Investing in sketchy areas....

[Carlos Quiros]

Hello all-

I am looking at a few properties, one in particular is fully remodeled, has tenants but after asking questions about the area on a facebook group I am told that gunshots are heard in the area and police are present often.

Is this an area where as an investor one sees opportunity with a unit thats fully renovated and a start to beginning to gentrify an area or an area where you'd rather avoid until more people jump into that ship

Any advice would be helpful & appreciated

Carlos

[Ricardo R.]

@Carlos Quiros without knowing the area... if you are a buy and hold investor (rentals) you typically want to avoid areas like that. Can you get into the area and can you then ride an 'upwave' on appreciation? ... sure BUT... the entry $ for these areas is usually low and although for example appreciation of 50% might occur (unknow when and unsustainable), in actual dollars... it really means very little... 50% appreciation on little equals little appreciation in dollars. 

Additionally, typically buy and hold investors that enter these areas do quite the opposite... they have properties that are NOT remodeled because the area's tenant base is of low-quality and high-risk, so when they have an issue at the very least there is not too much on the line since the property is of a lower grade to start with. 

The worst thing is buying a fully remodeled buy and hold property in a war zone or D grade area and then be stuck either with 1) problem tenants that either won't pay and/or destroy your property and/or conduct illegal activities or 2) be stuck and unable to raise rents because after all the area is still dilapidated. War zone and D grade properties have a tendency to look great on paper but in actuality they are management intensive and pay out poor - most amateur investors that invest in these areas either tout their ROI ex. "My ROI is 80%"... and then you come to find out that it's true but... that is really only $100/mo. or less in actual cash-flow OR they tout high cash-flow but fail to tell you all the economic vacancy they experience, the difficulty with local government and the difficulty in dealing with the lower grade of tenant. 

Gentrification areas are best for flippers where you won't have to be around to deal with management. In these areas you are WAY better off waiting until the area turns around and paying a bit more for a more stable area. But in general, you want to buy the area first and the property second; meaning I would take a C class property in a B+ or A neighborhood any day of the week over an A++++ class property in a war zone or D neighborhood and you would also make way more $ with way less hassle doing it. Don't believe me? check the listings in these areas, and you will soon find an 'investor' that has acquired 5,10, 20 properties in these areas that is selling them in batches --- now think 1) if it's such a great investment area, why sell in batches? and why exit the area? and 2) you will likely see that a single C class property in a B+ neighborhood would likely equate to 4-6 of these war zone properties in these batches and the better area is 1) more stable; 2) able to be held onto 'forever'; 3) the sky is the limit as far as future of rents and appreciation; and 4) much less moving parts to achiever a much higher CF and wealth position. Just my two cents, hope this helps.