Buying rentals in semi warzones???

[Mike Nelson]

It's seem like a lot of people that I've talked to aren't really interested in purchasing rentals in rough neighborhoods. My question is why not?

I was just looking at property that was in good condition listed for $35k with a 71k ARV. It's will probably need about 5k to get in in rental shape. If I was to purchase this I would take out a hard money loan for 35k and put my own money 5k in it for repairs. After 12moths I would do a cash out refinance. The total rents for this property is $1200 a month, this is a duplex.

What do you guys think?

[Michael K.]

With risk comes reward. However, sometimes the risk is too high and the reward is too low.

I cut my rental teeth working for my cousins with their Class D properties. Nearly all (all but two) were in war zones. One was in a semi-warzone / "transitional neighborhood."

Sure, the numbers look good. But I like to call the return a "theoretical return." Here are examples of what I encountered:

1. Stolen garage door. Yup, the tenants stole and scrapped out the overhead garage door.

2. Broken windows and doors. Okay, I see you yawning. But we replaced at least 1/4 of the windows in EVERY dwelling unit yearly due to ill-behaved children, rocks, bricks, gun fire, etc. That adds up. Doors get kicked in, locks get ruined, and entire door frames get splintered. FYI, screen doors are nothing but a waste and WILL get trashed in VERY short order.

3. Bad applicants. I'm not just talking bad credit. I'm talking horrible credit with multiple evictions, no to grossly unstable work history, long and violent rap sheets, sex offenders, drug abusers/manufacturers/dealers.....

4. Stupidity. So one of our tenant's stoves dies. They call at 5:00 pm when the maintenance guy is eating supper. The next call at 6:15 pm was from the fire department. The tenant dragged a Weber charcoal grill into the LIVING ROOM and decided to cook "out"... Indoors. Unfortunately, the were stoned out of their mind, passed out, and the building caught fire.

5. Property used for illegal purposes. I'm not talking about someone quietly fixing neighborhood cars for cash in the garage in violation of zoning ordinances. I'm talking discovering that tear gas from SWAT gas grenades is IMPOSSIBLE to clean out of drywall.

6. Disgusting. Ever come upon the remains of a dog that was cooked in your tub by a bunch of squatters? Or people using the shower as a toilet?

7. Trashed places. How many dumpsters will you need when you need to do a complete clean-out including ALL flooring, carpeting, cabinets, counter tops, and trash? You might be surprised...

8. Copper and aluminum siding theft. As Josh said and as our garage door proves, scrap's worth money. We eventually cut out the copper ourselves and replaced it with that new poly-whatever hosing. It's not as nice but now the tenants don't take a stolen sawzall to our plumbing. (We show EVERY new tenant how we "upgraded the plumbing" by getting rid of that "old cruddy copper" and replacing it with "better plastic." You should see the long faces when they realize what we did!) Aluminum siding is another one. We're switching over to vinyl whenever our aluminum gets stolen.

9. Do-gooders. Bless their hearts, they have NO clue as to what REALLY goes on. Worse yet, they try to "fix" things based upon a worldview that doesn't exist. While their hearts are in the right place, they took leave of their brains in their first sociology class. These types generally find ways to be troublesome and are best avoided. (Ever have a tenant advocate show up in eviction court to argue that it was okay for the tenant not to pay rent because they were trying to give their children "a good Christmas?" Or have them file a complaint with building services that your building doesn't have siding - when the TENANT was later found to be the one stealing and scrapping out your aluminum siding?)

10. Safety. This covers everything from very aggressive panhandlers to prostitution to drug dealing to robbery to poor race relations to rape to murder. You're going to have to collect rent, and your tenants may not qualify for a checking account. Expect to be paid in cash and weird money orders from the corner bodega. And expect that people will know when you leave with lots of rent money in your pockets. And you'll be collecting after dark because that's when the tenants are awake (or less commonly, around because they're home from work). I advise taking a firearms training course that covers your state's laws and toting a quality RELIABLE firearm.

FYI, I now refuse to handle anything worse than a Class B property.

You've got the possibility to earn a solid amount of money with Class D properties. But man, you're going to earn EVERY CENT.

Mike