Thoughts On Buying A Rental For 60 K In Philadelphia?

[Isadore Nelson]

Good afternoon, I am a first-time investor looking to get started with my first property. 

I've for over a period of 2-months been looking at properties in the cheapest neighborhoods in Philadelphia, namely those within the 19134 zip-code. It seems that properties in the area can range on average from 50k-75k. I'd like to acquire one for say 60k with a 20% down-payment of 12k. Monthly mortgage payments including insurance and tax would be around $475 while the rent would be around double that, leaving me with a monthly cash-flow return of about $500. 

Is this a reasonable expectation and a good option?

I'd love to hear any of your feedback, thank you!

[Nicholas L.]

@Isadore Nelson

no, this is not reasonable - you're leaving out lots of expenses.  that is not how cash flow works.

it's also going to be challenging to get lending on properties priced that low - it may be difficult to get standard conventional financing.

and finally, the lowest prices are going to be in the most challenging neighborhoods... which will come with additional challenges.

some suggestions

can you spend some time researching neighborhoods more broadly, going to REIA meetings, and building a network?

can you house hack?

[Isadore Nelson]

Quote from @Nicholas L.:

@Isadore Nelson

no, this is not reasonable - you're leaving out lots of expenses.  that is not how cash flow works.

it's also going to be challenging to get lending on properties priced that low - it may be difficult to get standard conventional financing.

and finally, the lowest prices are going to be in the most challenging neighborhoods... which will come with additional challenges.

some suggestions

can you spend some time researching neighborhoods more broadly, going to REIA meetings, and building a network?

can you house hack?

Thank you so much Nicholas for your response and input. I can definitely attend meetings and continue to network but I'd like to make progress too.

"you're leaving out lots of expenses. that is not how cash flow works"


"the lowest prices are going to be in the most challenging neighborhoods... which will come with additional challenges"

Would you mind to break that down for me with more specifics? What's the inherent flaw with my understanding of cash-flow?

Thank you!

[Eric Gerakos]

Isadore, the primary flaw in your idea is a common one among new investors. You overlook the most basic rules of supply and demand. Have you asked yourself WHY are the properties so cheap? And what kind of tenant is going to live there? They are cheap because they are undesirable and will attract crappy tenants. Instead of the cash flow you see on paper, you’re looking at high vacancy, high maintenance and no cash flow. Cheap properties are usually no bargain. Best of luck to you.

[Bill B.]

Investors are scouring the market looking for 10-15% COC but your target market appears to be littered with 50% COC returns? How can that be?

imagine you’ve decided to invest in company bonds:     
   
You see Coke, Pepsi, Tesla, Apple are all paying 5-7% but that’s not good enough. Then you spot “Vinnie’s Beer, Pizza and VCR repair” is paying a 50% interest rate on the money it borrows. 
 
Is your first thought “These things are the same and everyone else is just dumb for not investing in them.”?

[Isadore Nelson]

Quote from @Bill B.:

Investors are scouring the market looking for 10-15% COC but your target market appears to be littered with 50% COC returns? How can that be?

imagine you’ve decided to invest in company bonds:     
   
You see Coke, Pepsi, Tesla, Apple are all paying 5-7% but that’s not good enough. Then you spot “Vinnie’s Beer, Pizza and VCR repair” is paying a 50% interest rate on the money it borrows. 
 
Is your first thought “These things are the same and everyone else is just dumb for not investing in them.”?

Haha. I like your analogy, point taken. I'd think it primarily comes down to the risk and effort involved in the investment. However, that is not to say that it can't yield significantly higher returns?

[Isadore Nelson]

Quote from @Eric Gerakos:

Isadore, the primary flaw in your idea is a common one among new investors. You overlook the most basic rules of supply and demand. Have you asked yourself WHY are the properties so cheap? And what kind of tenant is going to live there? They are cheap because they are undesirable and will attract crappy tenants. Instead of the cash flow you see on paper, you’re looking at high vacancy, high maintenance and no cash flow. Cheap properties are usually no bargain. Best of luck to you.

