I have a question for those of you who have experience investing in a poor area of town.
I found what I feel to be an amazing deal on a multi family property that would give great returns, however, it's in a poorer area where there are abandoned buildings scattered around and very poor quality housing all throughout its immediate surroundings.
Any experience in this kind of market in terms of success of your actual investment? Any suggestions?
Getting into a C or D class area, could be nice because the cost to purchase is usually more attractive, however there are some things you should keep in mind. You will have to set what expectations you have of the applicants for this asset class, which isn't an issue, but you shouldn't expect to have highly qualified applicants for this area. Also, showings are a bit more difficult since the area isn't very "welcoming" and as much as you try to make your building the best on the block, the general status of the neighborhood may be a turn off to applicants. You will spend more time on this type of asset because it will probably need more work than a B class asset, however your cash flow will probably be a bit higher, so you have to ask yourself, do you want time or money?
If the buildings are older, you may have more expenses due to the age of the asset, which could potentially knock out the cash flow even if it is a higher cash flow due to a lower purchase price.
I bought a 6 unit in a not so great area, and have done as much as I could to increase the curb appeal and rents, and was pretty successful but it took about 2-3 years to really get it running well enough to increase the value of the property. It wasn't until the neighbors started taking care of their properties as well, that the area started to improve and bring better tenants. Had I known then what I know now, I may not have purchase the property, however, it has been a great teaching tool (paid a lot of tuition and been kicked a lot by the building and tenants). I personally suggest that new investors find something a bit easier to manage and learn small lessons first then get into more challenging types of investments as time goes on. But that is just based off my personal experience. I wish you the best in your decision and future ventures.
@Dorothy Butala thank you so much for the insight. With that property did you use a property management company or was it self managed?
@Evan Parker Self managed. Will you be self-managing?
@Dorothy Butala No i would go with a property manager, so my next question would be, do you think your experience would've been drastically different had you used a property manager?
@Evan Parker The experience would have been different, but I don't believe better. Property managers aren't miracle workers, and you will have to work along side them sometimes to approve items they may tell you your property needs in terms of renovation and maintenance, and if you see you are having high vacancy rates, you may need to work with them to find out what is causing that, then work together for a plan to increasing occupancy. Managing it yourself will have its own issues, but having a property manager will have a different set of issues you may have to deal with. The worst thing you can do is think you can buy a building, hand of off to a property manager and not be involved at all. You will want to take a pulse to make sure it is being managed to your expectations, which may be difficult with that type of property. My advice is to make sure you have a property manager who will manage the asset for you and understand what they will and won't do. Some managers have criteria for the properties they take on, so you want to make sure you have one that you spoke with who will be up for the task of managing the property.
I much prefer buying in higher quality areas for several reasons. One to ward off all of the above, higher quality tenancy, and from the start higher returns. Often times spending more on the front end pays off huge! I have been fortunate to find agents in Indy that are also investors and know what areas to stay out of for the before mentioned reasons, and what areas are ones that would allow me to go in and do some minor rehab work or updating (finding value-add properties) to maximize rents, thus maximizing the return on my $! Spend the money up front! To me, the key is a good agent who is also an investor or works with investors who also knows the area I am investing in thoroughly!