Two Houses for the Price of one in Class D Neighborhood

[Mark Millich]

I’m discussing a potential deal with an individual who’s in the process of fixing up two houses and selling them both for $40,000 in total (for sale by owner). They’re both on the same lot, so it’s one property tax. One of the houses is already occupied by a tenant as well with a rent of $600 a month.

The issue – the houses are in a Class D area with a relatively high crime rate. The houses are also over 100 years old. My coworker, who’s also into property investments, has five properties in this area that he bought in cash and is doing very well on in terms of cash flow. He does have some issues, but nothing detrimental. As a matter of fact, the individual selling the properties is someone that my coworker purchased one of his properties from (that's how I got in touch with him). I would obviously get a home inspector in, along with completing a title search and getting an appraisal before purchasing the property. If bought, I would also contract out a property manager. It would be my first property investment, but I’m obviously a little hesitant considering the area.

Thoughts? Thanks in advance for any feedback.

[Nick Giulioni]

There are no free lunches in real estate.  Class D neighborhoods look great on paper but often times are more headaches than they are worth.

I think you need to establish what your goals are.  Is cash flow your top priority? If yes, then these could be fantastic.  Truth of the matter is that you are likely to struggle to finance these properties.  Do you have the cash to leave locked in for the full purchase price?

If you are looking for an equity play, this is likely not going to see much appreciation.  If you are looking to trade up in the future, I would look at higher end properties.

[Mark Millich]

@Nick Giulioni Thanks, Nick. Yes, I'm focusing more on the cash flow for these particular properties. However, overall, I am looking for properties that would have a good equity increase and ones that I could trade up. This deal just sounds decent considering the price and potential cash flow. In terms of funding, I would be going half on the properties with a partner for a down payment and then take out a loan.

[Nick Giulioni]

Originally posted by @Mark Millich:

@Nick Giulioni Thanks, Nick. Yes, I'm focusing more on the cash flow for these particular properties. However, overall, I am looking for properties that would have a good equity increase and ones that I could trade up. This deal just sounds decent considering the price and potential cash flow. In terms of funding, I would be going half on the properties with a partner for a down payment and then take out a loan.

 Do you know of lenders that will go that low for loan value? Most won't. 

Make sure you have significant reserves to deal with issues. You likely will have them. 

[Sean LeBlanc]

This is an issue all investors deal with on different scales.  Cash flow and D class properties go hand in hand.  However with that cash flow comes the caveat of the properties typically being much more management intensive. 

So if when looking at numbers with a hefty vacancy factor, and a decent reserve fund,  and the "juice is still worth the squeeze" - Then I say go for it. 

Just make sure you have reserves! Buying an old rental,in a bad area, with no reserves, is how you become an accidental slum lord ! 

[Ryan J. Shope]

@Mark Millich

Due to the age of the houses, I would be very cautious in buying it "fixed" for $40,000 and thinking that you won't need to put any more capital expenditures into the building. Even if it is a class D neighborhood, the price of those units is likely cheaper than the materials it would cost to build them. Assuming the seller wants to get it off his hands and make a profit, he's likely putting in as little as he can to get it cosmetically acceptable. You will definitely want to make sure the structure of the buildings are good (i.e. no termite damage to the frame, foundation is solid, main plumbing line wont burst on you. 

From one new investor to another, I would be careful biting off more than you can chew. I bought a VA foreclosure on the cheap and it gave me a world of headache for nearly a year. Hope this helps!

Ryan

[Bob Okenwa]

In real estate, you usually get what you pay for. You can change the roof, paint, flooring, water heater, etc., but you cannot change the neighborhood. Tread carefully when considering such properties unless you have a good track record with such investments.

[Dennis M.]

most people on here ( especially west coast) are going to be very reluctant to advise you to do this . I would say the opposite . Because I invest in such areas I have found it to be profitable and the entry price to be very easy . That being said it is not for everybody and it’s surely a bit more hands on . There is a learning curve but You have the advantage of being local and having a local mentor that can successfully guide you through this . I’d Have your investor friend guide you and listen to him . Practice your due diligence and know what your getting into . The low income areas offer a lot of income potential but many investors want an easy check in the mail without the work . Getting loans will be difficult . Owner financing is what you want either that or get a unsecured line of credit to buy them

[Caleb Heimsoth]

@Mark Millich. If it’s truly D class not sure you want that. I own lower income stuff but it’s all in C areas where there isn’t a lot of crime