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Investing in El Cheapo Houses

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CashFlowDepot

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<div class="bbWrapper">this is from one of Jack Miller&#039;s ebooks&quot;<br /> <br /> <br /> <b>Buying El Cheapo Houses </b><br /> <br /> Making money from the earnings of poor people is like getting orange juice from an orange tree without any oranges on it. The same can be said of investment houses that are bought in blighted combat zones. Usually, only through the intervention of government in the form of low-income property improvement grants and rental subsidies can marginal properties in marginal areas be made profitable. This places a would-be investor into the same food chain as the hapless tenant who depends on both rent and government subsidies for financial survival.<br /> <br /> Those who buy subsidized properties are gambling their financial independence upon the good will of the taxpayer who has just about reached the limits of his willingness to support these social programs. They also run the risks of high levels of regulatory pressure and litigation by virtue of their renting to legal wards who have access to free lawyers and zealous bureaucrats who see independent investors as a crop to be harvested. Thus, it does little good to garner high cash flow from these rentals only to spend it in higher maintenance, management, and legal costs.<br /> <br /> Low income subsidized rentals may return a high gross cash flow, but their total investment value in a growing portfolio is more glitter than gold. One should look at the total return of an investment, not merely the cash flow. These factors would include the numbers of properties that can be managed efficiently; the amount of capital their acquisition consumes (which is function of their down payment and financing terms), the quality and durability of the income stream they produce both in times of inflation and recession, their fiscal independence from government subsidies, and the time one must spend puffing out fires in order to continue to function.<br /> <br /> Last, but not least, one should consider the &#039;burn out&#039; factor. When you&#039;ve reached your limits in handling these properties, you&#039;ll find it difficult to sell them. There&#039;s a dearth of people with the money and inclination to cash out your investment in &#039;high adventure&#039; properties. Moreover, those to whom you might sell on installment terms may not have the perseverance or skills to manage them. Ultimately you may find yourself giving back a lot of your profits just to escape</div>
 
<div class="bbWrapper">Well having a bit of experience in this by watching my partner manage his worst investment ever...<br /> <br /> He bought a 5 family in a so so area, far from a war zone but not a good area either. On paper it looks fantastic, the numbers are great. But in reality its a mess, and its just so much work to deal with. No one pays, or if they have rent you have to run right up their and get it before they spend it. Eviction and banging their credit isn&#039;t much of a threat, and they don&#039;t have bank accounts so collecting judgements is a waste of time. They police are always their for drug dealing or something else, and break down the doors.<br /> <br /> Its a mess, and I don&#039;t see why anyone would want to get involved in low end properties. You can make such good money in the middle or in high end stuff. Why mess with bums?</div>
 
<div class="bbWrapper">So. I don&#039;t know if this is happening where a lot of you guys live, but Houston is growing really fast. Now it seems like some of the shittier areas in the city are being bought by investors. They are buying old homes at lot value and renting the house for the time being. Eventually with increasing property values closer to the city they are being sold at a large profit to more wealthy people that knock down the house and build a walled property and a nice home.<br /> <br /> Point is, a lot of the el cheapo homes around here are prime location.</div>
 
<div class="bbWrapper">Like just about everything else involving real estate, it&#039;s a case-by-case synopsis.<br /> <br /> In Phoenix proper, we have what we affectionately call the Baseline Corridor. Whole subdivisions that were literally built overnight, surrounded by blight, to meet the demand of the buyers of the market. After everything turned, you have a multitude of homes, built in 2003-2006 or so that plummeted in value &amp; were bought up by investors who are continuing to make a killing with the buy-and-rent method. Remember hearing about homes for 30 cents on the dollar? These homes were right in the middle of the Phoenix Metro area (<i>not </i>the outlying areas with a 60 min commute into downtown). Because people need a place to live, no matter their budget.<br /> <br /> It may be more due diligence when acquiring lessees, but I personally know individuals who are still enjoying their stroll to the bank after having purchased a multitude of homes with little to no deferred maintenance while spreading their risk over smaller dividends as opposed to the large &amp; few returns. They&#039;re making it work. And work beautifully. Just because it&#039;s some ebook author&#039;s non-preferred method doesn&#039;t mean you can&#039;t make it profit handsomely. <br /> <br /> There is someone, somewhere who can make anything work. It&#039;s a case-by-case scenario &amp; speaking in absolutes rarely makes you correct on anything.</div>
 