Eric, I really appreciate your input, thank you. I have verified with local management company the availability of tenants. In fact, I've looked at property with an already paying tenant. If rent for a 3-bed home is only $1100, it won't attract the higher-class, but it doesn't necessarily mean it's attracting the local meth dealer either, does it? 

I am not trying to be cookey, just trying to better understand. It's certainly a risk, but I can afford the risk or better said I can afford it more than I can a 800k home.

[Calvin Thomas]

Unless you know Philly, stay the heck out.  The laws, registration, crime... It's nearly as bad as NYC.  I'd say stay around the university or medical center, but you'd have a hard time finding a property that cash flows at 8% interest.

[Nicholas L.]

@Isadore Nelson

happy to help - some of the expenses you're missing would be property management, capex, repairs, and vacancy / turnover.

so for example - $1000 in rent - you might have $100-150 in property management, $50-100 in repairs, $50-150 in vacancy and placement costs, and capex would be whatever is coming due soon. a furnace, a dishwasher, whatever.

it also generally costs half a month to a full month's rent to place a tenant.  that's why high turnover is so expensive - you're patching things up / cleaning up / and then paying another month's rent just to get it rented on top of any vacancy.

and again - that's just hypothetical math.  individual properties cost what they cost.

[James Mc Ree]

@Isadore Nelson

@Nicholas L. makes good points. In addition, Port Richmond currently has 87 3br units available for rent. Your prospects have many choices before you add yours. You may have longer vacancy times. Your price point of $1,100 puts you below nearly all of the competition mitigating that.

The Philly L&I department has a terrible reputation. Plan for licensing and inspection hassles and delays.

Be careful how much weight you put into a prop mgt company's casual answers about the market. Have you ever gone into a restaurant, asked "What's good?" and they say, "Nothing." If you ask a prop mgt company if they can find you a tenant, of course they can! It's strange that there are 87 similar properties currently vacant, but they can for sure find you a tenant.

Based on your price point, my guess is you are looking at northern Port Richmond. Those properties tend to be older, as in 100 years old or so. They likely have plaster walls, nothing conforming to current code of course, but not illegal either, and rough basements. Bars will be on the windows (crime reference above).

Don't be surprised if your cheap purchase costs that much or more to repair as your repair costs will be much higher than a home built with more modern materials, such as in the 1940s-1950s. Be sure to look the house over well yourself so you know what you are getting yourself into before you are in it. It might be a good idea to bring your contractor with you to look at the property and get a quote to fix it to your standards so you know what you are dealing with before you buy it. That could be a very well invested $100 or so.

Additional expenses I add are municipal inspection fees, inflate the cost of all repairs if your prop mgt company is handling them for their load onto the repair cost and utilities while you hold the property initially and with turnovers.

Overall, I wouldn't say this is a bad idea if you know what you are getting into and are comfortable with it. That's a huge leap though for a first time investor who can't possibly really know what they are getting into. (I'd like to learn how to swim. OK, how about in the shark tank? Sounds good. What stroke should I use?) Finding a local mentor who isn't selling you something would be a very good idea. Consider making a local real estate group your next stop. Don't be in a hurry to buy. You make your money when you buy, unless you buy poorly.

This is a relative value question. Is your $60k purchase + $x in repairs for a total of ??? better than an $80k property in a better area or better condition, for example? You might get $1,400 - $1,500/month rent for a nice $80k property and a higher class of tenant.

Get to know Section 8. Your tenant will very likely be part of the program.

[Matthew Paul]

@Isadore Nelson   Those numbers sound great , now ask yourself this , why arent all the experienced investors who are loaded with cash rushing in and scooping up those properties ?

Have you ever been to that area of Philadelphia ?   If so would you walk around in that area after 8 pm ?   

[Henry Lazerow]

Cheap properties can work well if sec 8 them and take care of accounting for the large cap/ex item costs. But $500 will definitely not be cashflow need factor in all the wear tear, cap/ex etc. Maybe cashflow comes to $200-300 if run it very well and self manage. 

[Drew Sygit]

@Isadore Nelson why aren't you using the BiggerPocket Calculators?

They cover most everything you have NOT thought of.

