What is your tolerance for bad or below average areas?

Question

Do you guys only buy in good areas?

Does anybody buy in bad areas or below average areas?

For instance, property is close to "druggies " area....

An appraiser came to a unit and there is a passed out tenant on the couch.

Would you buy the property?

James Wise · Answer

Working with low income properties is as savage as it gets. You've got to be a battle ready landlord at all times. If you are getting into this business & are uncomfortable dealing with constant stress and unrest with your customer base no matter what you do this ain't for you. I've dealt with 1,000's of them & they will do some wild stuff. The most important thing to do is set firm rules about rent collection & enforce them at all times. If rent is late for any reason we evict. Doesn't matter why. If the tenant says they can't pay because grandma got cancer it doesn't matter whether it's true or fabricated. Same thing with job loss, sick children, injury, car trouble etc.....None of it & I mean none of it matters. It's black & white. They pay in full or you remove them immediately. Even on Christmas! Running the business any other way is a recipe for disaster.

Marcus Auerbach · Answer

Hell no.

A lot of people will disagree with me, but once you understand the full financial picture over the life cycle of the investment including capex you will understand why some call it fools gold. That does not even consider what this will do to your life. Working currently with a client who went down that path a few years ago and is now desperatly looking for a way out and trying to sell the vacant properties without loosing his shirt.

Erik W. · Answer

As others have indicated, we don't want "bad" areas.  But the first step in a question like this is to clearly define terms.  What is "bad" to one person is "marginally okay" to others, and to still others....a warzone.

I rent exclusively "Class C" homes, which I define as "clean, safe, and functional."

The neighborhoods do not appreciate, but they cash flow positive after all expenses, vacancy, debt-service and CapEx between $100-$150 per month per door on an "all in" investment of $30,000 or less.  "Pigs" some call them.  Low-income housing is my term of choice.

I don't carry a weapon, nor do I feel the need to.  I would not invest somewhere if I felt I needed to conceal and carry.

So hopefully that sets up some basic parameters.  My family would not want to live in one of those units.  But it's exactly the kind of situation I lived in during college.  The worst incident we had is when a doofus from next door cut his hand up badly smashing a window when his girlfriend locked him out.  He staggered over to our back door and bled all over the place, then wandered off.  We cleaned it up (wearing gloves & face masks)....lots of bleach.  Called the cops.  Nothing came of it.

One of the major challenges I see with investing in "nicer" areas is the cash flow is often much lower compared to the amount invested, so unless you're willing to get deeply leveraged upwards of $1-3 million, it takes forever to get any sizable amount of units.  Also, nicer areas tend to lose value during market downturns, whereas my base-line units barely fluctuate at all.  The house that was $30K last year is $29K this year, and next year it will be back to $30K or $31K.  There is no boom or bust in low-income, because you can't go much lower, so we get all the folks who "trickle down" from nicer units.

Also, nicer units demand more frequent upgrades.  How much cash flow gets eaten up every 5-10 years repainting to trendy colors?  How much spent upgrading the kitchen? ($5-$8 K)  I paint all my units the same color, and the kitchens are 40+ years old in some cases.  Used appliances vs. new stainless steel or whatever is "hot" today.

I'm not anti-Class A or B, but I simply find that Class C offers the advantages of good/great cash flow and the negatives (i.e. more tenant-intensive) can be handled with a combination of careful screening and staying on top of issues.  Hands-off, carefree land lords who want nothing more complex than "mailbox money" need to think carefully if they want to swim in these waters.

Josh Caldwell · Answer

Personally, I don't do bad areas, but that is a personality issue. I have a low idiot tolerance.  So to keep myself out of jail, I shouldn't own war zone property.

With that being said, there is fantastic cash flow in horrible neighborhoods. There is actually an inverse relationship between neighborhood quality and cash flow.  That is why people tend to flip in great neighborhoods and buy and hold in crappy ones.

