Buying a Block?

Question

What do you guys think about buying several properties on the same block? I'm about to close (God willing--this has been "about to close" for almost 3 months now, but this time I think it's really going to happen!) on an awesome triplex, but the rest of the street is largely duplexes, a couple of which appear to be abandoned. There is HUGE growth potential in the neighborhood (remodeled houses are selling for a good 2-3x what non-remodeled ones are), and I'm intrigued by the idea of improving the value of all of my houses by improving the value of any of them.

Anyone have experience or insight on buying several properties on the same block?

Christopher Leon · Answer

A broker I met knew an investor who owned a property that was currently under rehab; The broker had a pocket listing in the same neighborhood, virtually the same house. He ended up telling that investor about the house and suggested he buy it because he could then control the outcome of what he could sell the house for or rent due to having a solid comp under his control. Now I don't know what the outcome of this was, but the idea stayed with me and I feel that it kind of fits here. If you did buy these, could you then use those houses as leverage against each other to bump up the market rent in your area? I guess this is a theoretical question, but I thought it had some bearing in this discussion and may be useful. Good luck.

Tom Goans · Answer

@Lindsay Wilcox,

Please Be Cautious. Don't let dollar signs cloud your judgment. Conduct thorough research. Just from the little amount you wrote in your post, I see red flags. To list a few:

• "HUGE growth potential"
• "awesome triplex"
• "...couple of which appear to be abandoned."
• This is my opinion and experience: if the market is hot or trendy, you may be too late to the party. The best investment opportunities come during the making of the trend, not at the peak.

I have been associated with buying every property within several blocks. However, the plan was to demolish every property, not rent the existing ones.

Good luck.

Garland Davis · Answer

I live in Ybor City, which is a historic/entertainment district about two miles from downtown Tampa, FL.  It was a neglected area ridden with crime and drugs for decades.  A friend started picking up properties 7-8 years ago and now has about 15 within a few blocks of each other.  He's done really well as values have steadily risen.  It's also a trendy, upcoming area that's walkable so he's been able to make several of them vacation rentals.  Most of the homes he bought were vacant/abandoned and as he's fixed them up the values of his other properties have gone up.

A lot of factors have to come together for that to work as others have mentioned.  This was the perfect area so be sure to do your diligence and take into account the things that have already been mentioned.

Jeff Kehl · Answer

I own several properties in the same areas, some next to each other and I find it does help because a) I make sure they're well maintained and b) if other properties were to be neglected in those areas, I would look into purchasing them.

However these were already nice neighborhoods to start with. As others have said, one investor trying to change an area's image can be very difficult unless you have unlimited funds.

Early on in my real estate investing, I bought a bunch of properties in a town called Miller Beach, Indiana. It's nestled in the sand dunes with views of Lake Michigan and commutable to Chicago. The drawback of it is it's technically a neighborhood of Gary, Indiana with all of the crime and financial issues that go along with it.

After about 5 years of investing there, I decided it was unlikely things were going to change there and started selling. As I was doing that the county restructured and property taxes went way up killing most of my profit on the ones I hadn't sold yet.

So I would probably not try that again unless there were external forces I knew about that were already working to change the area.

My suggestion would be to get very familiar with the local government and chamber of commerce in the area and see what is going on. If new businesses/retail/colleges are expanding or moving into the area then I might be tempted.

Kyle Hipp · Answer

I have considered this and do not feel I have the capital to handle the risks at this time. If I were to own 10 properties on the same block all across from each other 5 on each side of the road, this is the way I looked at it. First I would target an area like you described. This would require roughly $200,000 minimum just in rehab and remodel costs by a rough estimate. It would also require purchase money of some sort although in a neighborhood such as this it has creative financing opportunities. There would be a lot of conversation among the neighbors I would imagine which would be a factor in rental rates with the direct knowledge that I would own 10 properties. Property owners in the area would also have a greater incentive to apply pressure if something was not kept up with this knowledge as well.

This has all assumed that I would be able to aquire all these properties in order to bring about the positive change in the neighborhood. 2-3 property owners that don't care to sell or want to leverage an unreasonable price or are satisfied with the cashflow from a deteriorating property ciuld cause big problems.

