The bad neighborhood I invested in may kill my investment

[Rodney Lorenzo]

The urge to get into real estate pushed me to invest in a 6 unit building in a neighborhood that I didn't think was that bad. I thought, the cash flow could be good so why not. This was a year ago. Now, my PM is struggling to fill the units from bad tenants that I've had to evict and I can only pay the mortgage out of my own pocket by so much. I'm very worried of defaulting on this property. 

To make matters worse, I have a 5% penalty on the loan if I sell it before 5 years. If I were to sell it, I'd have to not only pay this penalty, but the 6% realtor commission on top of that. What would you do in my case? I'm thinking of selling it off market to avoid the realtor commission and possibly paying someone a 1% finder's fee for bringing me a buyer. I would then pay 6% in total in ridding myself of the property, which is the same amount I would be paying a realtor. 6% is better than 11%. I've learned that bad neighborhoods tend to attract bad tenants, while good attracts good. I may just have to have my PM fill the units with whomever, just to boost the value of the property, which is what the previous owner did, hence, me inheriting his bad tenants. Yes, I'd hate to do this to another investor, but at the end of the day, I don't want to see my first investment go down the toilet. What would you do in my case?

[Marcus Auerbach]

Quote from @Rodney Lorenzo:

The urge to get into real estate pushed me to invest in a 6 unit building in a neighborhood that I didn't think was that bad. I thought, the cash flow could be good so why not. This was a year ago. Now, my PM is struggling to fill the units from bad tenants that I've had to evict and I can only pay the mortgage out of my own pocket by so much. I'm very worried of defaulting on this property. 

To make matters worse, I have a 5% penalty on the loan if I sell it before 5 years. If I were to sell it, I'd have to not only pay this penalty, but the 6% realtor commission on top of that. What would you do in my case? I'm thinking of selling it off market to avoid the realtor commission and possibly paying someone a 1% finder's fee for bringing me a buyer. I would then pay 6% in total in ridding myself of the property, which is the same amount I would be paying a realtor. 6% is better than 11%. I've learned that bad neighborhoods tend to attract bad tenants, while good attracts good. I may just have to have my PM fill the units with whomever, just to boost the value of the property, which is what the previous owner did, hence, me inheriting his bad tenants. Yes, I'd hate to do this to another investor, but at the end of the day, I don't want to see my first investment go down the toilet. What would you do in my case?

Time to roll up the sleves and start to grind.

You can absolutley find good tenants in a bad area. It is usually a sense of neglect and resignation that leads to a downward spiral. People in this neighborhood have the same desires you have; they may not have the funds you have, but they also want to live in a a nice place and not a ********, thats treated as "just a rental" - it's supposed to be their home!!

The quality of your property will define the quality of your tenants, but you may have to step in personally. Make sure the units are cleaned up, don't smell and everything works. This may require personal attention; a PM or contractor usually lack the drive to finish the job compared to the owner. also clean up the outside, fertilize the lawn, clean up the edges, make sure the garbage area and hallways are spotless. This will attract good people and is commonly known as stabilizing a unit.

And BTW: selling FSBO to save 6% comission is defeating the purpose; why do you think everyone on BP is hunting for an off-market deal? Clean up the property, stabilize it and manage it to it's potential. Then you can decide if you still want to sell it.

PS: we asked three of the largest PM's in Milwaukee which of the portfolios they have managed for many years have performed overall the best for the owners. Without hesitation, all three said portfolios in B+ neighborhoods outperform everything else by a wide margin.