$35k row-home as my first rental property purchase..pros and cons
Real Estate Agent · Baltimore (Dundalk), MD · Member since 2015 · 23 posts · 3 votes
BP members, living in Baltimore, MD $20 to $50 thousand dollar row-homes are a dime a dozen; their everywhere within Baltimore City limits and are within my price range. I've listened to podcasts where some say stay away while a few others say go for it, low risk. What's everyone's personal take on this type of investment in a C- neighborhood? Is this something I should consider and look deeper into or keep my distance and look elsewhere? I figure the risk is low considering I'm only into it for such a low amount. Opinions...?
Thanks,
Rob
They are tricky. Here is a redux of why I am personally staying away:
- Baltimore City Rent Court is extremely tenant friendly, to the point of being landlord hostile.
- Lead paint.
- Tenant placement can be tricky. Lots of working poor with varied forms of income. Less traditional W2 income means trickier qualifications.
I'm not saying I won't eventually get into that space, but I'm looking more in the Dundalk area. Properties are more expensive, but I think in the long run, the revival of the Sparrows Point area as a hub for jobs will bode well for investments in the eastern Baltimore County housing stock.
If you get lucky and are able to secure a tenant that actually pays and stays there for a long time then it could work out. I know real estate taxes are pretty high there and evicting tenants there might also be costly and time consuming. I also think you could be on the hook for some of the past utilities if a tenant doesn't pay and abandons the property. I'd also assume tenants there do a lot of damage so you could end up paying 20-50k in renovations each time you turn the property over unless you have a good handyman.
What's everyone's personal take on this type of investment in a C- neighborhood?
It's all about screening.
If you accept idiots, your place will be trashed, you'll fight for rents all the time, and it'll be butthurt from beginning to end.
If you are able to hold back and find the right tenants, then it'll be a whole different experience.
Personally, I wouldn't go into Cs without being a hands on landlord. I would not put a C or D with a property manager unless you dislike money and never want to see it again.
Great city, if you want to buy some properties and do a nice rehab. I buy in the nicer parts of C neighborhoods for 20K-30K, put 20K-30K in renovations, and rent to a solid voucher holder. Don't buy near boardups, or blocks with alot of renters. Also check out the murder map, and make sure there isn't a ton of crime in the immediate 1 or 2 blocks, certified lead free on everything, have a team on the ground that knows what they are doing, pull permits always if your going to do work, get good insurance.
Thanks for all the input guys, really gives me something to think about and consider before I go the $35k route! @Andy Gross, you mentioned Dundalk & Sparrows Point I take it this is your current investment area? I do a lot of "driving for dollars" in and around Dundalk since I live here and know the area well.
I do a lot of "driving for dollars" in and around Dundalk since I live here and know the area well.
You might think I'm mad to mention this, but I "walk the dog for dollars".
Sounds strange, but if you're interested in a subdivision, you see far more when you walk the dog. If you have a dog that is. You could walk a cat if you want, but you would look a bit odd.
It's what I'm doing at the moment as I look at very specific subdivisions, and I've discovered that you start to see far more when you actually slow down and look around. You don't cover as much distance, but you would be surprised how much you miss in a car. I've found abandoned houses behind bushes in fairly open roads that you wouldn't normally see, I've found triplexes and quads in places that you would normally just go by, notices on windows that you can miss and so forth. And rather than looking like some stalker guy in a car when you stop outside houses, your pace is that much slower so you don't look like a child predator.
And the dog likes seeing new things as well.
Thanks for all the input guys, really gives me something to think about and consider before I go the $35k route! @Andy Gross, you mentioned Dundalk & Sparrows Point I take it this is your current investment area? I do a lot of "driving for dollars" in and around Dundalk since I live here and know the area well.
Not yet, but soon. I'm from Maryland, but I've been out of town for work. I'm moving home this summer, and once I get my house together, I'm going to start looking strongly at Dundalk. I'm seeing a lot of 3/1.5 or 3/2s going for 60-80k, with an ARV of $155k when renovated for retail. I think if renovated for rental, you can be all in for under $100k with a pretty decent product. These numbers mean the BRRRR strategy might be perfect.
Are you comfortable knocking on doors and collecting rent each month in C- neighborhoods? I don't expect C- tenants to be mailing you a personal check or money order before the 1st of the month. Don't expect them to have bank accounts either. I think the only thing that is low is the relative value compared with neighboring communities. The risk is going to be high in collecting rent, keeping your property secure from theft, and finding qualified applicants in the first place. To me that is not worth the risk or level of hands on that is required to minimize the above risks. I'd rather have tenants that can mail rent on time and be in a neighborhood that attracts a better tenant applicant pool.
