What are the benefits in buying inner city distressed properties?

Question

I’m currently in the Baltimore market and looking for some of the benefits to buying in the hood. There’s a large inventory of properties and higher cap rates plus we’ve seen what happened in philly and I definitely don’t want to miss another boom once folks start buying in the city again. So to my fellow landlords what’s your take on this? Do you buy them or do you stay away from them?

Ian Barnes · Answer

Its not subtle insults. The city has only gotten worse. City is not run well, crime is at its highest ever in the last 3 years and getting worse. Water has gone up over 100% since 2012 and will go up another 100% in the next 5 years. Corruption is rampant in the police dept and the mayors office. City Counsel refuses to make being caught w an illegal gun a felony, you cant even pay bills because of the ransomware attack, and the city refuses to shut off water, and you cant kick a tenant out in rent court for refusal to pay water even if its in your lease. Also, eviction at a minimum takes 3 months. I could go on and on. I will never buy a rental in the city again unless major changes happen in the govt. On the other hand ill buy fix and flips or wholesale deals anyday.

Matthew Paul · Answer

I have looked at Baltimore in the past , ( I grew up there 1961 to 1972 . I am in and out of the city weekly , I have run numbers and they "Look " good on paper . But I have only seen small sections moving forward , and much larger sections moving backwards . @Ian Barnes sums it up all too well .  What I have seen is the money leaves the city when the kids have to go to school . It is cheaper overall to buy a $300K house in Anne Arundel county than a $175K house in the city , once you factor in taxes , private school for 2 kids , water , appreciation car insurance and homeowners insurance . Then you have the crime .

The city as a whole is still going down . Harbor Place is in receivership , Happy Holly scandal , University Of Md board back room deals , and on and on .

Like I said the numbers "look" good . But there is one thing I trust better than numbers , and thats my "gut feeling" . And no matter the numbers , my gut says NO for Balto city .

Russell Brazil · Answer

DC and Philadelphia have had strongly growing populations for 50 years, while Baltimore has had a shrinking population for 70 years.  I wouldnt be banking on Baltimore doing the same thing unless the population situation changes. Thats just 1 of the major glaring differences.

Erik W. · Answer

Well, as you already noticed the major benefits are two-fold:

1) Larger than typical cash on cash return.

2) Potential for massive price increases if the area(s) in question gentrify / become "hip" again.

When I was in college in 94-99, the town where I went to school had "moved south" about 20 years prior.  The downtown was a neglected venue of closed-up shops, dilapidated brick buildings, and homeless/vagrants.  The only businesses were eclectic music shops and dive bars, and a handful of marginal restaurants.  I rode my bike past large, vacant building with broken windows and boarded up fronts that could've been bought for less than $100,000.

Then about 1997-2006, a major revitalization effort hit.  Money poured into the area.  Buildings were converted to high-end boutique shops or trendy hipster bars and brew pubs downstairs and swanky loft apartments for young professionals upstairs.  Same building is now priced well north of $1 million.

Could I / should I have sunk all my money then into a building?  You bet I should have.  So why didn't I?  My crystal ball was busted.  I had no way of knowing a) when the trend would take off, b) how sustainable it would be and c) what to do with the building in the meantime.

I invest almost elusively in Class C "cash cow" SFH residential property because it pays for itself both now and into the future.  That lets me stay in a good spot regardless of whether or not the hood revitalizes.  If you can get into buildings that will cover their expenses and you think the area is setting to boom, then by all means go for it.   Diversify if you can.

Lamont Marable · Answer

This is the best time to start buying in Baltimore.  DC had a period where the pop was high then decreased doing the drug epidemic but now is on the upside.  Watch the same thing happen to B-more in the next few years.  Don't sleep, Winter (aka investors) are coming.

Sebastian E. · Answer

While the DC and Philly comparison is tempting, I don't think that kind of growth will translate to D neighborhoods in Baltimore City. There are too many dynamics that have been described above that will make that kind of change difficult in some of these tougher areas. I think it could happen for some other areas in Baltimore but that is for another discussion.

I recently bought two D class properties n Baltimore for 10k each because I was curious to test out some of the theory that I have read here on BP and heard from others in investor circles in Baltimore City. Here are a few takeaways from my direct experience.

