C/D Class RE Investing

[Nathan Scott]

I have a house under contract that I knew was in a rougher area. However, after speaking with 2 home inspectors they both informed me that this area is “ground zero for gang activity.” The purchase price is $33,800. Rents for $500/month. Cashflow should be around $125/month. Current tenant has payed on time every month for almost a year now. I’m going to speak with the property manager tomorrow and ask if she has other properties in that area and how paying rent usually goes, how long it usually takes to get the property rented again, etc. I spoke with my mentor and he said “Well, cashflow is the main focus right?” And I agreed. He then said, “If the property is cash flowing and the tenant is paying on time then I wouldn’t be too concerned about the area. Everyone needs a place to live. If the tenant is paying on time every month then that’s great. I wouldn’t be to concerned with it.” I know the unemployment rate in this particular city is close to 5%. Vacancy rate from what I’ve seen is close to 10%. Thoughts/guidance/etc? Questions I should ask?

[Jim K.]

@Nathan Scott

Hi, Nathan. This is my area of expertise. I understand the urge to buy a cheap property with a rent-paying tenant in it. I understand everything you're telling yourself about this property. But you're going to get screwed on this place. It's almost a mathematical certainty. Properties described as "ground zero for gang activity" do not get good service by property managers. Many contractors are unwilling to go to those neighborhoods. The only way to make place like this work, usually, are to be there yourself, handling the tenant, handling the maintenance. I think you're setting yourself up for a fall on this property if you go forward. I know of absolutely no one who has a 3-property-or-larger portfolio of SFR that would be described as "ground zero for gang activity" and runs them successfully from a distance, through a property manager or by themselves. Too much can go wrong.