Just keep in mind the properties will be very much management intensive. These are not the type of property where you can simply sit back and collect rent checks. If you need to rely on any degree of luck to get descent tenants that will pay on time and not destroy the property you might want to reconsider because luck does not work in this business.
You could be describing Trenton, NJ :) We own 2 SFRs there, and almost everything that's been said here is true. Except one major point - although NJ is a tenant friendly state, Trenton is a landlord friendly city. We've evicted twice there, and the tenants were out in 4 - 6 weeks for non payment. We use an attorney that has been doing evictions there for decades. They do at least 40 a week and know the judges, the court clerks, and quite a few of the tenants.
Tenants in these areas are basically one flat tire away from financial disaster. We're thankful we have had our units rented to the same good tenants for the last few years, but we've had pipes stolen during vacancies and the places were trashed by departing tenants several times. We stopped investing there after those first 2 properties.
Decide if you like to sleep at night and not worry about properties in those areas.
Just keep in mind the properties will be very much management intensive. These are not the type of property where you can simply sit back and collect rent checks. If you need to rely on any degree of luck to get descent tenants that will pay on time and not destroy the property you might want to reconsider because luck does not work in this business.
I think it depends. Get the right tenant, and although they may be lower class it doesn't always mean they are broke idiots. As I said, it's all back to the screening. Low income does not mean bad person.
Neither does a property necessarily need lots of maintenance if it's a good property in the first place. You can avoid a rotted out bathroom floor by fixing the leak for instance.
And when you keep your property nice, even in a C, you get a better response when advertising, and you'll eventually get a nicer tenant.
C class is still C class, You can not turn a low quality tenant pool into a silk purse. Eventually the shoe will drop regardless of how carful you are. Simply be prepared for late payments, chasing tenants, vacancies, evictions and extensive tenant damage. It's part of the game.
@Robert Garcia what I've read about these neighborhoods, especially in Baltimore is to strongly consider accepting Section 8 and similar programs. Baltimore has a few different programs. Using one of these guarantee some of your income as tenants would be leary of being removed from these valuable programs. Tenant screening is still a priority and ensure you hold tenants accountable for paying their portion of the rent.
Are you comfortable knocking on doors and collecting rent each month in C- neighborhoods? I don't expect C- tenants to be mailing you a personal check or money order before the 1st of the month. Don't expect them to have bank accounts either. I think the only thing that is low is the relative value compared with neighboring communities. The risk is going to be high in collecting rent, keeping your property secure from theft, and finding qualified applicants in the first place. To me that is not worth the risk or level of hands on that is required to minimize the above risks. I'd rather have tenants that can mail rent on time and be in a neighborhood that attracts a better tenant applicant pool.
I see your point, didn't think about having to "personally knock on the door to collect the rent"..
There are many factors here. What is the value of the neighborhood for that $30K house? Is it a $30K house in a 70K neighborhood?. Are you going to rent to market tenants or subsidized like section 8. What is the desirability of that particular block? Does it get better or worse in any direction? How old is the building? Has it ever been renovated? How old are the systems?
Are you going to do any repairs before lease up? Are there other investors that you know investing in the area? Is this neighborhood more likely to go up or go down?
There are $30K neighborhoods I will invest in. There are certainly $30K houses I will buy. There are also 30K houses and neighborhoods I wouldn't buy in.
You can give them 12 self addressed stamped envelopes and tell them to buy a money order at 7-11. That may take care of the collecting the money in person problem.
I wouldn't take advice from folks not in those neighborhoods. It's mostly unjustified fear. If you're that worried get a Property Manager and pay 10% and never have to worry. That's what I do for all my properties.
Also keep in mind the concept of selection bias. Look on Zillow at the quality of the highest recent sales in some of these neighborhoods. They are nice. And the people in them are good hardworking people. Be smart as there are definitely people looking to take advantage of the system but that can happen anywhere.
It really depends on what kind of tenants you can deal with, if you are looking for appreciation or cash flow and your goals 10 years down the line. C neighborhoods can be great or you can end up being the next person selling to an investor at a discount if you can't handle the issues that come with a C neighborhood. It has a lot to do with personal tolerance.
Thanks everyone for the great advice, it definitely gives me a lot to consider since everyone has brought up a lot of great points.
@Ned Carey, good questions to consider, I'm going to do my due diligence on the property and neighborhood.