<div class="bbWrapper"><blockquote data-attributes="" data-quote="hatterasguy" data-source="post: 261742" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=261742" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-261742">hatterasguy said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> ts a mess, and I don&#039;t see why anyone would want to get involved in low end properties. You can make such good money in the middle or in high end stuff. Why mess with bums? </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote>Lower barriers to entry. <br /> If you dont have a ton of cash and want to get in the game not too many other options<br /> <br /> <blockquote data-attributes="" data-quote="Red" data-source="post: 261753" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=261753" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-261753">Red said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> I personally know individuals who are still enjoying their stroll to the bank after having purchased a multitude of homes with little to no deferred maintenance while spreading their risk over smaller dividends as opposed to the large &amp; few returns. They&#039;re making it work. And work beautifully. Just because it&#039;s some ebook author&#039;s non-preferred method doesn&#039;t mean you can&#039;t make it profit handsomely. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> The key is in taking your time and doing the due diligence on the signing of the leases. The proposition is much better if you are in a landlord friendly state, rather than a tenant friendly one. <br /> <br /> <blockquote data-attributes="" data-quote="CashFlowDepot" data-source="post: 261307" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=261307" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-261307">CashFlowDepot said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Last, but not least, one should consider the &#039;burn out&#039; factor. When you&#039;ve reached your limits in handling these properties, you&#039;ll find it difficult to sell them. There&#039;s a dearth of people with the money and inclination to cash out your investment in &#039;high adventure&#039; properties. Moreover, those to whom you might sell on installment terms may not have the perseverance or skills to manage them. Ultimately you may find yourself giving back a lot of your profits just to escape </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> Burnout factor is quite high if you plan on doing your own management. But if you have enough of them that you can get a competent PM than that would reduce those issues. Also if you buy it cheap enough (vs market value <i>in that specific market</i>) someone will buy anything for the right price. Granted if you are in a true war zone then you are probably screwed but low income housing can be a viable strategy if you have the stomach to deal with the issues it presents.</div>
 
<div class="bbWrapper">I have a decent amount of experience in this arena. In fact I have and am currently managing a large portfolio of multifamily rentals in some of the roughest neighborhoods. Most would consider these areas to be war zone in fact about 1/2 block away from one of my buildings two people got shot on Monday morning, I have shit heads regularly breaking into buildings, smoking blunts in the hallways, and breaking anything and everything that could possibly be broken. When ever we buy a new building we must immediately secure it and either hire a security guard (I could go on for days with stories about these guys) or put k9&#039;s in the building. I will now list the pros and cons.<br /> <br /> Pros:<br /> Buildings can be purchased for pretty much nothing, in fact we have had banks actually throw in buildings for free just to get them off their books. Because of this you can get a potentially huge rate of return on your investment, 30%-100%+ is possible and I know quite a few multi millionaires who do the lions share of their business in low income and war zones with six figure monthly cashflows.<br /> <br /> Depending on where you buy there is serious potential for some really crazy appreciation... for example I work with a now semi retired developer who was really active in the 80&#039;s. He turned down 6flats for 50K because he didn&#039;t think it was worth it. Since then the area has done a complete 180 and that same building will fetch well over $1mil depending on bedrooms over $2mil. This is not an isolated case and I have actually met a few people who them or their family invested in really &quot;bad&quot; areas that have since changed dramatically= big $$<br /> <br /> In conclusion you &quot;can&quot; theoretically make a ton of money in these areas.<br /> <br /> Cons:<br /> Its a nightmare, plane and simple. You either have what it takes to work in these areas or you don&#039;t, its as simple as that. If you cannot handle sex, drugs, and violence let me save you some time, stay away. Unless you plan to buy whole lot of them and hire a bunch of people to do it for you (lots of problems with this approach as well), or you do not mind being a full time manager and know how to work these areas, I highly recommend staying away. <br /> <br /> The tnt base will perpetually cause you head aches. Whether it&#039;s collection issues, trashing the place, or all of the attention you must give them and lets not even begin to talk about the pest problems. Murphy is alive and well.<br /> <br /> I will now cut my long post short, if anybody has any desire to know more or would like me to elaborate feel free to ask. <br /> <br /> In conclusion you can make a killing in these neighborhoods or get killed.</div>
 