Then once owning the properties yiu carry this risk as others have mentioned of weather related issues. Another problem that could be an issue that was not mentioned is road work or city utility work and the special assessments. We just had one property with sewer lateral work that ran $1,980. That would be a $20,000 bill when road work is done, not to mention 10 properties of inconvenienced tenants.

I always plan conservatively and would need a sizable war chest and a very detailed plan of action to tackle something of this scale although I would love to do In the future.

If you do want to get into a neighborhood such as this with just a couple properties this would be less risky as you can diversify your propertues in other locations. Down the road you can build up more properties in the location but would most likely miss iut on some of the gains but it might be the safer route.

Roy N. · Answer

Deborah:

How true ... on the block where we have three properties in  "UniversityVille", we are always trying to figure out which house would be a better fit for each applicant.   Frequently when a prospective tenant shows to view one property, I'll ask them to take a walk next door - or down the street - to have a look at another option.

Deborah Burian · Answer

@Lindsay Wilcox - all great responses above.  In the early days, I shared @Bill Gulley 's issue with physical proximity.  We live in tornado alley and it was easy to envision one bad storm wiping us out.  As  it is, everything we own is in  a 5 miles radius and sure enough, we got thumped pretty good by a hailstorm two years ago. But two years ago we were big enough to write the deductible checks and shrug it off.

This year, I bought most of a transitional block and I'm eying sections of the rest.  It has taken all of my experience and patience to manage what essentially becomes its own community. I took the leap because the price was right, the area is undergoing a renaissance (and this block isn't that bad to start with)  and I happen to know that the city is going to focus its community block grant funds on the seedy neighborhood between me and a local arts hotspot this year.

One small example of it being more difficult: the proximity of the 5 buildings complicates the tenant selection process. We really have to think about how each candidate will fit in to the community and at the same time be conscious of all the usual fair housing rules. Just because I think a crying baby on top of a night shift worker might be a bad idea doesn't mean I can automatically screen out an infant.

Short answer is that at the right price it can be an effective strategy.  It is, however, an order of magnitude more difficult than happy sfh's in stable neighborhoods.

Bill Gulley · Answer

Putting all your eggs in one basket?  Physical and economic risks....

How are storms in your area? You realize that if there are any services lost, like electric, all your tenants are out. Do  you fully understand the social aspects and responsibilities of overseeing a neighborhood as opposed to just a couple rentals in a neighborhood?

I'd suggest you look at a large public housing development and the issues of public perception, which steers your marketing abilities regardless of rent pricing, low, low-moderate or moderate.

You also end up competing against yourself, one unit will always be more desirable, you'll learn to stager rents and not show some units until others may be rented.

It's great to go in and redevelop an area, improving and increasing values, but it's not just dependent on the dollars like looking at the ARV of one property. Public perception is slow to change. It's as much a social study as a real estate matter.

Better think in larger terms as well, one block is not really that significant if the area is defined by adjacent blocks in poor condition or by say, an industrial area nearby. Your analysis needs to go from the city, down to areas, down to neighborhoods, down to a property, look at the big picture.

There is a reason that block went down hill, why did it happen and can you cure that or those issues. Paint and flowers are nice, but they may not cure the issues.

Now, if you can pull it off, there are great possibilities and advantages, but it's not usually as easy as fixing houses, but it's a start. :)

Pat L. · Answer

@Lindsay Wilcox as I said it was some time ago & I couldn't definitively say why they rejected us other than they were adjoining properties.

But because of this & the need to close fast we went with a mortgage broker & priv money. These homes were not vacant but were in need of some repairs, though the latter was not the issue. One has since been sold (regretted that) & the other is very valuable now.

Al Williamson · Answer

Ned, thanks for the introduction. @Lindsay Wilcox

I'm excited for you. You're getting lined up to be a Catalytic Landlord; meaning you can position yourself to speed up the neighborhood's improvement and capture the financial rewards for doing so.

There is too much to share here. Check out my BP blog or my home blog to learn more.

Best to you!

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