Is location THAT important?

Question

My husband and I have decided to get into REI and are looking for our first SFR to rehab with plans on renting it out and go from there. I have been reading this website religiously and have been reading alot of books. We are in SoCal (Riverside County) and there are some great deals out there.  We want to stay close..our range is about an hour or so from our residence. Our only issue is deciding where to invest..there are some "not so nice" area's which we can get a SFR for nothing, and would probably have enough money to eventually buy two properties and rehab them..but if we want the home to be in a "nicer" area it will take all of our available cash. I have run the numbers and think we should invest in the "not so nice" area's..but he fears that buying in these neighborhoods will mean the house never appreciates and we will have to deal with a different kind of tenants (we will have a property manager). Any thoughts?? Thank you all so much for your help..this website is great!!

Mitch Kronowit · Answer

The reason they cost "nothing" is simple... they're not WORTH very much.

Buying rental property in low-income, low-class areas is not for the faint of heart. Do your "numbers" factor your trailer trash single mother of 5 abandoning your property in the middle of the night leaving you with unpaid rent, 2 stuffed up over-flowing toilets because she tried to flush a dozen diapers down them, and her unemployment boyfriend who is now your squatter? Or getting a call from your PM that the DEA just raided your rental because your gang-banger tenant turned it into a meth-lab and it will be 3 months before the place can be cleaned, detoxed, and rented again?

Nearly all of our working to middle-class tenants have received 95% or more of their security deposit back because they left the place clean, trash removed, and carpets professionally shampooed. Only one didn't get his security deposit back because he, some low-class white-trash hillbilly, got evicted instead, leaving us $2,000 in the hole after repairs and legal costs. You better factor that kind of nonsense into your numbers as well.

Don Hines · Answer

What Mitch said!!!!

I am considering the landlord route. But, I will still use my flipping techiques to find them. If there is no grass but cars in the yard, deflated basket balls and bowling pins on the roofs, fire pits surrounded with worn out sofas in the front yard, ETC.
Do ya get the picture? I did a flip in one of these areas a couple of years ago. I was constantly bombarded by rental "oportunities". Offers of one months deposite and 3 months in advance. I finally learned that if I told them I had to visit their current location today; right now, that it killed their ambitions to live in my house.
Don

Max Drizin · Answer

Personally, as an investor, I think that location is everything.  As someone who works in Milwaukee, I think I'll describe it like that.

I only do investment in a couple of areas.  Personally, I describe them to people as "up-and-coming" areas.  Now, some people use that term to describe low-income, high-crime areas, but that isn't the case.  Most of my properties are in areas with young professionals, college students (commuters to UWM or Marquette students), and "hipsters."

Given a choice, I wouldn't live in these places.  But I promise every investor that I work with that I would never buy a property if I didn't feel comfortable being in the area for a showing, leasing, or management issue.  I've started expanding, as well.  One duplex that I'm flipping isn't in the best area, but the street it's on can almost be described as block-by-block.  There are places less than a quarter mile away that I would never purchase, and places a quarter mile the other direction that are well out of my price range.

On the other hand, another property that I'm closing on later today is a much nicer property.  It's in a historic area, and all of the properties, including the one I'm buying, are kept up extremely well.  It's pretty quiet, but it's also a block away from a major street, which gives it an extraordinary location for renters.

Depending on the areas, I'm willing to budge on the cap rates that I try to maintain, or the financing I try to obtain.  A property in a better area can have a lower cap rate, since it is going to be more stable.  On the other hand, a rooming house might need a higher cap rate, so it can absorb a higher potential vacancy.

On another note, one thing that I've noticed about more blue-collar neighborhoods is that people are more willing to do work themselves, and less likely to complain about issues with the property.  More than once, I've had tenants call me up, asking if they can repaint this or replace the cabinet handles and whatnot, and I end up just reimbursing part of the materials on their rent.

If you do the management yourself, it can be less of an issue, but lower-income areas generally end up costing you more in management.  But that's just what I've seen from my experience as well as people I've talked to in the area.

Jennifer F. · Answer

Thank you all for your opinions! Got me thinking..so we took the day and drove into all the area's that are in our buying range. One was SO bad that we didn't even continue to turn onto the street because the neighborhood was horrible! So I guess location IS that important!! But we did find a really nice family community after a few hours of searching that has some homes in our price range..so I looked it up when I got home..low crime, lots of close shopping and great schools! I think we will look into buying in that area! Now I need to find a great deal!! Thank you again!!

Don Wallace · Answer

My experience has been YES location is important but even more important is the PRICE you pay for a home in that location.

Eric M. · Answer

"Is location THAT important?"

Yes

Mitch Kronowit · Answer

I'm over an hour away from one of our rentals that I personally manage. It's not really a big deal. Sure, you're not going to jump in your car and drive all the way over there just to change a toilet flapper or electrical receptacle (2 repairs I recently had to do), so just call your handyman and have him knock out a bunch of "honey-do" items in one trip, including the furnace filter (as recently discussed on BP). I'll usually make the trip down if it's going to be a big repair that I can save $100's on by doing myself.

Silvio Brigliadoro · Answer

That sounds like a great neighborhood, do it ! The most difficult part about managing, is tenant selection, the rest is much simpler with the right tenant. The wrong tenant will make it management intensive among other things,  keeping up with collecting rents, the phone calls, plugged toilets, etc. Sounds like you've done lots of research, I am sure you can also research all about that and stay in control and save money. If its too much for you you can always turn it to a management company. Go get that property.

Jennifer F. · Answer

The area I am looking at is def. a blue collar neighborhood..but very family oriented and beautiful parks all around.  One thing I noticed was that all of the homes were very well kept.  I think I could handle the property management for the home..but is it really a hassle when you are an hour away? I am a little scared to take on the management of the property..but would really like to save the 10%!

Silvio Brigliadoro · Answer

I would avoid war zones, but if you are after cash flow, some of my best cash flow properties are in blue collar neighborhoods. Have you thought about managing it yourself and save the 10% ?

Is location THAT important?

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