Your post is about buying in low income areas… if you are new and just getting started i believe its better to go out after high rent areas as compared to low income areas…
I ve owned rentals in high rent areas and never had an issue compared to low income where you have to deal with issues…of low income…but to avoid getting burned out buy in areas you know well when starting out then you can branch out later.
I disagree with this but I can understand where you are coming from. Drama is heavy with the low income properties but personally, it doesn’t bother me. I can deal with drama when trading for a highly profitable property. BUT many landlords get involved in real estate not realizing that it’s work. They just thought they would buy a few houses and rent them out without problems. They didn’t realize that they will get sucked into court on a regular basis or that they will have tenants from time to time trash their places and the deposit doesn’t completely cover the repairs that your jacklegs do. The low income property business IS more work than the better neighborhoods.
If you are starting out, i dont believe the headaches of low income… drama, drugs and police calling u in the middle of the night is the best way to start…I agree many landlords get involved not realizing that if the toilet is broken… its your responsibility to fix it. Un foreseen costs arise from everywhere…A/c broke down on me one time when my money was tight it was a 2500 dollar repair i was not prepared for. My only luck is my tenants were very understanding.
How do you handle deferred maintenance such as a roof that needs to be replaced in a year or two or kitchen appliances that are on their last legs?
Rent X 30 minus repairs. The Minus Repairs includes getting that place into shape. Making it “safe” and “clean”. Basically the same things that your local code enforcement and section 8 will be looking for. Basically getting it into a condition that they will approve. Everything won’t be perfect like a flip. But it will be an acceptable place for people to live.
Lets say that you look at the property and it needs a roof right away because it is presently leaking. And the outside of the house needs to have the flaking paint scraped off. And the inside needs some holes patched in the walls and a standard in between tenant paint job. And there will possibly be some little BS things you need to account for to make your local Code Enforcer and Section 8 happy. Work up your repair costs and subtract them from the Rent X 30. That’s your offer.
So the house is now Rolling and bringing in some cash flow. The Hooch Method is nothing more than a real simple way of determining the value of property. I used to always figure my numbers by determining the Capitalization Rate on each and every property. Accurate but very time consuming. Then I ran a bunch of different scenerios and found that Rent X 30 is very close to a 18% cap rate which is what I bought low income housing for. Therefore I found a qiick and easy way that I could use to determine the value of a property without spending 45 minutes on each and every property doing a cap rate for it.
The Hooch method allows for enough cash flow to cover future maintenance of the property, taxes, painting in between tenants and the works. It covers the entire 50% needed.
You should also run the cash flow analysis on the property along with the Hooch method. I like to make sure that my bases are covered in all areas. I used to also determine the debt coverage ratio. If you have a DCR of 2.5 or above you will be able to pay a 15yr loan off in 5 years if you take NO cash flow and make double payments. In order to accurately determine the DCR you must do a full capitalization rate report. No need to do all of that. If you buy using the Hooch Method and don’t “TRY” to make the math work by being to liberal with your numbers, it will put you in a position where you will have around a 2.5 DCR.
As far as finding the deals goes, you must look for people problems. There are some Hooch deals from time to time on the MLS but for the most part you either find some good wholesalers and tell them what to get for you or you look for them yourself. I do both. You will look at many deals and put in many offers before that gem comes to you. You will learn through practice how to knock someone off their horse and show them some “other” numbers that prove how their house is worth much less than they think it is. You will use techniques like overestimating repair costs, telling them the cost to repair it as if you had a licensed contractor do it when in all actuality you will be using a couple of jacklegs off of craigslist. That is a key in the junker business. Get CHEAP labor. Some guys that can fix just about anything but charge very little. It may not be perfect sometimes but for the most part it is acceptable. You will be fixing things “landlord style”, not “flipper style”. You learn how to rehab things rather than buying new. Buy new only when necessary.
So if I’m using the Hooch method and in it for the long hall 10+ years do I care about these issues or do I know that if I estimate 50% gross rents for expenses that everything will work out in the long run.
Buy with the Hooch Method and everything will work out. Trust me! Just make sure that you accurately determine the rent and make sure that you accurately determine the repairs. Do that and you will have NO problems.
