Should you buy in a bad part of town?

Question

I live near St Louis,MO and see so many big old homes for sale in the $20,000 to 40,000 range. What advise would you give to a newbie looking to get started? The zip code I am referring to is 63115. I am looking for cash flowing rentals.

Jacob Pereira · Answer

Not familiar with that particular area, but I'll tell you this: in my experience you can make a lot of money solving the problems others are too scared/lazy/ignorant/etc. to solve themselves. I generally invest in lower-income areas of Austin, and it has worked well for me. That being said, lower-income here means $200k, not $20k. A roof/fridge/foundation on a 2000 sqft house costs approximately the same anywhere in the country, and the work involved with poorer renters tends to be more involved, so if you're not getting MUCH higher margins than you would in other parts of your city, don't bother.

Account Closed · Answer

Not worth it to me. But there are plenty of LL that do.A lot more problems so more time involved. But also return on investment is better.A gamble for a newbie, but can be a way to learn the business.And go for the smaller properties. Easier and cheaper to maintain. And the tenants have a better chance of affording the utilities so they have enough left for rent.Also less children so much less damage.Also in some areas I have seen a lot of old large homes for cheap.By the time you bring them up to code and fix everything for a good long term rental.You have invested more money in them that what it would sell for.So the only ones it works for are the true slumlords.Just have to be careful what you buy. And does not pay off longterm to do patch work repairs. So add in what it takes to fix the property so you can get decent tenants.

Linda S. · Answer

If you do section 8, it's a whole new ball game IMO from low income. I have a neighbor of our duplex, who is on section 8, who has essentially bragged to us about "not paying rent until the door screen on the storm door gets fixed"... stuff like that. .. it's a different mentality .. I agree with Thomas S., the profit is there, but it comes with the stress. I tell everyone that what I get in rent, I pay in stress!

Jared Watson · Answer

wait for the right one, there's no rush to possibly loosing money👍

Linda S. · Answer

@Pino Alu, an important thing to remember-- *YOU* decide on your tenant. YOU are deciding what income/rent to use, YOU decide who you rent to... There are a lot of good people that need or simply prefer a lower income housing, just because it frees up cash flow. We have tenants on social security/disability, and they are great! Others.. honestly most just need to be taught, but are catching on and just need to learn the process, and we're making extra in late fees.. I agree with @ @Jacob Pereira, you can make a lot of money going to places other are afraid to touch. Don't forget the human element too, everyone--regardless of income, wants a nice place to live. Don't be a slumlord, slumlords are ones with trashed places because the tenants don't give a crap b/c the owner doesn't, it goes full circle. IMO Risk will always follow reward... but again, just know what you're getting into... If you're buying house around $20K, you are buying the land, and you should fully expect to replace nearly everything, the market isn't stupid.. it's expensive, but if you have the determination, and the ability.. you can do it!

Michael Noto · Answer

@Pino Alu Simply put, if you are looking for an amount of work equivalent to having a second job then chasing the cash flow from a low income property will work for you.Keep in mind that returns on paper are just that. On paper. You will need to manage these properties like a hawk in order to even come close to the projected cash flow returns.

Dante Pirouz · Answer

I use Trulia.com's crime map to look up any address I'm evaluating. It gives you a heat map on the severity of locations and is pretty close to accurate given what I know about the neighborhoods where we invest. Just keep in mind, that if you have a bad (red) zone across a major barrier (main street, etc.) and your address is in the green, we have found that this is a relatively safe location even if it is very close to a potentially bad area. Like was said previously, crime works in tight pockets in working class neighborhoods.

Tommy Sowell · Answer

I started buying properties in bad area of San Diego 20 years ago. I learned a lot and there is far more problems in poor areas but there is money to be made. What saved me was having a business partner to help with all the problems and figure out some of the bizarre things that happened. I think having a partner helps when your starting out. I still have the same partners 20 years later.

Brooke Leach · Answer

Personally, I would try to stay away from buying in bad areas. Rehabbing the property isn't any cheaper, and you usually aren't able to sell it for what you're looking for. Also if you choose to rent it out, odds are you won't have the best selection of tenants if there is no demand for the property. At the end of the day you have to decide whether the "deal" is worth it in the long run.

Jeff B. · Answer

Cheap acquisition costs for REI typically run into more maintenance, time and effort to keep rented and in the long term the profits diminish to break-even or ultimately red-ink.What's your threshold of pain - - have you managed any rental before?