
I would invest in the "sketchy" area that people usually refer in San Diego. In fact, if you really have spent some time in those neighborhood, they are just another normal working class neighborhood. Of course Logan Heights is not University Heights and City Heights is not Clairemont/Linda Vista but those "sketch" area can produce positive cashflow!! If you would want to argue that the "nice" area can appreciate much faster, I don't agree. Percentage-wise those "sketchy" area appreciate faster.I saw a 2 units + a non-comforming studio in Logan Heights last week listed at 475K. Section 8 tenants but have potential with the CC-3-6 zoning. Rent is good and can definitely cash flow US500+ each month. If I am not under contract on another property, I think I would get this one. Agent has listed it as SFR which I think a lot of people have missed this deal by mistake....
- Been to San Diego several times over the years but don’t know the area too well . It’s still SoCal though so some things are similar to la I imagine . High demand , limited land , etc I don’t think San Diego has rent control so that is good . I’d be looking to see if the city is planning any new investments in the area , new transit etc . Are there new developments planned? Google or Google News search the neighborhood name . Are new hip or trendy businesses starting to pop up ? Yelp can be helpful as you can put in the address of a property you are considering and see all the places nearby . Or search by “restaurants” or “bars” . I’d look more for independent mom and pop places that have that artsy edge , it seems once Starbucks or Whole Foods moves in there probably isn’t much upside . Since these neighborhoods are close to you definitely check out the areas in person if you haven’t already. Will you be managing the properties yourself or have a property manager ? If you don’t feel safe going there and it’s really that sketchy , I wouldn’t recommend investing, positive cash flow isn’t worth your safety . From L.A I have definitely seen that these neighborhoods can go up a lot . People get priced out of the hip area so they start looking to the neighborhoods nearby for affordable places to live and open their businesses . The up and coming /gentrifying areas can have higher yearly price increases than more mature markets. Kind of similar to stocks . The startup or up and coming tech companies can have big gains versus a company like Coca Cola . But on the other hand there is more risk .
- Charleston, SC · Member since 2018 · 26 posts · 15 votes8y
@Mia Trasolini have you looked into the possibility of working with section 8 or local shelters to understand the demand for tenants.?Don't get me wrong they are still a lot of work in terms of managing the tenants but this would account for rent being paid for in a timely manner. If the numbers work and you have planned in insurance, possible vacancies and maintenance costs, I would give it a try. Betting on gentrification and the property inflation is a hard timeline to guess.
Hello @Mia Trasolini, it looks like your question has garnered great responses. I'll preface by disclosing that I am brand new just like you. No actual invest properties--yet. While exposing myself to the lessons of successful real estate investors, I was made aware of an online service that may be of use to you called Neighborhood Scouts. I have no affiliation with them but I visited their website yesterday and now I am interested in subscribing.
I'll admit that at first I did not understand what exactly their service was until I began watching their tutorial videos. To address your specific question about sketchy neighborhoods, I would consider using this website as an objective tool. From my understanding, their technology not only is able to data mine the criminal activities in your area of interest but they have annual projections that are considered highly accurate by market investors. I was personally impressed.
I'll show you what I mean. Here is a link to their "Crime Data Report" video. It's only 2:30 minutes long and gets straight to the point. After watching the video, then I would review their open report for a sample neighborhood in the country. I highly recommend that you watch the video first before analyzing their sample report. I did it in reverse yesterday and I felt kind of overwhelmed with all of the data they provide in their reports. All of the reports have tutorial videos, as well. I highly recommend them and as I mentioned before, my goal is to subscribe to their service later this month to evaluate prospective neighborhoods.
Please let us know how your first investment adventure evolves!
- 8yLee RipmaPro MemberRental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
California RE is just another ball of wax than what is often talked about on podcasts. CA is an appreciation market. Understand that it is an appreciation market. Can you guarantee appreciation? Well you can look at what has happened it different areas that used to have a lot of drugs and crime, north park, south park, normal heights, now logan heights and barrio logan. I think down in Sherman Heights and Bario logan areas where you have bay views is where to buy. I'd shot for breaking even now. In time the property you buy will go up in value. Buy low, buy where other people are afraid to buy, CA real estate goes up and you'll be sitting on a ton of equity. Appreciation beats cash flow any day, you just have to make sure you can hold on if the market corrects. With a 30 year fixed mortgage, you should be able to. I tried to buy for cash in SD. But SD is not a cash flow market, it is an appreciation market. Buy a property that is poised for appreciation! Buy a crappy property in a nice neighborhood and do work to it! Know the neighborhoods and know their potential. Buy a location you understand. I personally want cash flow, so I buy in a cash flow market (Kansas City) not an appreciation market (San Diego).
