Would is be a good idea to buy rentals...... - Posted by Stewart(Chicago)

Posted by Stewart(Chicago) on December 15, 2003 at 18:51:28:

I’ve heard this was a good plan, as I really don’t want to quit my job just supplement my income. Some investors in the area are making a nice living for themselves I must admit. Maybe I can retire at 40 once all of my properties are cash flowing free and clear.

Stewart(Chicago)

Would is be a good idea to buy rentals… - Posted by Stewart(Chicago)

Posted by Stewart(Chicago) on December 15, 2003 at 18:00:06:

in a bad area? I’m not really affraid to work in war zone like areas, kinda grew up in one myself. I have a nice amount of cash and a good job. My only downfall is my credit score. I like working with people and I’m very young, so fixing toliets at 2 a.m. is no problem until I can get a Mgmt Co. to do it for me. I know I can buy some homes in this area for about $300/mo. that will rent for at least $650/mo. I am in the process of getting to really know the area. Like I said I’m young (22) so I just want something that will be paid off free and clear in the next 15 years. Is this a reasonable plan?

What would be the advice of experienced investors?

Stewart(Chicago)

Re: Would is be a good idea to buy rentals… - Posted by GL(ON)

Posted by GL(ON) on December 16, 2003 at 09:34:30:

There are two reasons I would change this plan slightly. The change would be to work in better neighborhoods. Not deluxe, but solid working class neighborhoods.

In the long run you would be better off. Slightly less cash flow in the beginning I admit. But less work, less hassle and less risk as well. The other factor is appreciation. War zones can be expected to continue deteriorating. Your properties would be hard to sell and bring very little if you could sell them. In a better neighborhood you would have appreciation, and your properties would double in value in 5 to 15 years (average 10 years). So if you bought a half million dollars worth of property and paid it off over 15 years you would have a million dollars free and clear, in the war zone it would be worth probably less than you paid.

Now here is the way to make some real dough. Buy properties in a decent neighborhood that is next door to one that is undergoing “gentrification”. Usually there is an old dull neighborhood that suddenly became fashionable with yuppies who move in and buy houses then spend a fortune on modernising and renovating. In these fashionable neighborhoods houses commonly sell for twice as much as an identical house a block away. So buy a block away where prices are still low, get your pos cash flow, and wait for the yuppies to move in. This way you will get the usual appreciation that everyone gets, plus you will get the added boost that comes when a neighborhood becomes fashionable. Your property could well double and double again in value. Plus you would be buying in an average neighborhood but your house would end up in a much better neighborhood.

By targeting properties that are slightly run down, but not requiring major work, you should be able to get some good buys, fix them up and get the positive cash flow you need.

Buy and fix up just one house a year and you will be rich enough to retire in 15 years or less. Even if you don’t pay off the mortgages.

If being free and clear is important to you buy 2 houses a year and in 10 years when prices have doubled, sell the worst 10 and use the money to pay off the others. You will have 10 houses free and clear, bringing in $6500 a month in today’s dollars. Subtract 30% for expenses and you will have $4550 a month or $54600 per year, about twice the median income. And that is just buying and managing one or 2 houses a year.

There are many possibilites but your plan is very sound and doable. I know several people who have done substantially the same thing.

Re: Would is be a good idea to buy rentals… - Posted by Brian W(IL)

Posted by Brian W(IL) on December 15, 2003 at 23:55:48:

Stewart, I was wondering, what area of Chicago are you talking about, if you don’t mind sharing? I’m from Chicago too(as you can see from my name), and would be interested in this type of cashflow if I could get it. Thanks

Re: Would is be a good idea to buy rentals… - Posted by Jim (MD)

Posted by Jim (MD) on December 15, 2003 at 23:23:24:

Possibly, but be careful of the pitfalls. Financing and insurance in not so good areas is much harder to get, particularly in the big cities. If you intend to buy in these areas, always ask about owner financing, and try to find tired landlords. Landlords in these areas get tired quickly.

You also must scrutinize the prospective tenants much more than in higher income communities. I would recommend that a beginner use a tenant placement service. One bad tenant could destroy the house completely.

Good luck.

Re: Would is be a good idea to buy rentals… - Posted by Doug Pretorius

Posted by Doug Pretorius on December 15, 2003 at 18:39:15:

I know some people who have done very well for themselves in this niche. Unfortunately you tend to become something of a slumlord because properties in bad areas generally rent for about the same regardless of whether they’re in AAA or FFF condition, so what’s the point of costly maintanence?

Re: Would is be a good idea to buy rentals… - Posted by Stewart(Chicago)

Posted by Stewart(Chicago) on December 17, 2003 at 10:15:19:

Thanks all. I really appreciate it. I guess I should clear up a couple things. The area I’m looking to invest in is not a great area (Harvey & Calumet City) but it’s not exactly like you have to ride around with police protection. I would never be a slum lord and the apprecition in the area is about average.

I just know there are endless possiblities to gather property by traditional means very cheap or Sub2. I most likely will rehab one home a year but over the next 3-5 years buy 12 sfh and keep them in good shape to rent until I’m ready to 1031 them into a larger multi-unit building.

Thanks again,
Stewart(Chicago)