My personal strategy is to buy and hold in blue collar neighborhoods where people have jobs, but not high paying jobs that would allow them to become home buyers.  I like dealing with adults who can take care of themselves.  For that privilege I am willing to sacrifice some cash flow, in order to maintain my sanity.

I hope that helps

Josh

Pat L. · Answer

We have done very well over the last few decades holding contract for deeds etc on B-C properties. Most of the 'investor/clients' appreciate the situation, rehab it, live near it, manage it & make it work. Some have paid us off & have created a nice passive retirement income.

Personally I wouldn't buy such properties without this exit option but we have found a lot of savy investors who know how to make these low income properties operate in the black. Admittedly some have failed but there are many ready to jump in & make it work. Some of these same investors have each contracted >5 properties from us in C areas & have turned each one into a cash cow.

In fact one couple bailed after a stint of bad tenants (they chose) & yet the new investors evicted & made it work. Ironically the wife of the couple that bailed is now renting a unit in a duplex they once 'owned' & her rent is equivalent to what they once made clear from that property each month when they were running it.

I never under-estimate those that can run C grade properties at a nice profit.

Mary Jay · Answer

Thank you guys so much! I really appreciate your help!

Caleb Heimsoth · Answer

@Mary Jay. I wouldn’t buy in a well known drug area.  I think C class is fine if the crime in the area is relatively low.

Josh Oaten · Answer

@Mary Jay

I am currently assisting a group purchasing 100-200 units out here in Phoenix.

We look for areas that are above a $36k median house hold income with medium to low crime. We do this by using Trulia crime. If an area is a mid crime level but has had recent shootings we won’t do it. If the area has over 1200 crimes in a specific crime category we don’t really like this.

For example down here in Phoenix, we won’t buy anything in the Maryvale area due to the above criteria.

Maybe take a look into this type of thing by plugging the properties zip code into

1. American fact finder and hit the income tab to see the MHHI

2. Trulia and then the crime tab to see these stats for the area

Jill F. · Answer

We have great tenants in some less than great neighborhoods. In the last 3 years, we've done one eviction. Currently, I have two tenants on a payment plan and neither are more than two weeks behind. We provide decent housing with nicer than usual ammenities at fair prices. Since we buy multi-family, the properties are primarily appraised based on how much rent they generate rather than on neighborhood comps. In the past three years, we've been able to raise rents on turnover 20-25% after our updates. We figure initial updates into our purchase price and we keep our upgrade costs low because my husband has mad carpentry skills and can fix anything (he hangs a lot of doors), we also have a great handyman that can do plumbing which my husband hates, re-rope old windows, hang blinds, and diagnose and repair appliances. For that matter, I paint, and install tile, laminate or vinyl plank.

I do mostly month-to-month leases and I have "non-renewed" armed drug dealers, a girl with a "rescue" pit bull that was not housebroken, a couple where the guy had "anger management" issues that he took out on the doors (and refrigerator-- that had to hurt), and a psycho that killed the neighbors kittens. The one eviction was a case of NPD who right up until his eviction just didn't understand why we didn't want to renew him-- the self described "best tenant we ever had"

I guess that probably meets @James Wise definition of savage but most tenants are great, it's just that the savage ones are where the stories come from.

BTW, all my "savage" tenants were inherited except the armed drug dealers and they moved in with the girl I actually rented too ;)  ... Uh-Oh I re-read the last sentence and sound like the landlord version of one of the "innocent" guys in prison.

Still think its fun.

James Galla · Answer

I think the answer is staring you in the face. Before even looking into the "bad" areas, you should consider whether those areas and the people that live there bother you. For instance, when you drive through, do you feel the sensation to lock the doors, roll up the window, and get out of dodge as fast as possible? If you have that sensation, run for the hills.

In fact, I think you were already triggered because a tenant being passed out on the couch probably shouldn't be worth mentioning.

What is your tolerance for bad or below average areas?

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