Buying in a rougher neighborhood

[David Fischer]

Hey y’all,

I’m looking at purchasing a 6 unit apartment complex in a rough side of town. This side of town is known for higher crime rates and is just plain rough. I don’t live in the area so I had a family member drive by and tell me what she thought. Her description was the building was scary and made her feel pretty uncomfortable. There were windows boarded up and an eviction notice on one of the doors.

The sellers realtor tells me the property is being managed by a professional property management company- which I’ve tried to call but haven’t been able to get ahold of them.

The property has been on the market for awhile and I believe I can get it under contract for a good price. After running the numbers I’m looking at an 18% cash on cash return and a 27% total return.

What do y’all look out for when investing in the sketchier neighborhoods.. what risk do you take on.. and what do y’all do to reduce the risks? Or would you avoid this even if the numbers make sense?

Thanks in advance!

[Greg Kasmer]

David - If I were you I'd call around to 5-7 property management companies and get their opinion on the building and basically ask if they would manage the property for you. Their reaction should go a long ways to informing your decision. (i.e. "We don't manage there" or "Sure, we can do it"). I would also share with them your approach to improving the building (i.e. business plan) to see if they feel confident they can execute the plan for you. Additionally, they should also be willing to help you refine your underwriting and assumptions to see if your returns are reasonable. If you get 2-3 property management companies that are capable, I think that would be a good sign. If you get 0 or only 1, I would be hesitant. At the end of the day, they're going to manage it and their feedback speaks volumes.