Would this scare you away?

Question

Would be interested in hearing others opinion on how you tend to view these types of situations. I looked at a quad the other day (4 3-BRs). The street was basically all multifamily properties. After looking through one unit there was obviously deferred maintenance. The maintenance guy who also lives there showed us around and told us that the owner rents each bedroom out individually (in most cases - one unit is single occupied). Based on the current rents the numbers look really good. However I think they are getting more income from this type of situation than they would if they rented to one family.

Also, as I was walking the perimeter of the house I was chatting with the next door neighbor who was informing me that the building contains people with criminal backgrounds and has a lot of drug activity. He was very interested in me buying the place so I would clean it up. Said the current owner only cares about the rent check.

Obviously the above is concerning and I'm still trying to gather info on leases and nearby rents because the first thing I'd want to do is get rid of any tenants involved in criminal activity. That being said, would you even consider a place like this if the numbers made sense or would you just steer clear of it? Sounds like a lot of trouble (I'm also a new investor) but at the same time when I see places like this I tend to see hidden opportunity.

Dustin Beam · Answer

I'm of the opinion that the best deals are made by buying other people's problems, from what I've seen anyway.

If the area is decent, the market rents are high enough, and the purchase price reflects the deferred maintenance then I think you should go for it.  You don't often find great property with excellent tenants at a good price. You want a deal? You usually have to fix some problem.

Andrew Clark · Answer

Here are some of the lessons I've learned about renting out by the room in very low-income areas to low-income tenants. For us, all the numbers looked great on paper but our estimations of some commons expenses and issues were off. We underestimated turnover, repair expenses (wall damage, broken windows, destroyed stoves, busted doors), vacancy rates and overestimated % of rent charged vs. paid. We also learned that PM's don't really exist for low-income room rentals. At least not in the Raleigh, NC area. PM's do not want to deal with the constant attention needed.

With all that said, most of our issues could have been mitigated if we were more selective in the tenant screening process. We now screen based on verified income, criminal history (we do not accept violent criminals or folks with a current ongoing history of drugs, alcohol or domestic violence), no evictions in the last two years, and a few other small things. We deny promptly anyone who does not have 2x income and/or recent arrests. Nearly all of our tenants do have a criminal history but they are no longer engaging in whatever behavior caused the arrests.

Our mantra of more people more problems keeps our headache down. We do not tolerate traffic in and out of the house or tenants allowing people to sleep over more than two nights a week. We also eliminate tenants who are causing problems as quickly as possible; either by eviction or cash for keys. One bad tenant will prevent other tenants from paying their rent (they won't tell you that is why they aren't paying).

Bottom line, I would do it and I would pay special attention to the tenant screening process.

Cheers.

Thomas S. · Answer

For a experienced investor/landlord this could be a diamond in the rough depending on the community and the price. For a new investor it could be their first and last property purchase. C/D class properties require a skill set to operate that few new investors have.

A PM for a property of this type is not necessarily a solution. It may require a owner/landlord that cares about success.

Bjorn Ahlblad · Answer

@Scott Lyons You need to decide what you want to spend your time dealing with, and set your limits. If it was a decent area and there was an opportunity to upgrade the place I would ask the seller to deliver the property unoccupied, otherwise no deal.

Matt Crusinberry · Answer

@Scott Lyons, I absolutely would consider this an opportunity. I understand there may be a few hoops to jump through, but if the neighborhood supports it and the numbers workout, I would consider it. Obviously this won't be the easiest project, but you'll be able to walk away with a lot of lessons learned and a decent property. Also, that's another stepping stone towards your goals.  You may want to search out a PM, or at least familiarize yourself with evictions. Also get a contractor to give you some numbers to bring the property up to par, and continue doing your due diligence. Good luck!

Jill F. · Answer

Nope, not if the deal is good enough and the problem is primarily the tenants not the building. I look for buildings that were built as apartments rather than poorly hacked up former single families. If the building is over 60 years old we expect all the plumbing infrastructure to be at the end of its useful life and we expect the purchase price to reflect that reality.

We only do month to month or bi-weekly leases.  I have (recently) found that simply writing down a description of activities that I observed and including it in a non-renewal letter is pretty effective in getting drug sellers to move without a fuss. They know if you call the cops and report them they'll have cops with a search warrant knocking on the door.

We are renovating a building with a bad rep right now... We ask the sellers not to fill vacancies once we have a purchase contract. We let the empty units sit for a couple of months to make sure the bedbug infestation treatment by the former owner was completely effective. You definitely want to have a pest company in if the place is being used as a rooming house. We got rid of obvious problem tenants right away. Usually the real problem tenants are in violation of their lease if they have one... so we told them if they signed our lease we'd work with them and give them some time (30-45) days to get out instead of moving to evict.

The deferred maintenance will start showing up immediately after purchase, you'll learn a lot about the existing tenants based on how they deal with the deferred maintenance issues when you take over as a new owner.

Gilbert Dominguez · Answer

Well if they are all on month to month leases you simply have to give a 30 day notice to quit rent to anyone who you wish to issue such a notice and hopefully they will all leave. For month to month people you do not even need to go through a lengthy eviction process you simply tell them you no longer with to rent to them period. That should be enough legally to get them all out.

Scott Lyons · Answer

@Gilbert Dominguez - I'm not sure I quite understand what you are saying here. My intention would be to get rid of any tenants that are involved in that sort of activity not provide a home for them.

I plan on reaching out to the local government to see if I can find anything out on the property (e.g., # of police calls, etc). I did find out the leases are month to month so it should be easier to get rid of them.

I do dislike the fact that it is pretty much all multifamilies. I would like to see some SFRs sprinkled in among them.

Gilbert Dominguez · Answer

Here is one hidden opportunity you should consider. Any perdon using a property to conduct illicit drug activity can cause the owner to lose that property to authority actions, meaning a police enforcement and court action. Do you want to risk being shut down or losing your property?

You may care about the rents but athorities care about law enforcement and their concerns will take precedent over your concerns, think about that.

Would this scare you away?

Most Popular Reply