I do have some experience in the bad neighborhoods, but had the problems you spoke of. I usually had to pull teeth to get my rent, unless it was Section 8. It is nice to automatically get paid on the 1st top dollar rent, but I also don’t want to depend on the government completely for my investment income.
Crime really wasn’t the big issue if you are smart. You do have to worry about your HVAC unit on a vacant property (keep it locked up). One of my properties was set on fire, but my insurance covered the note.
In dealing with these areas, the return needs to be huge to deal with all of the hassles. I believe that a property paying for itself in less than 3 years would fall under this category.
Good advice on staying small. My plan is to do one of these deals all cash, get it rented out, and then only pull the money I put in out (approx. 50% LTV). This would be a nice 15 yr amort. with a solid cashflow. These type deals are becoming more and more abundant and is the tried and true way to invest in RE.
I have been active in my area for the past few years looking for bargains. One trend I have seen in the last few months are the huge slow-down of urban-area sales.
I have bought/rehabbed/rented several properties in the lower-income areas, but have not seen any deals like this.
Homes that I could rent easily for $500/mo. can be bought for $15k with little to no work! This is insane ROI, not to mention that these properties will appraise for $40k all day.
The cause behind this, in my opinion, is the dry-up of investor funds. Owner-occupants with FHA loans do not buy in these areas. There are also tons of RE investors getting out of the business. Hard money guys I used in the past have become slum-lords from their foreclosures and don’t want more real estate.
I know that there is blood on the streets and those with cash are in a great market for the buy and hold strategy. The only problem is the lack of leverage. Is my only option to buy and rehab cash, wait six months, then get a 70% refi?
Most of these properties that are steals are REOs from investors who let all of their properties go. Noone is making offers and all of the realtors who have them listed tell me the same.
Does anyone agree with this investing strategy?
What about depending on Section 8? I have had good experiences with it in the past, but will the funding dry up like everything else?
Are there investor resources out there gain some leverage besides conventional 20% down? What about rehabs?
Thanks in advance! I truly believe that this is the best strategy in my market.
Posted by Mark (SDCA) on October 21, 2008 at 15:11:33:
I tend to agree with Greg. These are probably proprties that would look good on paper but would under-perform expectations ie more turnover, harder to rent, more damage etc.
Posted by My world too! on October 09, 2008 at 12:23:25:
I resemble that “slumlord” remark! LOL.
I buy rehab and I rent Section 8. I used to be laughed at, now friends are calling me for advise…
Find your niche, this business is very flexible. Dominate your niche if it is there. Like they say on the basketball court, if you got the shot, take it!
You don’t say where you’re from. I live on the edge of Philadelphia and there are some similar opportunities here. I see two issues:
It takes a certain type of person to be a landlord to these types of properties. Do you have experience with this?
If the economy is in fact going into a significant recession, the tenants for these properties are potentially going to be unemployed a lot. You may have difficulty getting your rent checks as often as you think you will. Crime may also be an issue…up to and including looting of plumbing and appliances when the properties are between tenants.
I’d say try it but stay small…do it with money you can afford to lose.
Posted by camgere on October 09, 2008 at 07:56:14:
If you are refi-ing cash flowing properties to buy other cash flowing properties you are probably OK. Especiallty if you have 15 year mortgages. Your Debt Service Coverage Ratio is well above 1. If you are pulling out cash for consumption and life style you are essentially living on credit cards. Levers work both ways and can smack you hard.
Posted by Dean in NC on October 14, 2008 at 20:45:58:
Me too, I just placed a tenant sec 8 that cashflows close to $500/mo - -bought REO that needed very little work - -less than 1/2 tax value. Many do the low income, few do it well.