$20-30k cash for c-class properties. Worth the headache?

[Tiago Martins]

I am thinking about buying single family homes in a C class area. I have found $20-30k homes, that I would pay cash for. These areas generally rent $500-800/month. I would be cash flowing 2% or greater. They aren't desirable school districts, but people still live there and raise families there. I know getting rent might be an issue, but I've heard of people offering cash for keys. Also have read books on section 8, where they say people don't want to lose their benefits, so they tend to follow the tenant rules better than non-section 8 tenants. My theory, although naive, is that if a $30k home brings in $600/month (2%), and the tenant decides to not pay rent for 6 months, it drops the 2% to 1%, which is better than a $150k home bringing in $1,200/month. I could take that $150k and buy 5, $30k properties renting at $500-800 a month. That means $2,500-$4,000 a month. That would give me room to risk a tenant that doesn't pay. Is that an idiotic thought process? I need some guidance.

[Ozzy Smith]

I love this debate!  I personally buy these all day and twice on Sunday for the exact reasons that @Jeffery Waicak pointed out.  Just because the neighborhood isn't in a good school district doesn't mean that good people don't live there.  Nobody ever sees themselves as lower than the next guy. The tenants that I have in these neighborhoods live there because they want to live there or that's simply all they can afford.  They are trying to hustle to get a better life and do take care of things (to their standard of living) or they are "comfortable" and the same for them holds true.  Either way as long as I can identify my tenant as 1 of these 2 groups then I'm good.  My biggest problem I have with them is I have to drive to pick up their rent because they don't have a bank account and pay cash.  I've recently established that as a good thing because that's when I discover the issues that I have.  They invite me in each and every month so I can do an unofficial inspection of the property which is good because most times they don't call me for repairs because they are afraid I won't re rent them the property for being a headache.  I don't fix things nice but my properties are nicer than they are accustomed to.  I know also that a lot of cap x issues can be managed if you address them up front.  If everything is new it's quite a while till you need to replace it.  Drywall and paint is cheap and I never use carpet.  If my roof, furnace, electric, and plumbing is new it will last for about 20 years.  I buy houses for 5-10K gut them to the studs and rebuild basically a new house.  I can do this at about 20-25K every single time and rent for 650 - 700/m.  Lets do the math

vacancy 10%

repairs 10%

Cap X 10%

Taxes/INS 25%

Prop MGR 10%

Setting aside $130/m for 20 years = $31,200... I can COMPLETELY rebuild that house again if I have to!! That is still using a property manager and factoring 10% for vacancy (which I'm nowhere near). That leaves me $225/m profit for 20 years = $54,000. Even if I have to sell it then for $20,000 I can do it easy for a total profit of $74,000 in 20 years on a $30K investment which after factoring depreciation and all of the other tax benefits is well over 10% ROI (not counting appreciation of the property) which is my worst case scenario. These are the numbers on one of my SFR in my portfolio currently. I can get close to 20% ROI on my duplex and even higher on 3 and 4 units.

The other thing I saw in this post was referring to a C neighborhood as "The Hood".  This makes me laugh.  I define my neighborhoods as

A - best school where everyone wants to live

B - Upper middle class where most of us live (mostly homeowners or working pros that rent)

C - Lower middle class (about a 50/50 mix of owners and renters maybe 40/60)

D - Low income (mostly sec 8 rentals but not afraid of getting shot usually)

F - Don't go there unless you are packing heat

Just because I don't want to live in a C or D neighborhood doesn't mean I won't invest there or feel unsafe.  For some that is where they were born and raised and where they will die because it is home.  That's where my workers live... that's why they are workers and not the business owner. If they are good enough to work for us are they not good enough to rent from us? - JUST A THOUGHT