Is investing in a "rougher" area always a bad thing?

Question

21 Unit building in San bernardino

1,495,000 asking price

Actual GRM of 8.8 - Market GRM of 7.6

It nets a little over 100K.

From some research and asking around I've found that this specific area isn't too safe or somewhere you'd want to spend too much time in.

My question: If I have a great live in manager, does it matter that it's not in the best area? I imagine I'd be able to communicate with him/her for most of the issues. If the numbers are good, vacancies low, and the checks are coming in why be deterred by a "rougher" area?

Thanks!

Lucas Hammer · Answer

I think it really depends on who is saying it's "rough." I live in a "rough" area on the south side of Chicago, but after doing the math, I realized my odds of having anything bad happen to me was pretty slim unless I joined a gang. I moved there because I could get in the door faster and start my investing career. Now that I'm in, I'm watching for buildings to go vacant or for sale all around me because although it's "rough," the vast majority of people in my 'hood are blue-collar, hard-working families that pay their rent on time (although a lower price).

I wouldn't recommend everyone do it, but I spent some time in the neighborhood and realized that most of the people who thought it was too rough have never left their northside bubbles. I'm not in Englewood, mind you, but if the numbers make sense and you aren't afraid to drive through and check out the property/neighborhood, I know I'd personally do it.

JD Martin · Answer

Always remember: investments pay based on risk and potential, real and perceived. Some of the most successful real estate people I know operate mobile home parks. This is not for the guy that doesn't want to get his hands dirty, literally and figuratively.

Even in the most crime-infested areas you will find a lot of landlords. They make good money on buildings no one else wants to touch. Real estate is a lot like an eco-system; you've got your prime-rib eating humans on the top and your maggots on the bottom, but they all have a purpose and they all have opportunity.

Linda S. · Answer

@Nataniel A.,

Low Income investing or buying in the "rougher areas" isn't for everyone. There's a lot of money to be made, but honestly a lot of the wealthy people are scared-- scared to just go there thinking they'll get shot or robbed. It's different from the life you live, and the expectations are different-- that doesn't mean it's bad.. It takes a special kind of person to do it, just know what you're getting into. You have to be smart and do extra stuff to avoid theft, and do extra measures for security like more lights.

If you can handle the heat, get in the kitchen!

Jason Hirko · Answer

@Nataniel A. Definitely not - D neighborhoods can be a great investment, but in my experience you need to scale quickly to get the critical mass to be able to hire the people needed to get their hands dirty (figuratively and literally). You don't want to trust this to a PM as it will be the last thing on their to-do list every day, and unless you are the type of person who wants to do it yourself, you'll need people you can count on.

Thomas S. · Answer

Your deterrent would be the fact that there is 10X more hands on management required with lower class areas. A manager will not change the fact that there will be more work for you to do even if it is managing a manager. Finding and then keeping a good reliable manager will be a major accomplishment.

Greater returns is the primary reason investors take on c/d class properties but it is a specialised market that requires a separate skill set.

You will not be sitting at home in front of the TV watching the rent checks roll in.

Jeff Keller · Answer

If you're thoughtful about what you do, there is no reason to exclude "rougher areas." There may be more crime but almost certainly most of the people are good people. It is going to be the relatively few "rotten apples" that you have to be careful about.

A home isn't seen as a quick source by the "rotten apples" to get cash.

Michaela G. · Answer

I've been investing in an area that most investors were scared of and wouldn't touch a few years ago.

I got awesome deals, but I was also speculating on the Beltline (major project in Atlanta) coming in across the street and making the prices shoot up. That was going to be the icing, while I had great cashflow.

Yes, there is more turnover, but I've learned a lot and am better at picking tenants now. But things happen. Vacant houses get broken into easily. You can have an alarm system, but if the tenants turn of power, before you get the house back, it doesn't do you any good. My rents are being deposited by my tenants into my Wells Fargo account, so, I don't have to collect rents and carry a gun ;-).

I've also changed my market, by bringing in different tenants (artists,creatives) and am now seeing the increases in prices. Suddenly investors are all over the place, trying to buy, wholesale, flip. The neighborhood has been turning and I"m seeing a big upswing this past year.

Jay Hinrichs · Answer

@Jd Martin Maggots??? really LOL... I guess I am ground chuck somewhere in the middle :)

Lucas Hammer · Answer

As a follow-up, I've actually had (admittedly anecdotally) less horror stories in my area from people than in nice neighborhoods where people feel they deserve to have every little thing taken care of by management due to the higher rent prices. I've had to paint one bathroom with water stains on it and my tenant has never asked me for anything since. He's also always paid his rent on time. Again, anecdotes, but that's been my personal experience.

Jeff B. · Answer

These areas can be profitable as they usually cost less but still command reasonable rents. The hidden issues are the tenant drama, frequent move-outs and vacancies, and sadly excessive damage repair.

Hopefully you are aware that San Bernardino is in bankruptcy.

Is investing in a "rougher" area always a bad thing?

Is investing in a "rougher" area always a bad thing?

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