The Other Side of Town - Investing in a Bad Neighborhood

[Todd Dale]

Hello Bigger Pockets Community:

I was wondering if I could get your thoughts and opinion regarding investing in a bad neighborhood.

I've been searching for my first property since September. I was moving along nicely(seeing approximately 5 properties a week) but then I got slammed pretty hard by Hurricane Sandy (I live in Hoboken, NJ). I just got back on the hunt after being derailed for about a month or so. I recently found a nice short sell property that I might be able to buy for very cheap. The only problem is that it's in an awful (stress on awful) neighborhood! It's such a shame because the house is so nice but when you step outside to the street it is frightening...It's a like a beautiful disaster.

I've read a few articles and responses on here from seasoned investors on this topic and the general consensus seems to be that there is nothing wrong with buying property in a war zone. The common philosophy seems to be that just because I wouldn't live in a certain neighborhood doesn't mean someone else wouldn't. This is true because the short-sell property that I’m looking at is currently completely rented out with tenants.

My question is, should I get involved in something like this on my first go around? Or should I hold off, and because I've already been approved for a FHA loan, wait and buy something nicer and more expensive in a better neighborhood? I've been approved for a $600K FHA loan. The "Warzone" property could be purchased at $200-$225k. I feel like I'm not fully leveraging this 1x FHA opportunity of using Other People's Money to its full potential. Plus I'm a little nervous to deal in such a distress neighborhood without having any landlord/property investor experience.

Any help and advice would be greatly appreciated.

Thank-you,

Todd

[David Beard]

If you're considering investing in a low income area, then you should look for a prop mgr who has proven experience in dealing with this tenant class. It's another world, and there are some PMs that are adept at it. They might charge more, and THEY SHOULD. I'd wonder about any PM who says they can manage in the hood for 8-10% of rents. Ridiculous!

These PMs are very skillful in the Section 8 process, they know the inspectors well, they know the office personnel, they effectively market to this clientele at Section 8 fairs and other events.

They also know how to correctly condition (some say train) low-income tenants. The know how to effectively screen them, since they deal with this clientele all the time. They somehow know how to get them to come up with the rent in cases that seem hopeless. They have ready lists of community agencies, non-profits, churches, etc., that assist low-income folks, so they can instruct the tenant how to seek assistance. They make it clear too them that they need to get help from these sources, or friends and family, and that otherwise prompt legal action will be taken.

They make sure the tenant knows that an eviction WILL be reported on their record. If they're Sec 8, they certainly instruct them on the dire consequences to their voucher if they're evicted. My PM has had one Sec 8 eviction in 14 years of managing thousands of different tenants.

They know how to secure the property, especially between tenants, to prevent vandalism. Having your copper, AC, and electrical wiring stripped will destroy your profits for a long long time.

As a new landlord, I would not go it on my own in this type of area, but with the right PM, it can indeed be very lucrative. Even still, I would encourage you to stay away from pockets where there are numerous (a little bit of this can be OK) boarded up or vacant houses in decay. Your resell value in these types of areas will simply be terrible, and it'll be almost impossible to wring profits out of this tenant base.