What Neighborhood is a good neighborhood?

[Christian Bateman]

Hey guys,

I've been analyzing deals with a buy and hold mentality in the Tacoma, WA area for a while now. Like anywhere in the US, the best "deals" are in the worst parts of town. The area has a full spectrum of neighborhoods, from super posh urban with great schools, to po dunk ghetto. I'm having a really hard time comparing these properties because it feels like apples and oranges.

For you, what kind of neighborhoods have worked best? How ghetto is too ghetto (tenant turnover > 1/yr)? How nice is too nice (people don't rent if they live in these areas, if that even exists)? How much of a premium should you pay for a nicer neighborhood with less tenant turnover and higher rent? Is it worth the risk to pay less for a property in a bad part of town? 

I'm leaning towards paying a premium for nicer neighborhoods, but the delta between homes in nice areas compared to < decent areas is HUGE, like $60-70k, and I'm starting with very little capital ($30-40 down+reno).

Specific geographics aside (I'm interested in Tacoma, but would love to hear from anywhere), whats been your experience? Any suggestions?

[William "W.J" Mencarow]

Hi Christian,

Since nobody has responded, I'll give you my 2 cents.  I've been buying and renting SFHs since the '80s, first in the Washington, DC area, now in central Texas.   I'm a buy and hold guy, not a flipper.

I never buy a house I wouldn't live in.  That goes for the neighborhood as well, even if I like the house.   I don't mean the house and neighborhood has to be ideal for me, but in a pinch I could live there and be OK.  If I would worry about my wife being alone in the house, I don't buy it. (Since she does some of the rehabbing, she's often alone in houses we buy.)  If the house and neighborhood passes those tests, I know it will attract good tenants.  And attracting good tenants is THE goal.

I've learned by trials of fire in buying houses in all kinds of neighborhoods (except the worst slums) --  all the way from trashy houses in low income neighborhoods to one I own right now, on a private golf course.  My best rentals, both from good cash flow and fewer tenant headaches, are in middle income to higher middle income neighborhoods. 

High-end houses tend to have tenant turnover, which can kill your profits and even put you in the red.  People who rent high-end houses usually are doing it because they are waiting to buy a house and will move out in a year or two.  There are exceptions, of course (as is the one I have now), but that is one of the risks in expensive houses.

What do I look for in a neighborhood?  Kids playing, mothers pushing strollers, mowed lawns, cul-de-sacs, off major roads, little traffic (so kids can play outside), good school district, walking distance or a short drive to shopping.  I walk the neighborhood and talk to people, tell them I am interested in buying in the area and ask them how they like it.  John Schaub taught me to also ask them if they know of anyone who might be selling but hasn't listed yet (www.johnschaub.com).  

What do I look for in a house?  3/2s with garages.  I don't want more bedrooms because I don't want an army of kids destroying my house.  I want a garage because tenants often fill them up with stuff, a workshop, etc., and that means moving would be a huge deal for them (so they are likely to stay when the rent goes up).  I LOVE to see my tenants have to park in the driveway because of all the stuff in the garage.  New or newer roof and AC compressor.  Brick or other siding that doesn't need paint.  Tile floors, ideally everywhere.  A yard for kids and pets (upkeep is tenant's job).  Yes, I allow pets if there are tile floors, because I can get more rent

I have owned  houses in bad neighborhoods and paid less for them.  The cash flow was great -- when the renters paid, which wasn't often until I hounded them, and when there were no major repairs, of which there were many, and when there were no vacancies, which there were many of, and when I could find desirable tenants, which was rare, so the houses sat vacant for weeks and even months between renters.  

Bottom line:  If you are looking at houses in a neighborhood and you think you would be more comfortable if you had a gun, don't buy there.

The other MAJOR issue with bad neighborhoods is drugs.  The government under civil forfeiture laws can seize your house if your tenants are convicted of drug dealing/manufacturing. Yes, of course that could happen in nicer neighborhoods, but the chances are less.  That's why you need to visit your tenants every so often no matter the neighborhood.

Maybe slumlords do well with those kinds of properties, but I am not and do not want to be a slumlord.  I buy nice houses in nice neighborhoods, fix them up to the max, spend a little more to make them over the top, and rent them to nice tenants who appreciate the house and appreciate me as their landlord.  As a result my average tenant stays for years; one stayed for 18 years, and she'd still be there if I hadn't sold the house.

I hope this helps a bit.