The ony issue we ahve with them is the default 5% Vacancy Factor, only works for Class A rentals.

We believe for Class b it should be 10% and Class C 20%.

Why?

Because it really should be called Vacancy/Tenant nonPerformance+Damages.

In ANY market, if you target the cheapest prices you will get the WORST: Neighborhoods, properties & tenants.

Doesn't matter how smart you think you are or how hard you work, you will NOT get Class A performance from Class D!

[Hunter Stoudnour]

Quote from @Isadore Nelson:

Quote from @Bill B.:

Investors are scouring the market looking for 10-15% COC but your target market appears to be littered with 50% COC returns? How can that be?

imagine you’ve decided to invest in company bonds:     
   
You see Coke, Pepsi, Tesla, Apple are all paying 5-7% but that’s not good enough. Then you spot “Vinnie’s Beer, Pizza and VCR repair” is paying a 50% interest rate on the money it borrows. 
 
Is your first thought “These things are the same and everyone else is just dumb for not investing in them.”?

Haha. I like your analogy, point taken. I'd think it primarily comes down to the risk and effort involved in the investment. However, that is not to say that it can't yield significantly higher returns?

I think that a lot of experienced investors in this thread have brought up important points that are critical to deciding whether this will be a good opportunity. I will say that if you are younger, have a little more free time, and are willing to put additional effort into your property, this could be a great learning experience. I am not saying you should purchase this specific property but if you never take the step to start you could be on the sidelines forever.  Find someone who has had success in that specific area, talk to them, and go from there. 

[Alan Asriants]

Newer investors usually always go after areas and properties that are the cheapest because they usually don't have much capital for a substantial down payment. 

If you don't have 20%+ down, you really should seek a house hack. It is the best way to get into the RE world with 3.5%+ down. In fact its the best thing to do IMO if you haven't bouught any home.

Oh and as for where you should invest? - Your backyard, where YOU would want to live. This is why the househack is a perfect stepping stone. 

As someone mentioned here: ask yourself why the property is so cheap. 

If it is too good to be true, it is likely too good to be true. 

If you want to know for yourself, pick one of those address and drive around the area so you can understand why. 

The three most important rules in real estate are: location, location, location. When you go there you will quickly understand why the values are low. 

[Eric Greenberg]

19134 is a very dynamic zip code. Being east of Aramingo in Port Richmond is an entirely different world than Kensington Ave/the letter streets. 

You can certainly make money anywhere but I would only suggest investing by K&A if you really know what you are doing. If you have never been to this area please go during the day, not night and check it out… or even youtube it before. That might be all you need to know. 

[Wale Lawal]

@Isadore Nelson

Your plan's financial analysis includes $48,000 mortgage payments, about $229 in monthly principle and interest, $200 in taxes and insurance, and $950 in rental revenue. It is critical to examine vacancy rates, maintenance and repairs, property management, and net cash flow. The investment is deemed feasible, with a cash-on-cash return of 18.96% ($2,844 / $15,000). Additional concerns include area study, property inspection, knowing local market circumstances, and legal adherence to Philadelphia's landlord-tenant rules. With careful preparation and thorough investigation, your investment might be a firm foundation for your real estate portfolio.

Good luck!

[Dan Powers]

@Isadore Nelson It all depends on what you are comfortable with risk wise, the 19134 zip code has a wide range of values. If you are going to invest in that zip code most of my investors tend to stay south of Aramingo Ave, the further north you go the closer to zombieville you get. Like @Alan Asriants and @Matthew Paul said location, location, location, an area during the day and night are very different things in Philadelphia.

While the cashflow might be great, the greater the risk the greater the reward, but there are still plenty of other areas where you can get 200-400/month without being near the largest open air drug market on the east coast.

[Isadore Nelson]

Quote from @Dan Powers:

@Isadore Nelson It all depends on what you are comfortable with risk wise, the 19134 zip code has a wide range of values. If you are going to invest in that zip code most of my investors tend to stay south of Aramingo Ave, the further north you go the closer to zombieville you get. Like @Alan Asriants and @Matthew Paul said location, location, location, an area during the day and night are very different things in Philadelphia.

