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

[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!

[Michael Ealy]

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.