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Michael Hayworth:
Originally posted by @Mia Trasolini:
Any and all opinions are much appreciated!!
So here's the situation...I'm an aspiring investor looking to make my first deal, focusing on multi unit properties (mostly duplexes). ... I live in San Diego. Prices and competition are through the roof so breaking into this area as a new investor is challenging.
The only properties I've found so far that cashflow in my price range are in areas that are "sketchy" aka high crime, gang presence, etc. However, they are improving (crime is declining and rents are increasing). And for those not from San Diego, these areas southeast of the city are a 10min drive to the heart of downtown.
The same was said about similar neighborhoods like North Park and Normal Heights 5 years ago. Now, the areas are booming and 400k properties back then are now selling for upwards of 600k.
I'm tempted to make the leap of faith knowing the financials work and I would be very strict with tenant screening. To reiterate, I'm NOT banking on appreciation (although it would be nice). This is real rental cash flow.
What do you think??
I have made a hell of a lot more money from investing in sketchy areas that were ripe for gentrification than I ever could have from cash flow alone.
If you have some positive cash flow, and you're OK with holding onto the property for awhile, and you're able to invest in your local area so you avoid the concerns about out-of-area investing (and you're in freakin' San Diego! It's not like people are gonna quit wanting to live there!), then that seems like a much better investment than trying to invest in Omaha or someplace to get a slightly higher monthly cash flow.
Mike the real big money is made in the path of progress.. as you state.. and the big money is made in value add appreciation.. unless you have the ability to buy LOTS of doors just buying notes is safer and more consistent.. no tenant issues and consistent safe income.
I look at the tough parts of Portland 7 or 8 years ago.. I have a lot that we paid 80k for well it was a beater house.. I gave the lady a life estate NO rent for 8 years.. I just tore the house down.. new homes there now that it gentrified are worth 600 to 700k each and we can put 3 on this one lot. so about 2 mil in gross sale on a lot I paid 80k for and had no income for 10 years.. .. we will make a big fat pay day on that.. FAR more than cash flow could have done by probably 20X or more.
I found Charleston SC 5 years ago now.. first houses I bought were scary it was old old falling down no one wanted to live there.
last house I sold last month sold for 650k .. first house I remodeled and sold there 5 years ago with 260k.. so on and so forth.. now we have pioneered it and others are in the market as well building and regentrify and its rock star territory.. 5 years ago no one wanted it.. it was the hood .. :) Same with neighorhoods in Indy right now.. big money being made on value add.. far more than cash flow.
- Cleveland, OH · Member since 2018 · 133 posts · 59 votes8y
@Mia Trasolini so here's a thought. If you're sketchy about an area that's not far from you and considering investing, why not consider a better area in another city/state? Take a trip and visit to do an assessment of another area that's safer and generates positive cash flow. At the end of the day you're an investor and want return on your investment. The same research you're going to do in an area you feel "Sketchy" about, you can do research on b-c neighborhoods, excellent property management and properties that will cash flow and appreciate about the same. I've dealt with c- to d areas before and even though they're close proximity and might be self managed you cannot control what happens in that area. You can't control the tenants and unfortunately it's difficult to predict additional expenses that come along with it. I would not recommend this as your first investment for a number of reasons. Best of luck to you anyways.
- 8yJo-Ann LapinPro MemberLoan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
Wow this thread goes on forever. It so hard to predict what will happen in the future. The bottom line is that no matter what area the rental is in have a good cash safety net put away for bumps along the way and you should be able to be okay.
Originally posted by @Alex Price:
@Mia Trasolini so here's a thought. If you're sketchy about an area that's not far from you and considering investing, why not consider a better area in another city/state? Take a trip and visit to do an assessment of another area that's safer and generates positive cash flow. At the end of the day you're an investor and want return on your investment. The same research you're going to do in an area you feel "Sketchy" about, you can do research on b-c neighborhoods, excellent property management and properties that will cash flow and appreciate about the same. I've dealt with c- to d areas before and even though they're close proximity and might be self managed you cannot control what happens in that area. You can't control the tenants and unfortunately it's difficult to predict additional expenses that come along with it. I would not recommend this as your first investment for a number of reasons. Best of luck to you anyways.
>properties that will cash flow and appreciate about the same.
Appreciate the same as what? Are you trying to imply anywhere in the Midwest has historical appreciation anywhere close to San Diego? I do not want to be too harsh but I do not know if that is possible if you are trying to imply the Midwest has historical appreciation close to San Diego.
The appreciation in San Diego on a single unit in the last 5 years would likely equal 50 years of Midwest cash flow. Look it up, it is easy to do.
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