<div class="bbWrapper"><blockquote data-attributes="" data-quote="Pete799p" data-source="post: 262145" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=262145" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-262145">Pete799p said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> If you cannot handle sex, drugs, and violence let me save you some time, stay away. Unless you plan to buy whole lot of them and hire a bunch of people to do it for you (lots of problems with this approach as well </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> Pete, I would love to learn more about the headaches, and what it actually takes to get the job done in these areas. I have a buddy who owns three 4plex&#039;s in the hood and gets great cash flow, has some headaches, but the cash flow has allowed him to spend more of his time focused on his business. <br /> <br /> What are the specifics, what have you learned by doing this, and if there are any tricks of the trade, or big warning signs to be aware of when considering getting into a tough neighborhood? do you own any properties in good or bad areas, and what is your rational?</div>
 
<div class="bbWrapper">It comes down to management and if your dealing with lower end rentals, you make everything redundant. I.E. some guys will go with vinyl DON&#039;T use VCT tile, solid core doors, solid wood cabinets. Good luck</div>
 
<div class="bbWrapper"><blockquote data-attributes="" data-quote="NJRealEstate" data-source="post: 262597" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=262597" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-262597">NJRealEstate said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Pete, I would love to learn more about the headaches, and what it actually takes to get the job done in these areas. I have a buddy who owns three 4plex&#039;s in the hood and gets great cash flow, has some headaches, but the cash flow has allowed him to spend more of his time focused on his business. <br /> <br /> What are the specifics, what have you learned by doing this, and if there are any tricks of the trade, or big warning signs to be aware of when considering getting into a tough neighborhood? do you own any properties in good or bad areas, and what is your rational? </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> The biggest thing about working these areas is being able to deal with the tnts. If you don&#039;t know how to handle them they will eat you alive, it took me working with a really good property manager and observing how he dealt with them to learn my style. You will always be defusing some kind of situation, be prepared for tnts and their occupants to become very combative when you show up to do maintenance, collect rent, etc. Do not be afraid to call the police, especially if the combative person is just somebody who is visiting or an unauthorized occupant but always keep your cool no matter what. <br /> <br /> The first step is make sure you know your local landlord and tnt ordinances front and back because they will constantly test you on it and they will always be calling the city and trying to sue. However, these problems can be lessoned by properly screening your tnts before you ever rent to them. Make sure you always get a real ID and don&#039;t be afraid to ask for more proof of who they are, bank statements, SS cards, etc. I have seen prospective tnts who have several names listed on their IDs, James Smith-White. They will tell you that their name is actually James Smith or James White, when you screen them you will often find an eviction in the other name they are &quot;saying&quot; is not actually them. Never trust a landlord reference unless it comes from a large management company, landlords who are going through expensive evictions will do anything to get them out including lying about how great of a tnt they are. Don&#039;t be afraid to sit on some vacant units, take your time and find the right people, it will come back to you ten fold. I have had good tnts who have been in my buildings for 5 even 10yrs or more and always pay their rent so if it takes you 6months to find one its still worth it.<br /> <br /> Im not trying to make this sound like the best way to make a mil since sliced bread the reality is that you will have to earn every penny you get.</div>
 
<div class="bbWrapper">Come to Staten Island and buy some of these wrecked hurricane Sandy houses, needs a bit of work but doesn&#039;t look like anyone will be investing in property here for a while.</div>
 
<div class="bbWrapper"><blockquote data-attributes="" data-quote="Pete799p" data-source="post: 263726" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=263726" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-263726">Pete799p said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Im not trying to make this sound like the best way to make a mil since sliced bread the reality is that you will have to earn every penny you get. </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> Thanks for the great info, my experince has been that in life you have to earn every penny you get no matter what. I don&#039;t think there is a free lunch out there, but if there is maybe someone can direct me towards it. <br /> <br /> Are you a CCM or NARPM, or some designation of property manager? Also would you invest in these areas you manage in?<br /> <br /> Also do you ever feel like your life is in danger? I have heard some stories that you essentially have to go to the properties late in the day or evening because the people generally do not operate during normal hours, so if you want to see them you have to go at night. Do you carry? or have an assistant or something of the sort to protect you, maybe a mean dog?</div>
 
