Great Property, Bad Neighborhood, Good Deal?

Question

I am a fairly new investor based in San Diego. Currently looking for my second buy&hold cash flowing multi-family property. I'm realistic about cap-rates in Southern California, so I don't expect anything spectacular.

On to the actual property. I'm looking at a duplex located in Mt. Hope area, just south of Market St. and West of the I-15. If you are not familiar with the area, it's considered a pretty run-down, bad neighborhood in San Diego. High in crime and reported gang activity.

The property is a turn-key flip, so it's in tip-top condition, practically looking brand new. I've done my best estimating the rents and I would be getting around $300 cash flow on a home value just under $500k. I understand that the cash flow is not spectacular, but after looking for 4+ months, this doesn't look so bad for Metro San Diego area (I also have limited cash reserves, so I can't put down a 50%+ down payment to make some of the better properties cash flow).

My main question is whether it's worth buying a really nice property in a bad neighborhood as a long-term investment. I am concerned with the quality of tenants that I may be dealing with and with rent/price appreciation (I don't think this neighborhood will turn around any time soon). I am leaning against this investment, but want to know what you think, especially if you are a local San Diego investor. Is it best to stay away from these neighborhoods, no matter how nice the property is? Does any buy&hold investors even bother with South East San Diego?

Thanks!

Elizabeth Colegrove · Answer

@Anton Ivanov Please take this with a grain salt as I am not from San Diego area. I personally buy poor houses in great neighborhoods not great houses in poor neighborhoods. I find that people want to live in certain areas. I would also be concern that vacancies and maintenance issues would eat into your profit margin.

Joshua McGinnis · Answer

Yea, 8% of rents towards management fees + $200 condo fee. The nice thing about the condo fee is that I'm on the board with the other condo unit owner so I get a lot of say into where we spend the money. So far, we've made it a point to invest in improvements that will increase the value of both units (like a new driveway, new porches which were formerly eye sores, etc).

Mike Hurney · Answer

@Joshua McGinnis Good, that you're working on your "Curb" appeal!

Mike Hurney · Answer

@Joshua McGinnis $700 down to $200 net? Are you taking out an HOA, TI or CapX? I like to think of this Boston area as an Appreciation investment rather than a Cash Flow area.

Dawn Anastasi · Answer

Anton, this is why you are on Bigger Pockets! You can network with other investors and get insights into various areas around the country. Read up on all the forum threads about other people questioning investing out of state and you will probably learn a great deal. Don't be afraid to ask questions. You can see the question you did post got lots of quick responses; almost every post is like that. People are here to help each other out! :)

Shaun Reilly · Answer

For a cash flow investor it is a tough market to be in. Since prices and rents are so out of whack since people are investing based on cashing in appreciation you really have to find the diamonds in the rough to make any real returns based on income. Since the appreciation play is a big one I would shy away from buying a nice place in a rougher area if you don't think it will turn around. I'm all for buying in lower tier areas but only if you are buying better cash flow (Once upping vacancy and repairs to account for the area). Maybe in SD $300 on a duplex IS buying better cash flow, but not an impressive number on a $500K purchase. If you want to stay at home you have to figure out what returns are acceptable and will probably really have to work your butt off to find above average deals. No issue with doing that if that is what you think works for you. I will agree with the general sentiment that you can get WAY better bang for your buck in many other markets throughout the country.

Joshua McGinnis · Answer

I'd rather have seen you on the flip side, as opposed to buying after someone else has cashed in most of the equity. Have you looked at how the market has performed in the last 5 to 10 years? What kind of appreciation has it seen? There's a few places in Los Angeles that have been considered historically bad areas, but have shown consistent improvement in the last decade - specifically when it comes to crime rates and home values. $300 cash flow doesn't leave you much room for covering unexpected expenses, for which there will definitely be some. But maybe the tax benefits and the prospect of appreciation outweigh the risks. I own a property near Boston that cash flows $700/month, but after property management fees, I'm netting only about $200/month. I'm OK with this because the tax advantages and the fact my property manager is amazing makes the deal totally worth it for me.

Anton Ivanov · Answer

@Eric Black Thanks, I'll send you a PM. After reading your guys' comments and thinking about, I'm going to pass on this one and most likely just exclude this (and a couple of similar) neighborhoods from my search.

Eric Black · Answer

@Anton Ivanov You bring up all good points about investing out of your area so you are off to a good start. Also, the properties I mentioned that we have also were purchased with traditional financing, not all cash. If you're interested in exploring other areas send me a message and I'd be happy to introduce you to the teams we have in place in those areas. Good luck!

Anton Ivanov · Answer

Thank you all for your responses (and so quick too!). As I was before, I'm leaning more and more toward skipping this one. @Eric Black I am not purchasing this property specifically for price appreciation, I'm purchasing it more as a buy&hold wealth-building investment (through cash flow, rent-paydown and appreciation). But you bring up a valid point that if I want to exit in the future and the price has fallen or remained the same, my overall ROI would be little, or possibly negative. A little off-topic, but yes, I have considered investing out of state many times, because based on the research I've done, cap-rates and cash-on-cash returns suck in San Diego, especially if you are using traditional financing like I am. The problem I have is that I literally don't know anybody in other states and I'm not the best at making connections. But I feel like without having a solid team in place, or at least another seasoned investor who lives in the area, I would be gambling with my money. I know these are just excuses though, haha! @Aaron Junck I usually use a 10% vacancy rate for all my cash flow calculations, although perhaps for an area like this I should use a higher number... @John O. I really appreciate you making an account just to help me out! I'll send you a PM.