Next ?. What are the tricks of the trade for preparing a rental for tenants as most of them will be very hard on the property. Semi-gloss paint only?..no carpet?..no vinyl?
Around here there are a lot of OLD houses. Old wood floors and plaster. In my lowest income areas we go in the place and SPRAY the entire unit the exact same color of simi-gloss white. Every unit, every house, same color. That way you can come back in and paint one wall, clean another. Then roll the floors with a real dark brown that doesn’t show marks, etc. Make the needed repairs and we are out.
No carpet unless you have plywood on the floor. If there is plywood through out the house (not just a room or two) I would consider something else. I have put down VCT like you see in the grocery store. I’ve put down ceramic everywhere. Real wood is pretty darn expensive. Floating floors have a laminate surface that is real thin so I have been a little reluctant to use them. And I am not opposed to vinyl since it is cheap and quick to install. I’ll hammer a tenants deposit if they ruin it. Which in most cases it is not wear and tear that damages it. It is cigarette burn holes or tears from dragging a washing machine or whatever across the floor. The key here is to do checks on the apartment from time to time. Go in and write down a list. Your kids damaged the blinds $25 per blind, you burned holes in the vinyl, $500 or whatever. Then fix it. In my lease it says that if they damage the property I will fix it and they will be responsible for replenishing their deposit. If they don’t they are in violation of the lease and I can evict.
In my low income blue collar areas we do a little better job as it commands a higher class tenant. We will paint all of the walls in a semigloss bone white which is basically a very light khaki color and paint the trim the exact same white as on the other rentals.
Last ?. I would think month to month leases would be the way to go on these properties as a number of tenants will leave before the lease is up anyway. This would give me more say if I wanted to not rent to the same tenant again. What do most of you do?
I like to lock em up for a year. I also have a part in my lease that says:
a. NOTICE OF TERMINATION: TENANT and LANDLORD may terminate this lease by giving the other party written notice of termination at least 60 days before the date this lease is to end. The effective date of all termination notices shall be the last day of the SECOND full month following the month in which notice of termination is given, unless a later date (which shall be the last day of a calendar month) is stated in the notice. Time is of the essence of this agreement.
b. AUTOMATIC RENEWAL: If nobody gives notice to end this lease, then at the end of the lease term, this lease will AUTOMATICALLY RENEW YEAR-TO-YEAR at a 5% increased monthly rental amount, and the same terms and conditions already in effect.
If they default on our agreement I will throw a judgment with interest on them for a reasonable amount of time to find another tenant 
Like 2 or 3 months since they screwed me over. :rolleyes
And very few people remember to follow our agreement and give the 2 month notice EVEN with me specifically telling them about it and making them initial right next to it. They break my contract they just bought another year. So I will be nice and charge them just for the time required to get another tenant. And for my advertising expenses in doing so. I may be able to find someone suitable quick and they will only be out a half a month or so in rent + advertising expenses.
I have learned over the years how to squeeze blood out of a penny. :biggrin And when you are dealing with highly irresponsible people you MUST be firm and ALLOW for NO excuses. I don’t care if they tell you that they can’t pay rent because they need to get baby formula. They WILL take advantage of you and many of them are REAL GOOD LIARS.
I love it when they plea with me that they can’t pay rent right after telling me about the fun trip they just had to Myrtle Beach. EVICT them on the first late payment. Many of them are highly skilled at sucking off society and they will masterfully keep putting you off as long as they can until you wise up and find out they just hoodwinked you.
thing is I’m trying to get cash flow and pay off properties in 10 years…i’m fine taking zero income until then…i want to buy enough to replace my current income in 12-15 years (after loans are paid off)…
If you don’t take any cash flow and apply it all back to the mortgage, and bought using the Hooch method, they will be paid off in 5 years, not 10. And, if you come across some hard unexpected luck, you can always just make one mortgage payment for a while and use a nice little chunk of cash flow to level things back out.
i don’t see how this is possible with higher rent areas…
It’s not.
but it just doesn’t seem like i can accomplish my goals unless i go the high cash flow low income areas…
There you go. A man who is involved with real estate because they want to actually become wealthy quick. I love to hear it! Sure, you will have the drama but I promise you it will be worth it. Just think of it this way, the drama will add constant entertainment to your life. :biggrin