7 House Package Deal- What am I missing?

Question

Okay. From the 50% rule to the .02 rule, this deal is great. It's 7 SFH that has combined rent for $2850/month asking for $125K. That's NOT a typo! HOWEVER, the "problem" is that the houses are in the hood. Now, it's a relatively small town where I grew up, not South Dallas (Oak Cliff) hood. So this "hood" is more like the poorest area of town. I wouldn't go there at night, and my other rentals are in decent neighborhoods. I've been avoiding the "hood" on purpose, but this seems like such a great deal.

Questions: What other factors should I consider? Why wouldn't this be a great deal?

Thanks in advance - EXO

Ryan Webber · Answer

Well, iso, I'd have to disagree. Finding a 60K house that rents out for $1000 is not as easy as finding two 30K house that rent for $500. And no decent person would stay there? That's just wrong on so many levels that I almost want to leave it alone. Maybe you started with a silver spoon so don't know any better, but not all poor people are indecent. Exodallas is looking at a deal that has a monthly Gross Rent Multiplier (GRM) of 44, while the $62,500 house you would rent for $1,000 is only a 62.5 monthly GRM. That is a huge difference when you start crunching cash flow and ROI. That's why people still invest in the ghetto. It can make returns that are significantly higher than middle or higher income areas, but it does require a higher management involvement. Its not for everybody and you do have to be ready for it, but the money is definitely sweeter on lower end rentals.

Josh Gibbons · Answer

"I wouldn't go there at night" That's my clue to pass.....its your call tho

Will Barnett · Answer

Let me rephrase myself: no decent person would WANT to stay there. It was not my intention to degrade or put down poor people and if I have offended anyone, I apologize. That being said, I currently live and work in Oak Cliff. While I have never lived in properties such as this, my parents rented and I wouldn't exactly say I ate from a silver spoon. I'm just letting the OP know that in my experience, while working in this market and the DFW area, properties like this almost always have huge tenant problems. Those are the facts. I first started out buying these types of properties thinking wow what a deal. I soon realized what a headache it was. I had to collect rent in a bulletproof vest and pack a firearm (I'm 100% serious). In almost all cases tenants never fulfilled their lease contract, and either disappeared or had to be evicted with a constable present. They almost always left a huge mess. I'm talking about stolen appliances, holes in the drywall, broken windows, drug paraphernalia, and even sometimes urine and feces. What is the exit strategy? I assume you're buying this package from another investor. Why are they selling? Because they are tired of dealing with it. I can assure you in a year you will be tired as well. I know I was. There are house like this that do have good, decent, hard working people. Talk to the tenants to see what they're like. However, 9 times out of 10 you won't like what you hear. Once again I'm not trying to denigrate the poor. We're all poor starting out. I'm just letting the OP know my experiences and giving him other options to think about.

Will Barnett · Answer

I would stay away. 2 main reasons: type of tenant and amount of management. Those properties are gonna attract gang bangers. No decent person would ever stay there, why would they? If you do some research, you could find 2 SFR for the same price which would collect almost 2000 in rent and you would be dealing with only 2 honest, hard working, blue collar tenants instead of 7 drug dealers, crackheads and ho's.

Ryan Webber · Answer

Lower end rentals have more management headaches but come with greater returns. If you are open to taking on the challenge, and its not the war zone of Oak Cliff, then it could be a good deal for you. Many times with war zone areas the rents might be $2850 but you aren't going to get half of that unless you are all over it as a manager. You will have a much higher vacancy and late pay rate than with your other rentals, but again as long as you on top of it as a manager it can be worth it. I would research that specific part of Oak Cliff and get a feel for rentals there. If the area is too rough, it won't be worth it to you, and you won't be able to dump them when you are sick of the hassles. I specialize in lower end property, but there are still some areas that I will NOT buy in. Some areas will not stay rented with even moderately decent tenants (meaning they can keep a job and don't smoke crack), and the resell value is nonexistent. You have to make sure that you aren't buying in these types of areas. In these types of areas sometimes its better to pass on any house no matter what the price. I would also check with a realtor that specializes in Oak Cliff and get some realistic ARV numbers for the houses. Make sure they aren't fluffing the numbers. You want REAL world numbers for these houses. How long for sell time, and what percentage of listings expire in the area.

Aaron Schwartz · Answer

What type of vacancies are you going to inquire....are they government assisted houses?