-Baltimore City does a surprising amount to discourage repair and investment in derelict buildings in failing neighborhoods. It seems if you are in the good graces of the city as a chosen investor you will be shielded from a lot of regulatory oversight and your margins will be protected. To give you a direct example one house I bought I figured 10k in my renovation budget since I have a crew that I have a lot of experience with. Baltimore city eventually required me to pull 6 different permits to renovate a 10k house. I am now in it closer to 35k instead of 20k plus a lot of my time is out the window for having to meet all these inspectors and dealing with Baltimore city BS. In my opinion they should be happy that anyone is coming to invest hard earned money into these places.

-You will have a very hard time getting your cash out of these properties. Unless you are a very seasoned investor with a good relationship to a portfolio lender you will have to leave your cash in these properties because most banks and lenders won't touch them.

-It is difficult to find good property managers to deal with these kinds of properties because it is tough to collect rent and many are not comfortable going into these neighborhoods. So you may be better off sell managing if you are willing.

-Not all crews will work in these areas.

Now the good:

After going through it with my second property now, I do think it is possible to execute on this strategy but I am not convinced that it is for me. Not because I don't think it's possible but I think there are just better plays for me with higher margins and less work.

In order for this strategy to work, I think you need to spread your risk by acquiring a lot of them but then you again have the problem with how to finance them. So if you can figure out the financing, management, and renovation piece then you have a shot. I think it can be very profitable at scale if you are fairly sophisticated and willing to hustle.

Happy to chat about my experience if that would help at all.

Dennis M. · Answer

I don’t know Baltimore but in general this strategy seems to work for me . Large renter base , a good amount of multifamily homes available and the prices are usually very cheap .

Nick Ferrari · Answer

Take it from someone who has spent their whole life living in Philly. There may a real estate boom but it’s not everywhere, select neighborhoods you have to buy well in advance before it gentrifies to make your money and that is still a gamble. Many of the neighborhoods we thought would work out didn’t. Only a select few like Northern Liberties, Fishtown, etc turned out to be sound investments; granted there’s still time and other neighborhoods can still flip but it’s no guarantee.

If you really want to invest in the inner city. Find a neighborhood where young people with money are moving too.

Look for Cafe’s and cool bars.

Talk to local cops and find the districts with less crime. Notice I said less crime...you won’t find anything with no crime. That’s just the risk you’ll have to take.

Pay attention to the architecture the cooler more vintage looking homes the hipsters go nuts for.

Schools in the inner city aren’t as big of a deal as you think. Hipsters have kids later in life and would send their kids to private school anyway.

Erik W. · Answer

I think the take-away from this post is due diligence in a scenario like this must be 10x stronger than normal.  A city with reducing population, blight, city Govt problems, etc. is a rough place to make money.  Could it be the next Detroit?  Maybe, but it could also take 10 - 30 years for that to happen.  Or it could never happen.

The story is very similar to my down town example.  Many of the smartest, most experienced investors and agents who did this kind of stuff day in and day out in my town and who spend hours each day combing the city for deals didn't see the down town revitalization coming.   Or they saw it and pounced too early.  Or they bought close but not quite close enough.  Those few who did made their money thru a combination of skill AND luck (aka timing).  Many others came before them too soon or missed the market by a quarter mile, and they ended up selling cheap to the ones who got together when the timing was right and the direction of revitalization was more established.  But no one knows when the timing and location was right until AFTER it all happen.

A boom can never start, or it can start and fizzle, or it can start and move in a different direction, or it can start and keep going exactly as planned.   3 out of 4 scenarios you can lose money even if you're 90% "right" on all the pertinent factors.

"Boom" areas are almost always heavily speculative.  Yes, there can be "favorable signs"...tons of them.  But ask any investor who has been in the biz more than a decade what the signs looked like in 2007 and early 2008.  "Signs" aren't money in the bank.  All it takes is one factor out of your control (and there are dozens if not 100s) to go wrong or go too slowly and you're sunk, unless you have a small fortune and/or other investments to bail out the one that performs poorly, or to carry it until it does finally perform.

Bottom line: due diligence x 10!  I'm not telling you not to do it.  I'm saying proceed with caution.  Better to miss a "boom" than to lose everything in a bust.

Ozzy Sirimsi · Answer

I am not gonna be as harsh as @Ian Barnes on Baltimore, but buying $7500 houses, god knows where, only calls for trouble.

What are the benefits in buying inner city distressed properties?

Most Popular Reply