How to invest in problem neighborhoods and make it profitable?

Question

I grew up in an A/B suburb of Pittsburgh and am very familiar with the area.  There is one old mining neighborhood with a bunch of duplexes that's in an incredible location.  It's right on the trolley line which runs in to town.  Close to some pretty unbelievable stores and malls that service the incredibly wealthy communities just down the road.  It's right off a major road that runs up to the city as well.  Couldn't be a better location.  These few streets (maybe 50 properties) though are by far the worst in a five mile radius.

I do a fair amount of direct mail marketing and have had a pretty shocking amount of calls from people in this neighborhood when they get the flyers. Responses are from owner-occupiers and landlords alike. I always go to look when I receive a call, but almost every duplex I've looked at is in such bad shape, the only option in my mind is demolishing and starting over. I'm talking foundations that are so messed up, you're surprised the house is still standing. Holes in the roof that look like the house was hit by an asteroid. Smells that are beyond description. Unfortunately though, I can't seem to find a way to even get close to making the numbers work to buy one of these properties.

The town is a fairly well-to-do suburb and this is one of only two problem areas in the municipality. My question though to the Bigger Pockets community is: where do you even start with a neighborhood like this? As it stands, it's not profitable to buy, even if you're just going to demolish and sell off the land. It is my home town and I'd like to be able to do something and make it at least a little profitable, just not sure what. Does anyone have any experience in neighborhood revitalization and have any ideas of where to start?

David Krulac · Answer

Account Closed

I'm from Pittsburgh also.

I've bought and sold over 900 properties.  And I do land subdivision and development.  imho, accumulating lots is NOT a good strategy particularly for a new person.

I've bought houses in a railroad town, where the average house was built probably before 1900.  It was the lowest priced area in that county.  I was able to buy properties that had significant upgrades and improvements and rent them for higher than market prices due to their close in location.  I was renting houses for $950, that the neighbors were renting for $700.  I looked for specific features like upgrades to mechanicals, heating, plumbing and electric.  No basket cases and every property had to have off street parking because everybody has cars.  If the property met those 3 criteria, it was a potential candidate to buy and rent.

I anticipated low to no appreciation, but for example the house I rented for $950 was bought for $32,000 and was already fixed up.  Cash flow was very good, tenants stayed a long time. Instead of the 2% rule, that would be the 3.36% rule.

Jeremy Pace · Answer

Account Closed you need to negotiate down the price that the owner wants you to pay.  Don't just accept what the owner tells you in the value.  Figure out what the value is to you ... and offer them that, with your explanation.

Account Closed · Answer

Thanks for all your thoughts everyone.  I'm certainly intrigued by the tiny house idea, but I'm not sure it's the best option for here.  This an old mining neighborhood that was built for miners and there families for housing.  Meaning that they were built to be functional and to squeeze as many people in as possible.  It is a series of duplexes that are all exactly the same, built on a pretty steep hill, really close together.  So tearing one down and putting in a tiny house may look kind of silly and upset some people.

However, the idea of buying up a whole street or side of a street is an interesting idea.  It is most definitely a desirable area: there are new shopping centers (built this year), gas stations and other housing plans being built within a mile.  It's just not a very attractive looking neighborhood because it's never been taken care of and the houses are all exactly the same and on a steep hill.  Everything about the location is great.

Might be worth a conversation with someone in the municipality.

Account Closed · Answer

Hey Jeremy,  Thanks for responding.  Honestly, these people are practically giving the houses away.  We're talking $10,000 and under so it's not really the price of the property that's the issue.  It's pretty tight quarters so demolition would be expensive and the empty lot wouldn't be worth what it costs to tear down the house.

I'm just more talking about big picture stuff.  Working with the municipality?  Maybe buying up lots and holding them to sell off to a bigger developer?  Just looking for ideas or things other people have done with problem areas.  Perhaps there just isn't really a good solution at this point in time.

Wes Brand · Answer

You'll want to look up zoning laws in your area.

One lot might not be worth much of anything, but if you could buy up the entire street and combine the lots to make something bigger (commercial or residential apartment)...now you have a real play in the works. Further, why are the properties worth so little and why are none of them maintained? Well, more specifically, why isn't that area desirable? If it's because the area is run down you can fix it and make an investment for appreciation in the entire area. If it's because there's a ton of crime and it's actually dangerous/you're likely to have any repairs you do undone, you'll want to start talking to the local police and politicians -- you want them to step up patrols in that area to kill the crime element. Once the crime is gone you can start improving the properties and putting solid tenants in place.

Terry Gillis · Answer

Aaron, what about tiny house options for these small lots?  I got exposed to this from a recent REIA meeting last month.  Given the hype on tiny houses these days and the area...might be an option? Here is a link to check it out:  http://www.citylabpgh.org/blogs/tiny-houses/

How to invest in problem neighborhoods and make it profitable?

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