How Low WIll YOU Go?

Question

So I wanted to ask the question...

To all you REIs out there, how lowly of a neighborhood will you look to purchase a home in? Not speaking of the home's condition per se, but instead the neighborhood in which the property resides.

I am in Indianapolis, and am looking at purchasing a property that has had tenants for two years for a cash price of $15,000. That is not a typo. Rent is $535 monthly, and that yields a COC% of roughly 35%. A lot of it is the Indy market, and the neighborhood is not bad, but isn't the ghetto.

Anyways, was curious as to what you guys get yourselves into, and how "low" your neighborhood and pricing standards go. Fire away!

Al Williamson · Answer

Neighborhoods are in a constant state of getting better or worse. It's not a good assumption to think that an OK neighborhood will remain that way over the long term. And the same can be said about a "bad" neighborhood - it can become much better over time - especially if it's strategically located.

If you go with this strong cash flower AND you have a long term outlook, THEN consider improving the odds of the neighborhood improving over time by becoming an advocate for the area surround your investment. It is not a good choice for a passive investor, but a wonderful investment for someone who's willing to exercise a little leadership.

Buddy LaRue · Answer

My response is always the same when it comes to investment properties.  I want 100% return on capital gain and minimum 10% cash on cash return with at least $300/month poz cash flow.  As for area, if it's not a war zone, I'm game.   If it's less than a middle class neighborhood but I can still get those returns, I'll hold the property for a year or more, then take my capital gains and 1031 into the next property.

Chris Adams · Answer

If I wouldn't live in the neighborhood I won't invest in it. Pretty simple.

Jordan Meyer · Answer

Where is the path of revitalization headed? If you plan on holding for 10+ years, what do you foresee the neighborhood doing? You can catch significant appreciation if you guess correctly. I know there are many many Lilly employees who wish there was better housing stock closer to downtown so they wouldn't have to drive from Carmel

Yang Xiao · Answer

It depends on the area. In general I'd stick with $700+ rent. However, there're exceptions. One of my first rentals is close to Fountain Square. It was purchased in 2009 for $7500. This small 2 br only needed $5k of rehab because the roof, siding, windows, HVAC were all in all shape. The first year it was rented for $500/month, but the rent keeps going up every year. Now it's $650. In 2.5 years I got all the investment back. The area keeps getting better, so I'll keep this one for a long time.

Angie W. · Answer

I agree with David on this one. My first investment is in an ok area and has provided good cash flow for the last 3 years. I got lucky with my first tenant (until his girlfriend somehow managed to kick him out of his own home and then proceed to trash it) but now I am finding it very difficult to find an ok tenant much less a quality one. So I'm thinking of selling it to invest in a little better area.

There are a lot of "issues" in lower income areas that can cause a lot of headaches, as well as longer vacancy rates if you wait for that "quality" tenant.

Joel Owens · Answer

I don't own any SFR currently but my personal investing style is I wouldn't want to own those properties long term.

Now if I can buy and then immediately resale for a flip to a cash investor for profit I could see that but I would want long term holds to be better quality assets.

Everyone has to start somewhere and if that is all you can go with and as you said it is not a war zone or the ghetto than it can be a stepping stone to better areas.

It seems as investors get older and gain capital and cash flow they have more of a flight to quality and preservation mode to keep what they have and be more reserved with investing. They still might take say 10 or 20% of their portfolio holdings and be risky but nothing to take them under or cause a gigantic headache when they do not need it.

Hope it helps.

David Moore · Answer

Hi Clay, I'm from Indy also, here's my take. I have 2 SFR homes located in "ok" areas. Not good areas but there are certainly far worse around town. I have a much harder time finding good renters there. If you screen properly, you find you don't have the high quality tenants looking to rent in these areas. So you end up lowering your standard a little and have to settle for folks who ride the line.

I am fortunate in that I currently have people who keep the places clean. But I am always wondering if the next set will trash the place. I also have the most "hassle" factor with these. Though the homes are in great shape, I get calls regularly from these tenants for maintenance issues, asking to pay late on the rent, etc.

When you finally do get someone who trashes the place, the extra rehab cost and the increased vacancy rate begins to erode your returns. I believe your risk exposure is much greater in general. It might be quick, easy cash now but in my opinion, if you are in this for the long haul, you will get burned out managing properties in problematic areas as you have to fight much harder for that money.

Mike D'Arrigo · Answer

Hi Clay,
	 I know Indianapolis very well and do a lot there. That deal would scare me away. I don't deal with anything that doesn't bring in at least $700 rent and preferably $750-$800 because of the caliber of tenants you get. It may be that it has a good tenant now but I'd be concerned with what kind of tenant you can get when they leave. Tenants don't stay forever. The other thing you need to watch out for is what kind of deferred maintenance there is. A better plan might be to buy something in a better area with financing. Your cash investment would be about the same but you'd have higher rent and therefore better cash-on-cash return. If you want to send me the address of the property, I'll be happy to check it out and let you know what I think.

Best wishes,

Mike

Patrick L. · Answer

For me I try to stay away from any property that won't bring at least $650/month in gross rent, which is something I can still do with properties in that price range.  Why has the property sat empty for so long?  Is it in terrible shape or is there no demand for it?   I lived in Indy for a few months (that was about all I could take) about 10 years ago.  While there I helped out my friend's dad who had a bunch of rentals in the 10th & Sherman area of the near east side and he had a really hard time keeping anybody in them and ended up just dumping most of them real cheap.

How Low WIll YOU Go?

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