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Author Topic: Investing in "slums"  (Read 22867 times)

Offline smithinvestments

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Investing in "slums"
« on: September 12, 2006, 08:13:40 am »
I am looking at a deal that seems very attractive. Here are the details:

6 single family homes (750 sf each) in a bad part of town.
2 completely rehabbed and rented for $450 per month
The other 4 houses need new flooring and HVAC as well as stoves.
Purchase price for all 6 houses is $169,000. Figure $30,000 to rehab I would have a total of $199,000 invested and my gross rent would be $2,700 per month!

I would hire a property manager due to the location of these properties. Can you guys give me some feedback on (1) this deal and (2) dealing with low rent properties.

Thanks in advance
Leonard

Offline propertymanager

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Re:Investing in "slums"
« Reply #1 on: September 12, 2006, 12:14:17 pm »
Leonard,

This looks like a loser to me.  It is definitely a negative cash flow deal, losing about $100 per month.  I wouldn't do it.

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline smithinvestments

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Re:Investing in "slums"
« Reply #2 on: September 12, 2006, 12:31:44 pm »
mortgage $1,350 (borrow $179k)
taxes             195
prop mgmt     270
maint.            150
insurance      115
TOTAL =       2,080 per month

Total rent = $2,700 minus 10% vacancy rate gives me a positive cash flow of $350 per month. Did I miss something?

Offline aak5454

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Re:Investing in "slums"
« Reply #3 on: September 12, 2006, 02:03:24 pm »
your maint/repair/cleaning cost are way too low

if your in the low end like this, you need to be solidly cash positive becuase most of your ROI is going to be coming from that cash output

Offline smithinvestments

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Re:Investing in "slums"
« Reply #4 on: September 12, 2006, 03:02:21 pm »
Ok, I follow you. Thanks for the info!

I just ordered the Section 8 Bible by Michael McLean and Nick Cipriano. It looks like some helpful info into these types of rentals

deaaak

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Re:Investing in "slums"
« Reply #5 on: September 13, 2006, 12:01:02 am »
I agree w/ propertymanager.  Doesn't look like a good deal.  Cash flow, if any will be minimal.  Repairs/main will be higher than expected as well.  Also, don't forget about misc like water etc.

Also, a little off topic but worth mentioning,  if the props are in a bad area of town then appreciation will be on the low side.  Yes...It is tough to get the best of both worlds...ie...good cash flow along with solid appreciation but you should try and get at least one on your side.

Sounds like you are on track with considering section 8.  check the fair market rents on the hud website for your area.  That could be the difference between solid cash flow vs none at all.  I know in my area section 8 pays much higher than the true market rents.  

Just my 2 cents.

Offline smithinvestments

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Re:Investing in "slums"
« Reply #6 on: September 13, 2006, 10:01:50 am »
Thanks Deaaak. I will check Hud Rental rates. If you are getting higher than market rental rates, that has to be attractive. How many houses do you currently have rented section 8? What are your biggest headaches?

Offline propertymanager

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Re:Investing in "slums"
« Reply #7 on: September 13, 2006, 05:21:06 pm »
SmithInvestments,

You've been reading too much guru nonsense.  I truly wish that the only expenses were the ones that you listed - BUT THAT'S ONLY A DREAM!!!  In reality, you'll have legal fees, court costs, evictions, set-outs, lawsuits, damage done by angry tenants, exterminations, entity maintenance, office expenses, fuel for your vehicle, and many, many more!!!  The real world operating expenses are 45% to 50% of gross rents.  With what's left, you subtract the mortgage and finally you have the cash flow (or lack of it).

Good Luck,

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline smithinvestments

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Re:Investing in "slums"
« Reply #8 on: September 13, 2006, 05:46:41 pm »
Wow, Mike. Who screens your tenants? 50% of gross rent for operating expenses? OUCH!!! I have had two rentals and haven't spent half of that. Anyway, thanks for the input.

Offline henryinma

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Re:Investing in "slums"
« Reply #9 on: September 13, 2006, 07:46:09 pm »
I always see that 50% mentioned and I think it has to do with what part of the country you're in. I've done my taxes and I know my expenses aren't anywhere near 50% because my rents tend to be in the higher range of $825-$1500. I suppose if you're only making $200-$400, maybe you'll hit 50% as you probably average the same number of visits to a property no matter if you're making $400 or $1500 a month. And of course gas and car expenses are a fixed number, not a percentage of rents.

Also some of those are worst case scenarios. My parents have rented out property for 20 years and we never had a lawsuit, only had to do one eviction through the courts in all that time too, the other evictions were basically telling them to scram and they scrammed.

