Bad Area, Numbers Work - So What? Help Me Understand!

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Hi All, me again!  I need help understanding why this deal would be bad.  A similar deal discussed raised some valid points but I am not understanding the inherent issue of a "bad neighborhood".


These deals are easy to find in the Cleveland OH neighborhood.  I assume, a "rougher" area might have greater turnover (accounted for at 10%), probably more repairs during turnover (accounted for at 10%), need good local property management (10%).  


The property exceeds the 2% rule with worst case assumptions (2.38%)

The property meets the dollars per door, $175

Cash on cash hits 22%

Fully refurbished (actually quite nice) and clear inspection report including large items.

I am not looking for appreciation, simply cash flow.  Demand seems high in the area so exiting shouldn't be difficult.  I am not living there so a "rough" neighborhood has no impact on me.


What am I missing?  Seems like great cash flow all things considered.

Also, this would be my very first real estate investment.  Low cost of entry, I figure I will learn a great deal.

Help BP!

@Ricky Nigro - Couple things to consider: 

1. Double check the rental income on Craigslist, Rentometer and also with your PM (Property Manager). Use a conservative number.

2. Check the crime score on Trulia and also with your PM on their suggestions for what they've seen renting other units out in that area 

3. Closing costs are going to be higher than $2,300. I would budget closer to $5,000 just to be safe

4. I would weigh the tradeoffs in using turnkey. Do you have future plans to do BRRRR strategies or even any smaller cosmetic repair projects? Turnkey might be a good way to get your foot in the door but there's no better experience than managing a project yourself.

Originally posted by @Albert L. :

@Ricky Nigro - Couple things to consider: 

1. Double check the rental income on Craigslist, Rentometer and also with your PM (Property Manager). Use a conservative number. 

2. Check the crime score on Trulia and also with your PM on their suggestions for what they've seen renting other units out in that area 

3. Closing costs are going to be higher than $2,300. I would budget closer to $5,000 just to be safe

4. I would weigh the tradeoffs in using turnkey. Do you have future plans to do BRRRR strategies or even any smaller cosmetic repair projects? Turnkey might be a good way to get your foot in the door but there's no better experience than managing a project yourself.

 Thanks for replying Albert and great points!

1.  Yes, ran Rentometer, checked with PM.  Did not yet check CL.  Went conservative.

2.  There is crime.  Break ins, assaults, etc.  But my own neighborhood shows the same and I feel I live in a decent spot lol.

3. Lender confirmed closing cost will be $1900-2300, so I assumed the worst.

4. Yes, absolutely plan to BRRRR and do some flips in the near future. Like you said, just want to get my foot in the door my very first couple units.

Cheers!

Bad neighborhoods are subjective. Is it mostly drug dealers, prostitution, graffiti and boarded up buildings? If so then it isn’t worth it. On the other hand, if the neighborhood is subsidized and you can safely go and collect rent, then good money can be made. Well to do people often get really turned off by such neighborhoods. I have had more than a hundred units in the later type neighborhoods and they were very profitable. You just have to figure more hands on work by yourself or the manager.

Just make sure you have a property management company that will manage that property and will collect rent or evict.  Discuss the cost of eviction and time loss for rent.  And if 10% is enough for the damage they do.

Main thing is to make sure that someone feels safe enough to go there and collect rent!

And account for the property value going to nothing soon...as the area deteriorates more. 

Yield is a measure of risk in the property. Low yield is indicative of low risk, high yield high risk.

What will typically happen with the high risk high yield properties....greater chance of non paying tenants, evictions, damage to property. Watch James Wise videos on tenants from hell. Thats going to show you what the reality of a high yield property is, unlike a spreadsheet.

If you spend time reading posts on BP about OOS turnkey investing a couple things stick out: generally these turnkey homes are overpriced. They dont appreciate. When you want to refinance (you cant renovate since it was just done and you are paying for it) the appriasal will come in lower than you paid. If the area is bad the property will be stripped of any and everything when vacant. Capex will be high. Etc etc.

Basically while it might be cheap in CA terms, understand that you may be buying a lot more than you think. Especially if you are not there to manage. 