While the cashflow might be great, the greater the risk the greater the reward, but there are still plenty of other areas where you can get 200-400/month without being near the largest open air drug market on the east coast.

South of Aramingo Ave, meaning over the 95 closer to Richmond, that is the better area?

[Isadore Nelson]

Quote from @Wale Lawal:

@Isadore Nelson

Your plan's financial analysis includes $48,000 mortgage payments, about $229 in monthly principle and interest, $200 in taxes and insurance, and $950 in rental revenue. It is critical to examine vacancy rates, maintenance and repairs, property management, and net cash flow. The investment is deemed feasible, with a cash-on-cash return of 18.96% ($2,844 / $15,000). Additional concerns include area study, property inspection, knowing local market circumstances, and legal adherence to Philadelphia's landlord-tenant rules. With careful preparation and thorough investigation, your investment might be a firm foundation for your real estate portfolio.

Good luck!

 Wale, thank you very much.

[Isadore Nelson]

Quote from @Eric Greenberg:

19134 is a very dynamic zip code. Being east of Aramingo in Port Richmond is an entirely different world than Kensington Ave/the letter streets. 

You can certainly make money anywhere but I would only suggest investing by K&A if you really know what you are doing. If you have never been to this area please go during the day, not night and check it out… or even youtube it before. That might be all you need to know. 

I have been there, and know it is an insane place, but that wouldn't necessarily make it a bad investment, especially with limited resources as a start, no?

[Isadore Nelson]

Quote from @Dan Powers:

@Isadore Nelson It all depends on what you are comfortable with risk wise, the 19134 zip code has a wide range of values. If you are going to invest in that zip code most of my investors tend to stay south of Aramingo Ave, the further north you go the closer to zombieville you get. Like @Alan Asriants and @Matthew Paul said location, location, location, an area during the day and night are very different things in Philadelphia.

While the cashflow might be great, the greater the risk the greater the reward, but there are still plenty of other areas where you can get 200-400/month without being near the largest open air drug market on the east coast.

Safe to say that enclosed area below Aramingo Ave is the better and more ideal area to consider?

[Dan Powers]

@Isadore Nelson If your sticking in 19134, between Aramingo Ave and 95 is the best spot to be in the zipcode

[Isadore Nelson]

Quote from @Dan Powers:

@Isadore Nelson If your sticking in 19134, between Aramingo Ave and 95 is the best spot to be in the zipcode

 Got it, thank you. Now I ought to familiarize myself more specifically with the more intricacies of central Kensington itself. 

[Wale Lawal]

Quote from @Isadore Nelson:

Quote from @Wale Lawal:

@Isadore Nelson

Your plan's financial analysis includes $48,000 mortgage payments, about $229 in monthly principle and interest, $200 in taxes and insurance, and $950 in rental revenue. It is critical to examine vacancy rates, maintenance and repairs, property management, and net cash flow. The investment is deemed feasible, with a cash-on-cash return of 18.96% ($2,844 / $15,000). Additional concerns include area study, property inspection, knowing local market circumstances, and legal adherence to Philadelphia's landlord-tenant rules. With careful preparation and thorough investigation, your investment might be a firm foundation for your real estate portfolio.

Good luck!

 Wale, thank you very much.

 My pleasure!

Keep learning and growing...

[Eric Greenberg]

Quote from @Isadore Nelson:

Quote from @Eric Greenberg:

19134 is a very dynamic zip code. Being east of Aramingo in Port Richmond is an entirely different world than Kensington Ave/the letter streets. 

You can certainly make money anywhere but I would only suggest investing by K&A if you really know what you are doing. If you have never been to this area please go during the day, not night and check it out… or even youtube it before. That might be all you need to know. 

I have been there, and know it is an insane place, but that wouldn't necessarily make it a bad investment, especially with limited resources as a start, no?

It could be. It only matters if thats the type of investment you want to hold and deal with. Have you talked to any PM companies who deal in that area? 

And like I said being east of Aramingo in Port Richmond is an entirely different world. Lots of folks priced put of Fishtown are moving north and Richmond Ave had been slowly bringing in new businesses.