Thoughts on Milwaukee 53215?

Question

Hi everyone!

I live in California, and have been listening to the podcasts and absorbing every bit of education I can for the past few months and finally pulled the trigger last night and made an offer on a triplex in Milwaukee.  The offer hasn't been accepted yet and it looks like we are up against two other offers.  I am getting a bit nervous.  We have a realtor and potential property manager there.  The cashflow looks great and so does the cash on cash return.  I am a bit nervous about the neighborhood, though.  We have tried to do as much research as we can, but it looks like a lot of the areas with high cashflow have a lot of crime.  I realize a lot of time neighborhoods within a zip code can vary greatly, even block by block.  Can anyone shed any light on the area around south 19th Street and West Lincoln?  Thanks BP!

Adam Gollatz · Answer

@Melissa Roybal A lot of good information shared in here and I agree with what people have been saying. These D/C properties look great on paper, but hardly ever work out that way in real life. I generally recommend to investors I work with to stay away from properties built before ~1940 because of the heavy maintenance and capex costs. What people also fail to account for is that the higher quality tenants that you are looking for will not stay in these properties. And if you are lucky to get a good tenant, then you will not be able to push rents as high as you might have thought.

Its probably a good idea that you let this one pass. As you continue your search I would move to 1 and 2 unit homes only. Absolutely stay away from triplexes. In Milwaukee, the triplexes you find are either hacked up mansions or duplexes so they have strange layouts that make them harder to rent or a two structure situation like a duplex with a cottage house in which case you generally dont have off street parking which limits your tenant pool and quality.

Marcus Auerbach · Answer

Very good comments here about the neighborhood here.

@Melissa Roybal You have two issues on a strategic level: the first problem is that while your cash flow looks great on paper, over time capex will exceed cash flow. And the nasty thing is that you won't see that until you are a few years in.

In order to control that you need to know the remaining life of every component of the property and include that in your financial model: roof, plumbing, HVAC, flooring, kitchens, windows, siding etc etc In light of this you really need a home inspection, and it better be a really good inspector (many are not) not only to identify present issues, but also to understand your anticipated expenses over the next years. In many cases capex issues tally up to more than the purchase price. And it's all cash out of pocket, unleveraged. And even if you spend the money, the property value will not necessarily increase. This issue is magnitudes larger than cash flow. It's a rookie trap.

The second issue is that as an investment you are really not going anywhere. While cashflow is great, you are not doing much in terms of your net worth. Appreciation, forced or natural, and principal pay down are not amounting to much if anything. This is where wealth is created, not with cash flow.

I estimate we have about 1,200 local private investors here in Milwaukee (the type that hangs out on BP or is part of any of the local clubs and organisations), not counting the larger corporate and institutional investors. Many of them have been in the game for a long time and have accumulated significant net worth, so they could easily buy up these great cash flow deals. So the question on hand is, why do you think they are not buying up the inner city? What do they know that you don't?

My recommendation is talk to your agent about better areas. You will find that you can generate good cash flow at higher price points, but now you can make the rest of the financial model work as well!

Adam Gollatz · Answer

@Rebecca Knox I think it’s mostly if the client and property are a good fit. Best people to answer that would be @Andrew O'Brien and @Lola Uriona

@Melissa Roybal if you buy at the 1% rule on a single family in the Clarke square neighborhood you will be highly disappointed. Will it cash flow? Sure. Will you get crushed when you go to sell, more than likely, since you are probably buying 1000’s of dollars of negative equity at 1%. That’s more of a 1.5-2% rule depending on how much deferred maintenance and cap ex you have to do at purchase. Feel free to PM me to chat more.

Rebecca Knox · Answer

Like Jacob said, prostitution is rampant in that area although according to Clarke Square landlord meetings that I've attended, the city is well aware of this and trying to crack down on that but it seems to be a slow moving process. Christy Cooper Librizzi from Nimius Property Management or Mike Baron from PMI Property Management are very familiar with those areas and could provide you some insight.

Darren Budahn · Answer

It’s a very working class, diverse, dense urban neighborhood with older housing stock. Yes there will be crime in the area. Yes there is the potential for good cash flow if you can get good tenants and don’t get eaten up by maintenance costs. I think it would be a significant challenge making this work from long distance but the returns can be high if you are successful

Rebecca Knox · Answer

@Adam Gollatz does Welcome Home Milwaukee Property Management handle 53215?

Darren Budahn · Answer

I’m guessing it’s possible to invest in low income areas from far away, but I haven’t seen it done successfully. In fact, you can look at literally dozens of properties on the MLS that have traded numerous times over a short period of time and invariably when you look at the history many of the owners are out of state. In fact, the rate of failure for many local owners in certain areas is also very high. Biggest point that was made by Marcus is that cap ex truly will doom you in 100 year old buildings in these areas meaning you have to buy at the right price. Also many of the successful locals either do a lot of the work themselves or are at a scale where they can hire legit people and make it work.

Marcus Auerbach · Answer

Good point Darren, I have seen that occasionally as well on MLS. You remind me of something. What really shook me was when OOS investors called me to liquidate their Milwaukee portfolio, of course located in the inner city. He was in financial distress and was loosing money on long term vacant properties. I got to hear their prespective and frustration, the PM and then seeing the properties in person - and was shocked how different each perspective was!

The investor told me that his properties did not rent for half a year, he sent me picks which looked okay and the rent was not bad either. So it did not make sense and I called the PM to get their take on why they were unable to rent them out. They stated that it must be just the market. Mind you that we rent a property typically in two weeks or less with multiple applications. So I drove out to see them in person and make sense of it - and found them absolutley disgusting and badly damaged. No normal person would move in. How that did not get conveyed from the rental agent to the PM and to the owner is beyond me.

Ultimatly I had my crew clean the place and do repairs to achieve some level of habitability, the owner paid for that, I managed the process (something I normally don't have do of course, but it seemed as the only solution to get them in a sellable state) and we put the properties on the market. The goal was to sell them to owner occupants. And it turned out that was not an easy task either.

Starting out we had some issues with showings: door left wide open, lights on. Some of these agents are aparently nocturnal - I would get phone calls at 11pm asking me questions about looking to schedule a showing (which is done normally via Showingtime app, why are you calling me at 11 pm??)

Some of the offers were riddled with errors and missing information, I had to mark them up and ask the agent for new signatures. And we lost dels several times because the pre approval letters did not hold and financing did not work out. Aparently applicants had provided incomplete or untrue information to their lender. It was just a real cluster from A to Z.

As an investor of course I want to help in a situation like this, at least with damage control. Even if this is almost pro bono work based on the property values being so small, essentially not enough to cover my overhead.

I want to help if I can but after we closed the deals I vowed to myself I will not take on a rescue project like this anymore.

Brie Schmidt · Answer

I have properties in 53215, my PM @Gino Passante can probably give you some insight (they are a great PM too!)

Jacob H. · Answer

In 53215, I'd consider the north eastern portion of the zip code (east of 27th, north of Oklahoma) as a whole, to be a pretty tough neighborhood.  The rest of that zip code (by looking at crime maps and by being there) is a step, or a few steps, up, in terms of safety for residents.  I'd recommend looking between 28th and ~43rd, instead.  This is not to say that you won't find good tenants on 19th -- because you will.  Your biggest issue on Lincoln will be rampant prostitution, and all that comes with that.

Thoughts on Milwaukee 53215?

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