Anyway, the only other thing you're probably missing is the mortgage. Did you actually talk to someone who will give you one mortgage for 6 individual properties? That sounds like a commercial loan. Or 6 individual mortgages. Not too many places do blanket mortgages. I would certainly try and nail that down before you go further. There's lots of lenders out there who will say sure I can do that loan and then when it finally comes time to do it, they can't.
Realtor/Rental Property Owner
Boston, MA

Offline aak5454

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Re:Investing in "slums"
« Reply #10 on: September 14, 2006, 10:21:45 am »
Another angle on the 50% number is I use a couple of different types of property mgmt co.  My one that runs mainly big complexes are just use to calling out contractors for every little tenant complaint and you get billed out at $75 for a job that is $3 in parts and 20mins labor.  You can hit 50% of gross rents pretty easily.  On the other hand, another one of my co. (different area) has a great rol-o-dex of local handy guys who do the same job for $25 in cash.  Some of my properties have lawncare included; some of the them have no grass to be mowned (mtns of Calif..just rocks and dirt), etc, etc.

With that said, you can bring that number down to 35% if you actively manage your cost/management co., maybe do some work yourself or don't give crap and let your properties go into a state of disrepair.

The point is a lot of people UNDERESTIMATE cost.  This is inheritant to a "bottom-up" type of cost estimate (for any project, not just REI) vs. a top -down raw figure like 45% of gross rents.  

I got several dozen units in multiple states and have been doing this for >5 years and probably my long term average is ~35%, but there are variables based upon location, how I run my business, etc that influence that number.  As I proposed previous, one should maybe use the 50% number as a starting point in your evaluation process and work over time to improve upon that number (and improve your profit!).

deaaak

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Re:Investing in "slums"
« Reply #11 on: September 15, 2006, 06:40:46 pm »
Smithinvestments, to answer your question.  I am trying to get at least 1 section 8 tenant per property.  That way if the rest of the tenants forget about their rent at least I have some guaranteed income to cover expenses.

Offline smithinvestments

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Re:Investing in "slums"
« Reply #12 on: September 15, 2006, 09:51:37 pm »
Thanks Deaaak. I appreciate the response. I have been looking at the low income housing market here in NC and I think there are some opportunities, but I will only go section 8. That guaranteed check every month is the way to go!

Offline propertymanager

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Re:Investing in "slums"
« Reply #13 on: September 16, 2006, 06:56:02 am »
Smithinvestments,

With only 2 rentals, you are still a newbie and you clearly don't understand what the real expenses are.  When I first started, I said the same thing and I believed all that guru nonsense.  Looking back, I feel silly that I ever believed all that nonsense and that I didn't find out the facts until I had been in business for almost 2 years.  In fact, I had over 10 rentals before I ever had a single vacancy!  However, now that I have dozens of rentals, I see things much more clearly.  

Like everything else in real estate, the expenses are just about the numbers meaning that over a period of time and with a large enough number of rentals your expenses will trend toward the average.  For example, I am currently running about a 1% eviction rate per month.  At that rate, with only two rentals you could literally go years without having an eviction.  With a little luck, you might even go decades without an eviction.  However, if you had 10, 20, 50, or 100 rentals, that eviction rate of 1% would certainly result in a lot more evictions over time.  The same is true of all the other expenses.  Even with dozens of rentals, I still have not had a lawsuit (although we came very close this summer).  However, does that mean that I'm foolish enough to believe that we'll never have a lawsuit?  NO!  In fact, I'm planning on it - it is a statistical certainty.  

Your view on Section 8 is also a little naive.  There is absolutely nothing guaranteed about a Section 8 check.  In fact, there is very little difference between Section 8 tenants and any other tenants.  It is true that Section 8 will NORMALLY send you their portion of the tenant's rent each month, but the vast majority of regular tenants will also pay their rent each month.  Section 8 tenants are just as likely to refuse to pay their portion of the rent as regular tenants.  Section 8 tenants are just as likely to suddenly move out (breaking their lease) as regular tenants.  Section 8 tenants are just as likely to be arrested; do drugs; sell drugs; steal; and commit other crimes.  I could list example after example of the above, but I don't want to write a book.

The good news is that you don't have to experience all this nonsense without at least being informed.  Talk to other local serious investors (not other newbies).  Look at the National Apartment Association website.  Get the real story before you are surprised by the reality.

Good Luck,

Mike    
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline smithinvestments

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Re:Investing in "slums"
« Reply #14 on: September 16, 2006, 08:22:11 am »
Thanks Mike,

You are telling me that HUD's portion of Section 8 is not guaranteed every month? I seem to be hearing otherwise. As for the tenants, there portion is small in comparison, surely they don't want to risk losing their voucher by missing rent checks. Aren't they also screened by HUD? I'm not saying everything is easy with section 8 rentals, I know it's not. I'm also not going out and buying 50 or 100 rentals in the next 2 years either. If I get 5, I'll be happy!

 




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