What am I missing with this property?

Question

Hey Guys!

I have a triplex for $85k in a rough neighborhood outside of a military base that I am considering buying to turn into section 8 housing. I have been learning about investing for the past five months but this would be my first deal. The current owner is the definition of a motivated seller and has dropped the asking price 30% over the past month. The agent told me that he needs to sell because he took out a hard money loan that is due. The median rent in the area is between $900-$1000 per door but the current owner is only charging $600. One of the three units is currently occupied. The property isn't in terrible condition but I estimate that I would need to put in between $10k-$15k of repairs to make the property appealing to live in. I feel like if I invest $100k into a triplex and back the property using section 8 housing, it would be a safe investment, despite the bad neighborhood. I told the agent that we would need to get an inspection done on the house before I move forward, but I'd like to hear your thoughts about section 8 housing, buying in tough neighborhoods, and what I am missing about this deal. Several others have passed on the deal but I can't understand why. The seller's agent told me that the other buyers didnt like that the seller had to have 85k because of the loan. In my mind, I feel like I have found a great deal despite the issues with the neighborhood around the property and the repairs, but I am still cautious because I am so new. Thank you for your time!

JD Martin · Answer

A lot of managers won't take on anything in D class housing (some even won't do C class) so if you're not going to self-manage be sure you look into PM in that area first. As to why no one else has bought it, it's impossible to say. Sometimes it's because it's not a deal, no way no how - the neighborhood is death on a stick, or the potential tenant pool is difficult, nonexistent, or dangerous, or something similar - sometimes it's just a timing thing where the "usual suspects" who might buy it have all their cash or energy tied up on other projects, sometimes it's just because the house has problems that others know of that you don't, and sometimes it's just a good find that no one else has jumped on. I will say this: it must be a really tough neighborhood or property if the current seller has knocked 25k off a triplex that's now selling for 85k and can't find a buyer. I have no interest in the property myself, so I'm not going to steal it, so if you want to message me an address maybe I can take a look at it and give you an opinion. You really don't want to get into a quagmire on your first property if you want to be doing this for the long haul.

Nathan Gesner · Answer

If it's on the open market and nobody's making an offer on it, that's an indication that it's not worth the trouble. The market is hot right now and investors are buying up everything - and paying more than they should. This doesn't sound like a smart decision for an inexperienced investor.Keep doing your research, but be skeptical.

Benjamin Otey · Answer

Hey everyone! Thank you all for the help, support, and advice! I've decided to walk away from this one and look for a better deal down the road.

Chris Seveney · Answer

Why do people pass - buying in tough neighborhoods. Your expenses will be astronomical as the units will require constant repairs.

Benjamin Otey · Answer

Scott, Thanks for getting back to me! When I said the other buyers, I meant the previously interested parties. I would be buying the property. I have reached out to four different property managers to learn more about their experience but because of the time zone difference, I don't think I'll hear back from them until tomorrow. I have also reached out to the local PHA to inquire about their experience about section 8 housing in that neighborhood. Interacting with the agent concerned me because they really didn't have a lot of information about the property to begin with. He did not have an inspection completed and gave vague answers about the condition of the house. The agent started out the conversation by saying that I "probably wouldn't even call them back" after I heard the stipulation about the sale. The only stipulation that he explained was that they had to get $85k out of the deal because of the seller's debt, which I don't think would be enough to scare off other interested parties. I looked into the agent and they seemed to be a local with a small portfolio. That being said, I wouldn't be surprised if something came up during the inspection. I agree that this might be something that I should work with someone more experienced, or even hand over the deal to. Do you have any recommendations?

Scott Trench · Answer

This is real estate. There can only be one buyer of a property. I think that there are definitely issues around investing in tough neighborhoods, and also that those issues can be overcome. I'd encourage you to talk to a few property managers in the area - ask them what they'd charge, estimate for rent, and what their process is for screening tenants and putting them in there. It might be that this is a good one to hand over to an experienced professional, and even if you choose to self-manage, you will learn from their approaches about what is realistic in the area. Also - what does your investor minded agent have to say about these items? A lot of this will be specific to your market, and so it will be good to get local experts to chime in.

Nina Shoop · Answer

If only one of the three apartments is rented out then that could be a red flag. What is the rental history? I’d be happy to talk through this deal w you. I am a Pace Morby Subto Mastermind student and also do short term lending.