Thanks again for the input everyone, I'll be sure to get back why my findings...
Rob
I am too looking in the Baltimore City area for low investments. I too wonder why investors haven't jump on these low properties. As I look on the MLS at these properties I ask myself can I tolerate the headache for the high cash flow returns. My only issue at this point is buying where there's several homes boarded up. I am not pricing the opportunity to purchase 5 or 6 on the same block. Then I'll be able to make an impact and put a small neighborhood of good working class people together.
There are 15,928 Vacant homes in Baltimore. To say its block by block is an understatement. Even if there are boarded up houses a couple of blocks away, how would you know that your block will be next is impossible (unless you choose a popular well established area that no longer has 30k homes). I bet there are tons of homes with no hazard insurance policies and are one fire away from being the next vacant and boarded up home on your block, something you have no control over. Just something to be mindful of when you wonder why these "deals" haven't been snapped up....
http://technical.ly/baltimore/2015/06/04/baltimore-blight-maps-ouazad-elszasz/
@Jeff Bridges thats a great graph, I think on CNBC they had an article that I was reading saying that they think there could be almost 18,000 boarded up homes. Supposedly they are trying to get funding to knock them down and put in needed placed as medical and places for seniors etc.
Rob, my husband and I are concentrating on that niche, not sure if you listened to my podcast. We have had good years and bad years, and a ton of stories. You may want to check our my weekly blog posts on BP. Also, if you want to talk yourself out of this strategy, ready Buy and Hold Forever, a great book.
Lower property investment cost. $/square foot and square footage is lower, so purchase price and repair costs are lower. Our motto quickly became “safe and clean”, allowing us to stay focused on using the cheapest products available in rehab.
Higher occupancy rates. Applicants are often living with friends or family, so are often able to move in mid-month, as soon as the unit is ready. More stable tenants tend to need to give notice, and move near the first of the month.
Lower expectations. Low rent tenants are willing to live with more flaws, fewer extras, and won’t be as demanding about discretionary maintenance and improvements.
Fewer evictions. Low income tenants are more willing to move out when the situation gets bad. We have not had to deal with someone living in the unit rent free for months while we work through the eviction process.
More turnover. Low income tenants are not as stable, so they tend to move more often. Even some of our best tenants have become nightmares at move out. Dealing with move out, unit rehab between tenants, and prospective tenants is a huge time, energy, and cost drain.
Higher utilities cost. Water/ sewer/ garbage is about the same cost for a 500 square foot unit as it is for a 3,500 square foot house, so utilities become a bigger percentage of total rent and costs with smaller units.
Collecting rent is time consuming. Very few tenants mail us a check or deposit the funds in our bank account. Some bring the cash to our front door, more have us come get it at their front door, and both involve texts back and forth to coordinate schedules. We often have to initiate the conversation to find out where rent is, and we often have multiple trips to collect partial rent during the first two weeks of the month. We admit part of this is due to our desire to visit the properties more often and our willingness to be flexible for our tenants. It may be possible to set expectations and have low income tenants pay less hands-on, but it is a consideration.
More difficult to screen applicants. Most of our applicants have no bank accounts, have terrible credit, and it is difficult to know where they’ve really been living.
Lower loan amounts. It is more cost effective to mortgage and refinance one property worth $150,000 than two properties worth $75,000. The inspection and appraisal costs are about the same for a $30,000 house as a $300,000 one.
Easy to over improve. It is so easy to get into the trap of wanting to get the property to the standards you would want to live in. Such spending brings risk of being destroyed by tenants or never getting the value out at sale.
"i dont live on the outside of the house" is by far the best quotable in this thread. Too many "investors" devalue this aspect of getting a house ready for rent and keeping it rented by simply being cheap.
@Jeff Bridges thats a great graph, I think on CNBC they had an article that I was reading saying that they think there could be almost 18,000 boarded up homes. Supposedly they are trying to get funding to knock them down and put in needed placed as medical and places for seniors etc.
I think you're right about it being closer to 20k vacant houses now. The graph is a little older, but it still speaks volumes. I think demolishing some of the really bad neighborhoods is a good start, but it will be a challenge to completely eliminate the blight and knock them all down. Also, there are other major issues to address like suburban sprawl, double the property tax rate of surrounding counties (2.2%!!!!), declining industry, competition with DC for relevance. People are being driven away from Baltimore beyond the blighted community issue. Those that remain, probably can't afford to move to a different city in search of better situation.
another good NPR article explaining the situation: