Should I deal or run for safer turf???

Question

So I have been looking for deals.  I found one that makes money, but the homes aren't in a good area.  A guy is selling 5 single family homes, for $115,000.  The rents total at $3100/mo.  Properties would all be 10-15% below assessed value.  He is willing to do seller financing, but the homes are in an area of town that I would only go to from about 8am to 12 pm, and crime rates are a little higher then average but not the worst part of town.  The owner has owned them for about 20 years and has done some upgrades, he says he is just ready to get out of single family homes, to focus on his multifamily properties.  What do you think??

Tom Goans · Answer

To add to Jon's suggestions:

-- If the neighborhood is on the decline, big red flag.

-- If the average age of the people living in the neighborhood, this could be a problem for numerous reasons.

-- If crime is increasing, another red flag.

There are reasons why the seller wants out. Learn and understand all the REAL reasons. Beware of trying to create a perceived opportunity.

Jon Holdman · Answer

Assessed value is for taxes.  It may or may not be related to the market value.  So, first step is to figure that out.

He's owned for 20 years and "done some upgrades".  There's deferred maintenance.  Figure out how much.

Hard to assess the area.  If its a place you feel unsafe, don't buy.  If its an area that's not as nice as where you'd choose to live, it may be fine.

Brandon Turner · Answer

Hey Matt Markel welcome to the site!

Billy Rogers · Answer

Matt,

I would get an experienced property manager to give you their opinion on the vacancy rate and rents in the area you are looking at (I can give you my PM info if you need one) and get someone to give you an assessment of the condition of the properties.   My guess is that these are around 100 year old homes and may need some repairs, but having said that, it doesn't sound like a bad deal to me.  I probably would hire a property manager to handle them though.    Also, be sure you have some money set aside for repairs.   You never know when you might have to replace a sewer line or A/C or something like that.

Stephanie Dupuis · Answer

Tom Goans -

A huge thanks for taking the time to respond and respond so thoughtfully.

You described some of the neighborhoods I deal with fairly accurately - the "signs" are there. Very helpful (supported my instincts). I have much to think about.

Matt Devincenzo · Answer

Matt Markel if you can get solid answers for all of the questions that have already been posed to you by the others on this thread, then I would definitely consider doing this. With those numbers you posted and the ability to get it owner financed you are looking at some phenomenal cash flow.

I would at the least do your due diligence and run the numbers and see what it would be worth to you. Then talk to the owner and see if he may be willing to be a sort of mentor as you start taking on the management of these properties. Or at least see if you know of any LL in the area that would be willing to help you out.

But like everyone else said there is definitely a lot you need to consider right now before proceeding on, but at face value it definitely looks like it is worth putting some time into evaluating the deal.

Jon Holdman · Answer

Matt Markel the first challenge for buying rentals is to find one that will generate cash flow.  I'm assuming that's your goal, rather than something else like speculation on appreciation.  To achieve that, you have to have the proper ratio of rent to price.  So-called "nice areas" often fail this test.  In many areas, your best profits come in "working class" neighborhoods.  I don't have any precise definition of what that means.  Its not a "war zone" where you feel threatened just driving through.  But it is often not a "nice area".

What you find, though, after spending time in most areas is they're filled with regular families trying to live their lives.  My rentals are in a couple of areas that people I work with (I'm a software/hardware engineer) might say they wouldn't go into.  But I've been in those areas enough to know their reputation is unjustified.  Yeah, crime may be higher than some other areas.  But I've been there late at night.  Never felt threatened.  My biggest fear on summer nights is the little kids driving their electric cars in the street after dark.  So, don't just take a fear that its a "bad area" at face value.  Spend some time there.  Drive around.  Walk around.  It may not be as bad as you think.

Tom Goans · Answer

Stephanie Dupuis,

My original statement about older neighborhoods is a little too broad. Yet, the fundamental does warrant consideration when exploring for enduring investment opportunities for a young, career-minded real estate investor.

I agree with you, Stephanie, some older neighborhoods are excellent investment opportunities. Personally, I would rather do business with an older person for many reasons ... and not just because we may be of a more similar age.

However, over the years in markets in Texas and Colorado, I have seen once extremely attractive and thriving neighborhoods greatly decline as time marched on.

I will give you an example of one such neighborhood where I lived as a child.

The neighborhood was filled with young and middle-aged military families. There were many children of all ages. The homes in the neighborhood were well kept and manicured. Now, the children have grown up and left. First, the elementary school closed. Then, the high school closed. Most homes in the neighborhood have deferred maintenance. The landscapes are in great need of attention ... the landscape crews (children) have moved.

The type of neighborhood I just described could be a huge challenge for many investors.

Yet, for the right group, this type of neighborhood could be a goldmine. Here is why.

A group of investors with access to a very large amount of funds could transform the neighborhood back into a very desirable neighborhood for young first-time homebuyers. The largest hurdle that remains are the schools in the neighborhood I described. Yet, in many neighborhoods, the possibilities are only limited by funds and imagination.

I know of an old neighborhood in Dallas that was transformed into a very popular neighborhood for the nouveau riche. Bring money if you want to buy or rent in this popular area.

In summary, my original statement is far too general. Yet, the fundamental does warrant consideration when exploring for enduring investment opportunities.

Matt Markel · Answer

thanks guys, I appreciate all the advice.  I am a physical therapist doing home health, and I have some experience in these areas.  I figured the response would be as such. I kind of got the feeling of if a deal seems to good to be true....I guess part of the reason I was thinking about it was the profits.  
I do know some realtors and property managers in town that I have walked through properties with.  What type of questions would you guys recommend asking them or things to pay special attention to that may be a red flag or signs of deferred maintenance??  Thanks guys

Ryan B. · Answer

Save yourself the headache and keep looking for other properties.

#1 rule:  If I have to take a weapon to make me feel safe, then it is not the neighborhood I want to invest in.

Should I deal or run for safer turf???

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