Who is killing it? Inner city Milwaukee rentals for cash flow

Question

I will be investing in duplexes this month in inner city Milwaukee. I am looking forward to reading posts about success stories. Who do you know that has over 25 units in the rougher parts of the city? I know the tenant situation can be a bit sketchy and the crime/violence can be an issue. I would love to talk to some big hitter that are making a lot of money in the inner city.

Thanks,

Brendan

Daniel Hanson · Answer

@Brendan Piper - I have several units in different parts of the city, but not 25 yet, so take my experience with a grain of salt.1. Even though I'm only 45 minutes to an hour away, I find my property managers invaluable dealing with issues on a daily basis. There is no way I could handle most of the in-person rent collection, and regular property check-ins on my own with a full time job. Certain property managers focus on certain areas, so before buying any specific property, I make sure I have a competent property manager lined up who is familiar and comfortable with the area.2. I started with the idea of pursuing 2% and 3% rule properties and rehabbing them to a decent level at purchase. In my original analysis, I pegged my vacancy and capex and maintenance numbers at what I considered a high level. Based on my actuals, I should have pegged it even higher. Luckily, the overall cashflow is still attractive, but I recommend doing as in-depth of study as possible. As you probably know, you should expect zero appreciation on these homes. If I don't expect to more than meet my ROI targets from cashflow, I don't buy it.3. Due to the low purchase price paid in cash, or in some cases creative seller financing with a balloon payment out in the future, I have several properties that will require refinancing or a large cash payment. On future properties I plan to work with some local banks that will either finance lower priced properties up front with a mortgage, or will offer a portfolio loan against multiple properties over a longer term. This will reduce the variation in cash-flow that I see over the life of the properties.4. The Department of Neighborhood services (DNS) has really increased the level of inspections/ violations they are doing across the city. My belief is that it is a revenue play by the city. But in any case, because a violation can be triggered at any time, and even called in by a disgruntled tenant (...getting evicted? call DNS!...), I've figured out a few methods for quick response. You can set up automatic alerts on the city website for each property for both DNS and police reports; in case there is an issue you hear about it the same day instead of 7 days later when you get a letter from the DNS. Then immediately call the inspector to discuss (PM does this for me) and get your contractor in to take care of the issue once you agree on what is being requested. The sooner you talk to them, the easier it is to negotiate any unreasonable requests, or fix any reasonable requests.

Chaim Lampert · Answer

@Brendan Piper I currently manage about 75 units for other owners in Milwaukee. Most are not in bad areas, but the few that I manage that are more inner city are more time consuming and demanding, and turnover seems to be a bit higher. I haven't seen crime being an issue.

Brock Mogensen · Answer

We own 89 units in a C class part of Milwaukee. Great for cashflow but definitely management intensive. We leverage third party property management but it is still essential to stay involved with asset management.

Marcus Auerbach · Answer

I don't really know of anyone who has kept going after the first 5 units. The math does not work; capex will exceed cash flow and you have neigher appreciation nor equity gains, so it's a net loss. Most people realize that after a few years. The only way I can see to do this succesful is a hit and run strategy - buy one that is in good shape (no major repairs needed, someone else just paid for the new roof etc), rent it for a few years, sell before anything needs major repairs. When you do this long enough, you realize that every house needs a full rehab every 30 to 50 years. Plumbing lasts longer than a roof for example, kitchens and baths depend on quality of materials and the occupant. Typical rehab is $35 to $50 per SF; or if you prefer it this way on a duplex 25k per unit and 40-50k for the exterior.

Chris Carman · Answer

Hi Daniel. Do you have a recommendation for inner city property managers in Milwaukee? Thanks!

Daniel Hanson · Answer

@Jordan Napoli actually I haven't completed any refinances yet, I still need to take care of that. I would recommend @Shawn Ackerman as a first stop for that discussion.

Jordan Napoli · Answer

Daniel Hanson I was wondering if I can pick your brain on some refinancing questions I have as it seems you've done a few for single family investments. Any chance you'd be willing to share your opinion on a potential refinance I'm looking at?