@Ricky Nigro . Why are you estimating taxes and insurance? Get quotes. And look up the taxes. Your closing costs will be higher. Lender fees are just that lender fees. You'll have another 1000 or so in title fees and prepaid taxes and insurance. I am guessing minimum 4K closing costs. Cleveland has higher property taxes then other parts of the country. Stay on west side of cleveland it's the better side of town. 150 a month for water may be fine but don't forget sewer.

Originally posted by @Ricky Nigro :

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*This link comes directly from our calculators, based on information input by the member who posted.


Hi All, me again!  I need help understanding why this deal would be bad.  A similar deal discussed raised some valid points but I am not understanding the inherent issue of a "bad neighborhood".


These deals are easy to find in the Cleveland OH neighborhood.  I assume, a "rougher" area might have greater turnover (accounted for at 10%), probably more repairs during turnover (accounted for at 10%), need good local property management (10%).  


The property exceeds the 2% rule with worst case assumptions (2.38%)

The property meets the dollars per door, $175

Cash on cash hits 22%

Fully refurbished (actually quite nice) and clear inspection report including large items.

I am not looking for appreciation, simply cash flow.  Demand seems high in the area so exiting shouldn't be difficult.  I am not living there so a "rough" neighborhood has no impact on me.


What am I missing?  Seems like great cash flow all things considered.

Also, this would be my very first real estate investment.  Low cost of entry, I figure I will learn a great deal.

Help BP!

Ricky,

I made money in rough neighborhoods...like this one:

https://www.biggerpockets.com/forums/311/topics/64...

But, I watch it like a hawk and I am very hands on.

With you doing it out of state, it's going to be tough. You have to factor in 20% for property maintenance and repairs instead of 10% just to be safe. My suggestion is to build a cash reserve of 6 months of the property's repair and maintenance (and if you can, include the mortgage payment too) before you buy.

Also, before you buy, inspect the property. Walk the neighborhoods. Talk to the police department in the area and see if they patrol the neighborhood. Double check the numbers by talking with some people in the area, like other property managers, real estate agents, contractors, even renters. Don't take what you get from the turnkey provider at face value. Assume he/she is lying unless you prove otherwise.

If I were you, I will build a team in Cleveland before you buy a deal. A team you've vetted carefully.

The numbers seem to work but you have to be careful...really...really careful with out of state investing because investing is NOT just about the numbers. 

A good deal becomes a bad one when the investor does not know what he/she is doing. A mediocre deal can become a good deal with an expert investor.

Originally posted by @Ricky Nigro :

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*This link comes directly from our calculators, based on information input by the member who posted.


Hi All, me again!  I need help understanding why this deal would be bad.  A similar deal discussed raised some valid points but I am not understanding the inherent issue of a "bad neighborhood".


These deals are easy to find in the Cleveland OH neighborhood.  I assume, a "rougher" area might have greater turnover (accounted for at 10%), probably more repairs during turnover (accounted for at 10%), need good local property management (10%).  


The property exceeds the 2% rule with worst case assumptions (2.38%)

The property meets the dollars per door, $175

Cash on cash hits 22%

Fully refurbished (actually quite nice) and clear inspection report including large items.

I am not looking for appreciation, simply cash flow.  Demand seems high in the area so exiting shouldn't be difficult.  I am not living there so a "rough" neighborhood has no impact on me.


What am I missing?  Seems like great cash flow all things considered.

Also, this would be my very first real estate investment.  Low cost of entry, I figure I will learn a great deal.

Help BP!

 With this being your first real estate investment, I would advise against going into a rough neighborhood.

Main things for out of state folks - stay out of bad neighborhoods, and hire reputable service providers to partner up with. The includes brokers, lenders, home inspectors, property managers, contractors, much more.

Your safe bet to start is a single/multi-family in a solid B grade city like Parma, a C grade SF in Euclid, or a C grade duplex in Cleveland neighborhoods like Old Brooklyn, Westpark. You'll pay slightly more in Old Brooklyn today than what you're paying for the property in the report, but it's far more safe.

Many here on the site have invested in this market, I'd recommend taking the advice of those who have already experienced the pitfalls, and taking action from there.

For your first investment property, I would highly recommend buying a property in the local area, even if its ~2 hours away. This helps you network with local agents, lenders, and contractors. If you find a fixer-upper to BRRRR, it will give you experience with understanding acquisition of a distressed property, estimation of rehab costs, working with contractors, and gaining equity in the property.

