Buying in rougher areas

[Joe McGovern]

Hi BP!

I am looking for my first investment in Des Moines, Iowa (I live about 30 min away from DSM). I have found a property on the MLS where the numbers work great, but the property is located in a rougher area. This house itself was recently remodeled and is pretty much move-in ready. The houses around it look a little rougher. The house faces a park and is right next to a library.

I'm wondering how all you experienced investors weigh the factors of numbers working vs owning a property in a rougher area. What would cause you to pull the trigger on a property like this? Would you always avoid it? Do you think this is a good or bad idea for my first investment?

Thanks in advance for the help!

[Nathan Gesner]

I would rather be the ugly house in a nice neighborhood than an average or below-average house in an ugly neighborhood. Location makes a big difference.

These rough neighborhoods may look like they cash flow well on paper but they can be real losers if you aren't experienced and hands-on.

[Daniel Haberkost]

Originally posted by @Joe McGovern:

Hi BP!

I am looking for my first investment in Des Moines, Iowa (I live about 30 min away from DSM). I have found a property on the MLS where the numbers work great, but the property is located in a rougher area. This house itself was recently remodeled and is pretty much move-in ready. The houses around it look a little rougher. The house faces a park and is right next to a library.

I'm wondering how all you experienced investors weigh the factors of numbers working vs owning a property in a rougher area. What would cause you to pull the trigger on a property like this? Would you always avoid it? Do you think this is a good or bad idea for my first investment?

Thanks in advance for the help!

 Hi Joe, I don't own any properties in rougher neighborhoods but I have managed them in the past for others. My experience managing them is exactly why I don't own any (even though numbers look great on paper). 

Sure, some people make a killing off of low-end rentals but it is extremely time intensive and you would need to have your systems/processes firmly in place. Being that this is your first investment property it would likely not be a good place to start (unless you have some prior experience in management). 

Also, how long has the property been listed for? It's a challenge to find a turn-key property on the MLS that cash flows.

[Noble Willis]

Hi Joe
You'll need to weigh the risk versus reward.

I have a Quadplex in a rougher area, which has done well due to 3 good long-term residents.  But if my fourth unit was a single unit and I based experience on the 2 turn overs this last year in it -- then I'd be underwater.  Not just from missed rent, but damage/repairs, costs of eviction, etc.

After numbers that work for you, finding a good residents for each door you have is key to success.  As the others have noted, for a first investment it may not be the way to get your feet wet.

Best of luck

[Joel Owens]

Really, really think about this..... There are a lot of cheaper houses in rougher areas but not many below market houses in nicer areas.

WHY is that? It's because buyer demand for value growth along with rent growth long term tends to be in the more desirable areas.

The low end areas buyers many times purchase hoping for high cash flow only to land problem tenants that don't pay and wear down already old and outdated properties. Having a fixed up property in a bad area is usually a bad investment. The properties expensive items are generally not replaced and the seller is putting lipstick cosmetic on it like shining the outside of the car but the motor and transmission is fixing to go out.

There are investors that can make these rougher properties and locations work but few and far between. There are investors that gamble on transition areas. These are areas in a state of flux that can either become better areas over time and the investor wins big or they can fall back into war zones again.

I see that as gambling and if you do that you might only want to make it a very small fraction of your overall net worth to invest.

[Gerald McCullough]

Daniel being that you’ve managed property in those areas. What are some ideas you can think of that can improve that creates win win outcomes for everyone before the late payments, damages, and evictions? 

example: gift card if you keep if you pay rent on time 3 months. As a reminder you send weekly notifications. 

Originally posted by @Daniel Haberkost:

Originally posted by @Joe McGovern:

Hi BP!

I am looking for my first investment in Des Moines, Iowa (I live about 30 min away from DSM). I have found a property on the MLS where the numbers work great, but the property is located in a rougher area. This house itself was recently remodeled and is pretty much move-in ready. The houses around it look a little rougher. The house faces a park and is right next to a library.

I'm wondering how all you experienced investors weigh the factors of numbers working vs owning a property in a rougher area. What would cause you to pull the trigger on a property like this? Would you always avoid it? Do you think this is a good or bad idea for my first investment?

Thanks in advance for the help!

 Hi Joe, I don't own any properties in rougher neighborhoods but I have managed them in the past for others. My experience managing them is exactly why I don't own any (even though numbers look great on paper). 

Sure, some people make a killing off of low-end rentals but it is extremely time intensive and you would need to have your systems/processes firmly in place. Being that this is your first investment property it would likely not be a good place to start (unless you have some prior experience in management). 

Also, how long has the property been listed for? It's a challenge to find a turn-key property on the MLS that cash flows.

[Michael Peters]

Its nice to meet a fellow DSM Investor.  Des Moines does have many lower income areas that are still great neighborhoods to invest in but this can change from street to street.  Before pulling the trigger I would recommend looking at local crime reports targeting violent crimes and walk the neighborhood.  If your not comfortable doing so or see some troubling things I would think twice about investing there.

Regarding recently remodeled properties a lot flippers in the area do pretty shotty jobs on these lower income places.  If you can't tell yourself you should be able to make that determination with a good inspector during your due diligence.  Make sure to be present and make use of their time with plenty of questions.  Good enough typically will only cost you more down the line when things start to break.  But if the numbers work they work.  Just make sure to budget for higher repair or cap ex.

[Chase Keller]

Hey @Joe McGovern,

That's a great question.  There's a lot of variance to 'rough'.  I live in the Des Moines area, but came from market that had large neighborhoods that are were worse than anything I've seen in Des Moines.  That's not to downplay the rough areas though, I no longer buy in what I consider 'rough', but my rough isn't the same as someone else's rough. 

The biggest issue is to have the right management in place.  Not all property managers can handle the rough areas either, which will make the problem even worse. 

I can give you more specific thoughts and ideas if I know what neighborhood you’re looking at. Feel free to throw on here or in a DM