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Real Estate Shoul I buy in a rough side of town for cashflow or............

Discussion in 'Real Estate Investing' started by anunez, Nov 20, 2007.

  1. anunez
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    anunez New Contributor

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    Hello everyone, I was hopping to have your advice on something. I have researched the top schools in a school district in a town that is not in the middle of nowhere and has good cash-flow. The problem is that many would consider the location to be ghetto. Now the issue I have is that their is a good neighborhood on a good location that will not cash-flow but will cover all expenses. Should I go for the cash-flow or stay with a better location? What should I choose?:bgh:
     
  2. biophase
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    biophase Legendary Contributor I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    I would not choose a poor neighborhood just for cashflow. There are many reasons for this:

    Cashflow is only there when you have a tenant
    Cashflow is only there when you have a "paying" tenant
    Bad neighborhood rentals tend to need alot of upkeep and maintenance

    There is no appreciation potential
    When you sell, you'll lose 6% and with no appreciation it comes out of your cashflow (assuming you had some)

    Example: Bought for $50k, cashflow $200/mo. Sell for $50k, after commissions and closing costs you may get $46k back. Loss of $4,000 on the sale equals 20 months of positive cashflow to break even. Add in some vacancy and minor repairs and you're looking at 3 years to just break even.
     
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  3. tbsells
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    tbsells Contributor

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    I agree with all of biophase's points and would like to add another idea: Cashflow is not worth dying for. Seriously, these deals are never as good as they look. If you could actually collect the rent the math looks good, but you can't. Its just that simple. There are parts of Cincinnati that you could trade an old high mileage Dodge Caravan for a 3 family and you would still lose money.

    If you can't go there after dark and feel reasonably safe you don't want to invest there.
     
  4. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    While it's probably not the most fun part of the whole investing process, I would suggest sitting down and writing a plan for how you're going to invest, including entry and exit strategies.

    For example, you ask whether it's better to cash flow or break even. Obviously, if all other things are equal, cash flow is better. But certainly all other things won't be equal. Which of the properties will take the most time/effort? Which of the properties is most likely to appreciate? Which of the properties have the most potential for "forced" appreciation? Which of the properties have the most likelihood of being able to sell easily in whatever your exit timeframe is? What is being built around your properties? Will that affect your property's value?

    There are hundreds of other things you should consider. Most importantly, what type of properties will you enjoy buying and selling? If you're not having fun, you're less likely to be successful at it.

    Regardless, you should put together a plan for how you are going to make money, and then once you have a solid plan, it should be easy to figure out if Property A makes more sense, or Property B does (or maybe neither of them do).
     
  5. J P D
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    J P D New Contributor

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    biophase summed it up nicely.

    I'm sure a little cash flow is not worth the headache, especailly when you say you found a deal in a better area that covers expenses.
     
  6. reipro
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    reipro Contributor

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    I have one simple rule that I always start with. Would I go there at night to collect rent? If the answer is "NO" then pass on the property
     
  7. hakrjak
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    hakrjak Bronze Contributor Read Millionaire Fastlane

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    Mine are mostly on the poor side of town -- and rather than selling them for what I paid, or taking a loss -- I have been fixing them up prior to selling them, and selling them as full on custom homes. The result has been that I've been able to sell them for about 25-35% above what other homes in the neighborhood sell for.

    Not a bad strategy if you have the ability to fix em, and want to eliminate the short term capital gains tax by holding in excess of 1 year.

    - Hakrjak
     
  8. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    One of SteveO's strategies is to buy in border areas-- those that are on the "edge" of up and coming neighborhoods (provided there is growth).

    And one of the old timers on the RD forums (rusty), who had dozens of plexes, said that he'd buy solid buildings in blue collar areas--not the trendy neighborhoods, or the ones with trophy properties.

    It always amazes me what some folks consider "ghetto". There's a poster on the RD forums who seems to look down on anyone who doesn't a)go to her church, and b)live in a house at *least* as nice as hers.

    Needless to say, she's a terrible landlord (but fun to read about! :p )

    All to say: You don't want units in the best part of town (b/c they will be overpriced). And you don't want to buy in a neighborhood of crackhouses and meth labs, either.

    Strike a balance. Lots of used cars in the drives, but only after 4 pm (means they all work for a living). Well kept yards, but nothing too showy.

    Not necessarily a place where you would live. But by the same token, also not a place where you would expect to see drug buys going on from the houses.

    Make sense?

    -Russ H.
     
  9. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    Interesting to read the comments on this one.

    SteveO hasn't weighed in on this one yet, but I suspect that his strategy is similar to what we've done. And, we're both in the Phoenix area.

    A good friend of mine grew up in Detroit, now lives in San Francisco. "Bad" in San Francisco/Oakland is NOTHING compared to "bad" in Detroit. So, some of it is relative.

    Personally, my husband and I made a lot of money in the downtown Phoenix area. We bought when there were drive-bys and open drug dealing. But we also knew that the city was putting a lot of money into police in the area. Another investor and we would buy a number of properties close to each other and just clean up a block together. We got to know the police really well - even threw them a barbecue!

    My friend in San Francisco is a riot anyway - he looks like Richard Roundtree when he played Shaft. He, his lawyer and another big guy dressed in trench coats and just "out-attituded" the crackheads. He also threw money at them to get out "NOW" and they just took the cash and left. I think they might have been concerned about who these guys were. Anyway, that's how he cleaned up apartment buildings and ended up making a fortune by turning mostly vacant buildings into clean, safe buildings.

    I don't know if I would do that kind of investing today - but there was a time when it was very exciting and felt like I was really making an impact on the community.
     
  10. hakrjak
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    hakrjak Bronze Contributor Read Millionaire Fastlane

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    Hehe exactly... I laugh everytime somebody talks about the "bad" side of Colorado Springs. I'm from California, where I had a kid stabbed right in front of me in the school cafeteria my first year of high school -- and I can certify that there are no bad parts of Colorado Springs.

    - Hakrjak
     
  11. randallg99
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    randallg99 Bronze Contributor

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    I bought several properties in a "ghetto" with the anticipation the city was going to develop the areas adjacent to it... just read in the newspaper today that local legislation approved funding for development. I should sell about 6-7 of my units within the year to to take advantage of the hype.


    I wouldn't go to these properties at night to collect the rent, but the tenants themselves are solid and good paying... the properties are strong cash flow positive, but there is a higher maintanence attention required. These tenants can't do anything for themselves... so calls for loose door locks, door closers, and other little things seem to be the norm for calling the landlord. And not to side track here, but interestingly enough to note that tenants in my better areas perform the "small crap" themselves...
     
  12. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Re: Shoul I buy in a rough side of town for cashflow or..........

    There is so much that goes in to determining a location to purchase in that it can make your head spin.

    The process for me involves mapping out the locations that are desirable based on a long list of criteria. That list includes areas that are on the border or between strong growth locations.

    It is certainly a plus to a cashflow buyer to see the value of the land accelerate past the value of a property based on income. The biggest issue to me is that the transformation could take more years than I am willing to wait. So, while I do look for these opportunities, I am more focused on finding the mismanaged property with the most upside. It is great if it happens to land in that zone. My last deal fit this mold very well. Adjoining retail is revitalizing and rebuilding all around. The property across the street and bordering property are putting in new developments. I have already had a couple of developers contact me about the property and we have only owned it for 2 months.

    I don't know the right answer to the question as it was asked here. I like to stay out of the bad locations. It seems that there are plenty of opportunities with property that is less expensive but in decent areas. If this cuts out the cash flow, then you are not looking hard enough.
     
    Last edited by a moderator: Dec 15, 2007

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