The trick is whether or not you can sustain the projected cash flow. You can have a tenant sign a lease for X amount of money all day long, but is that income sustainable? That's where the idea of bad neighborhoods come into play.

While never a guarantee one way or another, bad neighborhoods increase the risks of:

  • tenants not paying rent
  • tenants requiring eviction
  • excess repairs and maintenance because of bad tenants (I can personally vouch for this one because I'm in the middle of an $8k turnover due solely to terrible tenants)
  • possible lower condition of property causing extra repairs and maintenance
  • And lastly, the market/neighborhood itself. At some point you might not even be able to find tenants for it. Which can cause a) increased vacancy and b) forced decrease in rents

So the numbers upfront might sound great, but can you keep them up...that's the question.

Nevermind all the headaches that can come from bad tenants...

@Ricky Nigro Where exactly is this property? Lived in Cleveland for 20+ years and worked in these "rough" neighborhoods. $65,000 in Cleveland in a rough (east side) neighborhood is WAY to high. Initial eyeball test tells me you should pump the breaks. I went down this road with my 2nd property that I paid WAY less for. I made a bunch of money on that duplex - and gave it all back with turnover and break ins.

Send an address or zip code.

Most posters on this thread are taking too strong of a stance on either side of the argument.  @Ed Simmons has it right.  There IS a sweet spot where things can work...and work VERY well.  Assuming you are in that sweet spot, your success will then depend on two things..

1.  The initial condition of the property, and how well it will hold up.

2.  The ability of the PM to manage that property class correctly.  If they're firm on collections, screenings, getting deposits, keeping tenants happy, etc, you WILL make good money.

Hi @Ricky Nigro - as always, as an out of state investor I would recommend an in-person visit to Cleveland. I appreciated checking out different neighborhoods and getting a sense of rents, idiosyncrasies of Cleveland housing, and meeting people who work and live there and have been supporting me immensely as partners. 

Having a solid (or a few) property manager to talk to is also helpful, my PM could show me actual rents in different neighborhoods and how long places were sitting vacant, in real time with their current listings (limited to their listings but still better than guessing if a certain listing on CL/Trulia actually rented at that price or not). 

Aside from the comments people made on tenants/turnover, turnkey, and needing to do your due diligence on what neighborhoods you want to invest in, just off the bat $800/unit on that duplex seems high from what I've seen. As @Caleb Heimsoth mentioned, you can find exactly property tax info on the MyPlace Cuyahoga County website. If you haven't already, talk to a broker to get an actual insurance quote as well so you can be exact on those numbers. I found my closing costs to be much higher than I expected, especially with small loan amounts. Even if it's "turnkey" I would tack on an estimate for basic up-front repair costs also to be conservative, or just set aside 6 months of repairs up front, making sure to not rely on setting aside a % of rent. On a duplex you'll want to add lawn and snow removal as well, and though PM is pretty standard at 10% there is a always a leasing fee, so either include that (1 month's rent) or increase that to 11% to be safe.

Hope those small tweaks help, keep it up!

Originally posted by @Ricky Nigro :

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*This link comes directly from our calculators, based on information input by the member who posted.


Hi All, me again!  I need help understanding why this deal would be bad.  A similar deal discussed raised some valid points but I am not understanding the inherent issue of a "bad neighborhood".


These deals are easy to find in the Cleveland OH neighborhood.  I assume, a "rougher" area might have greater turnover (accounted for at 10%), probably more repairs during turnover (accounted for at 10%), need good local property management (10%).  


The property exceeds the 2% rule with worst case assumptions (2.38%)

The property meets the dollars per door, $175

Cash on cash hits 22%

Fully refurbished (actually quite nice) and clear inspection report including large items.

I am not looking for appreciation, simply cash flow.  Demand seems high in the area so exiting shouldn't be difficult.  I am not living there so a "rough" neighborhood has no impact on me.


What am I missing?  Seems like great cash flow all things considered.

Also, this would be my very first real estate investment.  Low cost of entry, I figure I will learn a great deal.

Help BP!

 What area is it located in? Neighborhood? I would be VERY careful when purchasing within the city of Cleveland. I stick to the suburbs where it is a bit more stable.