Buying first property...in the hood?

[Philip Schultz]

I'm saving up some capital right now and hoping to purchase my first rental property in a couple months. I'm from Houston so as many know, the market is crazy and full of investors. I've been looking at starting in a part of town that is considered rough. 10 miles due south of downtown, just outside the 610 loop is crestmont park, sunny side and south acres. As I've done research, the selling market isn't hot in the area, but I know there are a lot of rentals. The houses that are for sale are pretty run down. However, there is a lot of new build about a mile away and from my opinion of the Houston market, this is the only direction that Houston can go with a lot of new growth this close to downtown and central to the metropolitan area. It's 5 miles from the Hobby Airport Right off of the 288 highway 8-10 mile north of Pearland that is just outside of the Beltway 8 loop (and booming - it's where I live - but haven't been able to find a deal with near this good of numbers) Numbers on a property.... I could probably get a house for 40-45k ($.35-.45/sf), do about 10-15k in rehab (I'm in the construction industry) and rent it for about $1000-1200 ($.70-.80/sf) for what seems to be $400-500/month NOI. The fixed up houses I've found on the market are around $80-90k so I figure I could refi in a year or less and do it all over again. I did the rental property calc on a listing I found: SF: 1400 Purchase: $42k Closing costs: $2.5k Estimated repairs: $12.5k ARV: $85k Monthly Income: $1100 Monthly Expenses: $572.10 Monthly Cashflow: $527.90 Pro Forma CAP: 14.10% NOI: $8.4k Cash on Cash ROI: 26.40% Purchase Cap Rate: 18.80% I hear all the time that you never want to buy in a bad neighborhood... But someone has to, right? And if it seems to have this much potential, is it worth the risk? Thoughts?

[Ramone Reese]

I buy in what some would call "the hood" in Detroit. That said I stick to the area I grew up in. It's easier to keep an eye on them once they go vacant or during my rehab. I've found its a strong rental market because, as my mom said, everyone has to live somewhere. It depend on your goals and risk tolerance. Rather than analyze your deal, I'll just give you a few tips on how I cut down on break ins and theft and crappy tenants.

1. I do some of the work myself which allows me to make my homes nicer than the competition. There are good people in the hood who just don't have the money to live in a better area. You're in construction, so consider adding some things like ceramic and glass tile back splashes, ceramic floors, ceramic baths with nice towel holders and light fixtures. You probably know where to get a lot these things for even cheaper than I do. But I've found Craigslist and Habitat ReStore to be excellent sources to get nice stuff for cheap. Many would recommend against this as its "just a rental in the hood." But I've found that not only have I been able to pick and choose my tenants, but many of them have recommended friends and family who are equally good tenants. Not to mention, if you make it nice then some of the people with housing vouchers/subsidies are attracted as well.

2. As soon as you start working on the home board up the windows from the inside (especially the back of the home) and use double-keyed deadbolts on the locks. If someone really wants to rip you off, you can't stop them but you can discourage or slow them down. Also consider reinforcing the side or back door from the inside while you're working and use the front.

3. Be a good member of the community. I usually introduce myself to the neighbors. I've even stopped the ice cream truck and gotten all of the kids ice cream. The neighbors have been very helpful once I show them a little love. Sometimes I'll even shovel the next door neighbors snow if I'm already doing my own. Takes me an extra half hour but they appreciate it. Plus they usually know who is doing the breaking in (it might even be them) so I've found any way to build good will helps. One even contacted the former owner and got me the keys to the house so I wouldn't have to break in. (I bought the house in a tax foreclosure auction). They tend to see me more as a neighbor than some rich investor guy trying to make money off of them. Keep up your lawn. Poorly kept houses are magnets because folks figure they are neglected and no one owns them.

4. If possible, drop by the house at odd times. I have friends in the neighborhood who might drop by the house on the way to or from the club and I do the same. Just to show traffic. It is my theory at least that people are reluctant to break in if they have no clue when someone might show up. Theft is a huge problem in Detroit.

5. Some investors I know pull the furnace and hot water heater as soon as the property goes vacant. I don't have the storage for that so I try to make up for that by babysitting the vacant properties where I'm doing work or waiting on a renter.

6. If possible, don't drive your nice car over there. In my experience, EVERYONE in the hood knows you by your car. No sense in making people any more interested in you or your property than necessary. Especially if it'll make them think you have something worth taking.

7. Be on TOP of your business. No need to be an *******, but they need to know that you are a serious owner. Prompt response to maintenance requests. All legal documents professionally created and executed. 7-day notices and rent ledgers where applicable. If you're lax, they'll likely also be lax.

Well, I hope you find those tips useful for this or any other property you decide to buy. I've had a few bum tenants but by and large have gotten some good ones. Some of these tips I picked up from other more experienced people, but all of them I use myself. When I haven't I paid.