I’m interested in learning how to successfully buy and rent out homes in the bad areas of town. I know this is’nt the easiest route to create rental profits, but there appears to be a constant supply of inventory in lower income areas at discounted prices. I’ve been giving this idea some thought for the past couple of years and I think I’m ready to try and make a go at my first deal of this type. But before I begin I just wanted to hear any experiences from people who have went this route.
In a nutshell my plan would be something like this:
Buy a distressed property somewhere between the price of 10-20k
Spend about 5-10k in repairs or upgrades
Advertise the property as a lease to own
Once the tenant is in place, pull out some of the equity to move on to the next property
My numbers may need to be tweaked a bit depending on the particular property, but I think my calculations will stand up pretty well based on what I’ve observed in certain neighborhoods. My biggest concern will be ensuring that I can easily pull out my invested cash through equity loans.
I’m in the same boat as you (newbie), and looking to do the same thing. I can’t offer you any experience, but from what I’ve read on this forum it’s not recommended to do this in the absolute worst areas because the tenants there will be so bad with messing up the property that you will end up having to spend a ton fixing the place up when they leave.
I’m planning to look in what Steve Cook calls “Zone 2” and “Zone 3” neighborhoods
Zone 2 = marginal neighborhood with crime, mostly investor owned houses, but not a war zone
Zone 3 = blue collar neighborhood with mix of owner occupied & investors.
Of course it ultimately comes down to whether the #s work, regardless of the type of neighborhood.
Lease to own–is that the same as Lease Option? I know some people have mixed feelings about whether those are worth the bother. I’m planning to buy and hold long term.
HTH. I’m sure others will correct me if I’m wrong. :cool
There is no point to doing lease to own (lease-option) in low income neighborhoods. People in these neighborhoods almost universally will not end up buying the house. While you’re waiting for someone with terrible credit but a big pile of money to show up to do a lease-option, you will be missing rent. Therefore, I would just rent these properties and you’ll be ahead in the end.
There is no secret to renting in “bad” areas. The tenants are more challenging, but the profit margin is often higher (if you manage the property correctly). The key is to not buy in an area where honest people won’t live (in other words a war zone). If people are getting shot on a frequent basis in the area, it’s probably not a good idea to invest there. Likewise, if there is a lot of gang activity, it’s probably not a good idea to invest there.
The other thing to consider is that it’s often advantageous to take over several of the worst properties on a block. Often, taking over (and cleaning out the scum from) 3 or 4 properties on a street will turn that street around. I do that frequently. This also makes it easier to keep an eye on your property - if they’re clustered together.
OH YES, I have done this, and currently own over a dozen ghetto rental properties.
I’ve used a very similar system, and here’s where the problems arise:
Ghetto tenants tend to be sue-happy. They’ll try to rip you off however they can, and if you slip up ONCE with not giving them the right disclosure, it’s all over.
Crime - you’ll have your property broken into, vandalized, and destroyed, while your tenants abandon the property because they don’t want to be held up anymore.
Lack of retail buyers - it’s hard to sell these retail to homeowners because (surprise!) none of them qualify for a mortgage.
On #3, don’t you just sell it to another landlord once you want to get rid of it? I wouldn’t expect a retail buyer to be interested in buying a ghetto rental house.
The key is finding an area that’s bad enough where you can get great cashflow, but good enough to where there is a possibility of it improving and appreciating. War zones will probably always stay war zones. But areas that are properly positioned close to new developments, or better neighborhoods, will potentially get better over time and provide you a good, profitable exit strategy.