Posted over 5 years ago

Making Money on Deals in the Ghetto

Is there any money to made on deals located in the ghetto Phil Pustejovsky? Although there may not be an exact definition for what constitutes, "the ghetto", you know what it looks like when you're there. These are the parts of town that have very depressed property values, extremely high crime rates and tons of vacant or boarded up homes lining the streets. Is there any opportunity for real estate investors to do deals in those areas? There absolutely is and that's what you're about to discover!

The most important distinction is that cash flow rates are typically extremely high in the ghetto. The property prices tend to be very low while the rental rates remain reasonably high. It's quite shocking sometimes just how high rental rates can be in such bad parts of town. So therefore, the big profit center in the ghetto is in owning rental property and collecting strong amounts of cash flow each month.

In most cases, properties do not appreciate much, if at all, in the slums. However, in some rare instances, a city may actually revitalize an area and what used to be the ghetto may turn into an artsy, trending locale over the course of time. So a side benefit of owning rental property in the worst parts of town is that in the future, it may turn into the next big area and the values of your properties can soar. But don't bet on it. If it happens, then consider it icing on the cake.

Many investors fear becoming landlords because of all the horror stories they have heard, even in good parts of town. Then, you suggest the investor own rental property in the most dangerous parts of town and then they run for the hills! Landlording is comprised of three main responsibilities; collecting rent, handling maintenance requests and viewing the property ever-so-often. Freedom Mentor

Collecting rent can be difficult no matter where the property is located and if tenants don't pay, you may have to evict. What ghetto investors typically do is rent their homes to Section 8 tenants. Section 8 is a government program that pays the tenant's rent for them. So as a landlord, your rent check is coming from the government, not the tenant. Assuming your property passes Section 8 inspection and is maintained up to Section 8 standards (and the government doesn't go broke), you can all but remove the concerns of collecting rent when leasing to Section 8 tenants.

Next is the responsibility of handling maintenance requests. There is an old Chinese proverb that says, "Those in the free seats hiss first." With Section 8 tenants, since they aren't using their own hard earned money to pay the rent, they can actually have more maintenance requests and create more maintenance headaches than the normal tenant. What some Section 8 investors do is set up a 24/7 phone number that their tenants can call and it forwards to their 24/7 handyman so that if a call comes in to fix a toilet at 3AM, their handyman takes the call and heads out to the property and fixes it. Since homes in the ghetto leased to Section 8 tenants cash flow so well, there can be enough money to afford this additional expense.

Finally, as a property owner, you should check on your properties now and again, for all kinds of reasons. Perhaps you are uncomfortable driving around the ghetto? That would be a good reason NOT to invest in there. Personally, I have driven the ghettos of several cities and never been concerned over safety issues. But my wife feels quite differently. She doesn't want me driving through the worst parts of town. And since "happy wife, happy life," when deals in the ghetto come across my desk, I flip them to Section 8 investors who love those types of deals. For some of you, doing business in the slums may not be scary at all, to which case, becoming the owner and leasing the deals out on Section 8 tenants may be a great way to build a tremendous amount of monthly positive cash flow.

One of the biggest drawbacks to owning ghetto homes long term is obtaining loans. Most mortgage companies and banks that lend on real estate tend to have minimum loan origination thresholds. Oftentimes houses in the worst parts of town have purchase prices that are far less than the minimum threshold mortgage amounts. Therefore, in many cases, in order to acquire properties in the ghetto, you have to pay all cash. Most Section 8 investors pay all cash for the properties they purchase.

If you plan on flipping properties to Section 8 investors, then keep in mind that fixing up the property is usually a bad idea. This is completely off topic and random, but check out these Phil Pustejovsky Reviews and Freedom Mentor Review. Sorry, back to the topic. First, because Section 8 investors will do their own renovations in order to get the property up to Section 8 standards. Second, because you don't want to renovate and try to resell the property to a retail buyer since there are very few lending options for prospective retail buyers in the ghetto. Just get the property under contract and then flip to a new buyer.

To learn more about the Section 8 requirements for your local area, search your county departments for the one that handles Section 8 housing. Also, to get a quick glimpse of what Section 8 houses are on the market in your area, go to GoSection8.com

That's how you make money on deals in the ghetto; either rent to Section 8 tenants or flip to Section 8 investors.


Comments (3)

  1. Hey Phil, well thought out video.  Def have some good points.  

    I would say to anyone thinking to invest like this to think long and hard about it.  They might be better off in mutual funds or a REIT.  

    Ghetto properties are what I call high touch properties.  That means your going to need to be in and around them a lot.  You mention a few  downsides.  One  being high maintenance.  Another being complaining tenants.  Both very accurate points.  

    Think a lot about that, if your considering doing a S8 biz.  Do you want to own a lot of property that has to be regularly fixed (who broke it)while the tenants complain more than a normal tenant? Think on this too.  You mentioned that s8 tenants don’t pay much rent.  Sometimes true but many pay up to 30%.  That means tho that some of the tenants don’t work full time.  Leading to many of the tenants to spend a lot of time at home.  So you have a tenant that tends to break things more often, complains more and is always home.  This is all pretty common. 

    I am a ghetto landlord.  But I’m your examples polar opposite.  I buy out tired beat up slumlords and renovate and rent out the best props in the hood.  So I get the best tenants. And I watch all the S8 guys run around dealing with all kinds of bs waiting for their check from the gov in between trips to the hardware store, housing court,  building Dept to and violation court.  

    And the handgun? Beware of any business that might need a handgun in the glove box.  


  2. I have the misfortune to live in one of these ghettos.  It's people like you who create them.  You should be strung up in the street!


  3. That Chinese quote is very appropriate. I've had some luck in the "ghetto" although I would add that you don't want to get into big rehabs there. There just isn't enough equity to be had for the work that needs to be done. There also tend to be good (at least relatively) pockets and bad pockets in overall bad areas, and it's important to find the good ones if you're going to invest there. At least that's my experience. Good post!