Cheap real estate - Bad area.

[Carmen Falcone]

I'm currently looking for my first investment property in North Eastern Pennsylvania. One of the properties I am looking at consists of 3 buildings and 7 units total. The asking price for this property is $85,000. Sounds like a good deal, but the property is located in a pretty rough area. Is investing in a property that is located in a bad area worth it?

[Shawn Ginder]

I am a new investor also, we closed on our first deal in June 2016, we bought a total of three properties in two different towns, a total of 6 units. 

My advice would be no, it isn't worth it to buy in a bad part of town. From all the advice I have read on BP and other places best to avoid on your first one. Reasons: getting good tenants will be tougher, property likely won't appreciate much, risk tenant and owners safety when going to the property, as well as a few other reasons.

A friend of mine purchased a deal through a turn key company in PA, only to find out it wasn't a suitable part of town. What happened is couldn't get long term tenants in to stay, the place got messed up with each tenant costing funds each time to turn it over again. In the end he sold at a huge loss just to get out of investing.

We purchased our first two properties in the same city but a better part of the city, and are doing well with paying tenants. The properties are old, but I expect they will serve us well for the coming years. We got the existing tenants to sign a new 3 year lease and a new 2 year lease, that is the kind of situation you want as you begin. After you have some property and you want to explore the rougher parts of town by all means nothing stops you. 

When I was getting started I was looking at an 8 house portfolio deal in Reading PA, but after talking to a local investor it was eye opening to learn from him. He knew the seller, knew the properties she owned, they were way over priced and the condition of the city had dramatically changed in the last 20 years making it a bad market to invest in. His advice was ask the owner if the tenants are current on the rent, I did to discover only three tenants were current, I walked away from the deal. Long story short, you are doing the right thing by asking these questions, listen to others in the local area and filter what they say and make sure you know what you are getting.

In my journey I also looked at and had a deal under contract for a 5 unit in a not so nice area. In the end we let it go as the price was $85,000, but after extensive estimates from contractors had seen it would require another $85,000 worth of rehab. I am glad I let this go, as after taking ownership on our first ones we did buy what happened was the insurance company does there own inspection once you take a property and if they find things needing repaired they give you 30 days to get it fixed or they send a second notice with another 30 days to fix it or they will cancel your policy. The repairs on the property were minor issues and things we knew about. I am grateful that we didn't do the 5 unit at $85,000, as we would have had to do some major repairs for insurance on a time line no doubt.

Bottom line you got to run the numbers on any deal, make sure you cash flow after all expenses, and factor in repairs that will be needed if the property has deferred maintenance.

Wish you the best,

Shawn