<div class="bbWrapper"><blockquote data-attributes="" data-quote="NJRealEstate" data-source="post: 263877" class="bbCodeBlock bbCodeBlock--expandable bbCodeBlock--quote js-expandWatch"> <div class="bbCodeBlock-title"> <a href="/community/goto/post?id=263877" class="bbCodeBlock-sourceJump" rel="nofollow" data-xf-click="attribution" data-content-selector="#post-263877">NJRealEstate said:</a> </div> <div class="bbCodeBlock-content"> <div class="bbCodeBlock-expandContent js-expandContent "> Thanks for the great info, my experince has been that in life you have to earn every penny you get no matter what. I don&#039;t think there is a free lunch out there, but if there is maybe someone can direct me towards it. <br /> <br /> Are you a CCM or NARPM, or some designation of property manager? Also would you invest in these areas you manage in?<br /> <br /> Also do you ever feel like your life is in danger? I have heard some stories that you essentially have to go to the properties late in the day or evening because the people generally do not operate during normal hours, so if you want to see them you have to go at night. Do you carry? or have an assistant or something of the sort to protect you, maybe a mean dog? </div> <div class="bbCodeBlock-expandLink js-expandLink"><a role="button" tabindex="0">Click to expand...</a></div> </div> </blockquote><br /> All the time, especially when you take over a troubled building, but you have to be smart about it and you have to be able to read into situations to avoid trouble, if you don&#039;t like what you see keep driving and comeback later. Two weeks ago I was walking a building I am managing when I saw some people hanging out on the corner. I decided I didn&#039;t like what was going on and since it wasn&#039;t in front of my building there wasn&#039;t much I could do so I took off. About 15min later my buddy calls to tell me not to go to that block, right after I left two people got shot, one killed and this was at about 10am. <br /> <br /> I wish I could carry but (sorry if I offend anybody I would be more then happy to debate this in another thread) stupid gun control advocates think that making laws to prevent the legal carry of weapons will stop the violence, what a joke. I have seen 12&amp;13yr old kids walking around with pistols all day slanging dope and I am willing to bet not one of them purchased it legally. I am also willing to bet that most gun control advocates, don&#039;t own/ are uneducated about firearms=they are scared (its human nature to be scared of what you don&#039;t understand) and I get that but they don&#039;t do the kind of work I do and their beliefs put my life in danger. Anyways back to business.<br /> <br /> I would actually do the exact opposite of what you heard about operating hours, unless you are there for a specific reason. I find the earlier you get in and the earlier you get out the better. Shit starts to get wild around 3pm and its better to avoid the traffic anyways. Also just because it is not a good neighborhood does not mean that they are all bad people or are all degenerates. In fact most of my tnts work and a lot are good people, if you take good care of your buildings and your tnts you will attract a better caliber of tnt. A lot of the problems happen from the mismanagement of buildings. If you let shit heads into your buildings and do not identify and remove them quickly you will have problems. In fact a lot of my tnts live in these neighborhoods because it is where they grew up and where their families live so natural they do to and the good tnts don&#039;t want to live with the shit heads either. <br /> <br /> Also rule number one never carry or collect rent in cash. If you do be prepared for the possible consequences and make sure you do not pick it up the at the same time every month.<br /> <br /> I first got interested in these types of properties when I met a guy who owns a few hundred 2&amp;3 flats as well as houses in these neighborhoods and talked about how good his returns are. I started running the numbers and liked what I saw but I always second guess things that seem too good to be true. I am a Manger for a local PE company that invests in these lower income neighborhoods. I took the job as a try it before your buy it approach. I am currently looking at a few buildings right now but I am looking to purchase in areas that are not quite as deep in the warezone.</div>
 
<div class="bbWrapper">Pate you are very good with your suggestion and it is really helpful for a new learner like me..<br /> Thanks for sharing such experience here..<br /> keep it on...</div>
 
<div class="bbWrapper">I think you can find some El Cheapo Houses in El Paso.</div>
 
<div class="bbWrapper">yeah there&#039;s little crime in el chuco</div>
 

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