Should I Buy a House in a Bad Neighborhood?
From Tom Nardone, Millionaire Mailman …
Buying in the “hood” is something I’m confronted with on a daily basis. We all know that some neighborhoods are better than others. I used to hate buying houses in bad areas.
If you are considering buying a house in a less than desirable neighborhood, consider these 2 things first:
1. Am I buying to sell it and make a quick profit?
2. Am I buying it for ROI and cash flow?
The older and wiser I get, I realize that if I’m going to GET IN - GET OUT - and GET A CHECK, then I don't mind buying in the hood.
Not Mr. Rodgers Neighborhood
Recently, I bought a run-down 3-bedroom house in a bad neighborhood.
Right before the closing, I went to the house for a final walk through and realized that someone was living in the house. They peeked out of the bed sheet drapes they had hung up over the windows. All the doors were closed and locked.
Get this… I was at the house just 3 days prior, and it was completely vacant.
So, I called the Sheriff’s office and they sent a police car to the house where I was waiting for them, and that officer, knowing the neighborhood, called for a SWAT team back up.
I needed a little excitement in my day of course, so I followed them around and got it on camera. Yep, my own version of “COPS.” Bad Boys, Bad Boys, watcha' gonna do… (come on, sing it with me…)
As the SWAT team went in the front door, the squatters exited out the back door and disappeared into the neighborhood, like cockroaches, before being squashed by the SWAT team.
So, now I have my house clear. I changed the locks right then and locked all the windows and went to the closing. This house is a quick wholesale for me. It needs a roof and paint and new kitchen and bathrooms, so for me, it’s a wholesale deal. Too much work!
My advice is - when a house needs a ton of work in the hood, just GET IN - GET OUT - and GET A CHECK.
On the other hand, if the house is in rentable shape and you have the cash to buy it out right, and it rents so you can get a 20% ROI on your cash purchase by renting it, then I would buy it to hold.
Especially if you can rent it on Section 8.
Know Your Numbers
FIRST, you gotta know your numbers.
In my county, I can rent a 3-bedroom section 8 house for $1,300 per month.
If I can buy that house for $40,000 cash, then my after tax and insurance return will be about 25%. That works for me!
If the rent in your area is a lot less, then you have to make a decision as to what’s acceptable to you. I don’t like to buy anything to hold that’s more than a 1-hour drive away.
And my new philosophy since the real estate crash is:
I would rather own a low-end house in the hood free and clear, than have a leveraged house in a nicer neighborhood.
Look, there’s nothing wrong with leverage, but as long as you have a mortgage, you are a slave to the lender. I don’t like being in that position.
It’s Your Choice, Choose Wisely
In general, if you are starting out in real estate, you want to start out buying and selling/wholesaling to build up your cash, and then take that cash and buy something free and clear for high cash flow.
>Wholesaling is a good way to stay liquid in the market, it limits the time you spend managing and it relieves liability from what may go wrong with your properties.
I live in a hurricane-prone area, so my whole rental portfolio can change in a single day. And it has!
Look at the market conditions in your area. If you think you are headed for another bubble, then recognize where your market is at and adjust accordingly if you feel it’s time to cash in before a price correction takes place.
House in the Hood
Regardless of the housing economy:
- A free and clear house…
- In a low-end neighborhood…
- Rented to section 8 tenants…
- At a 25% return on your money is… an investment that will pay you back many times over.
Oh, back to the SWAT-team house…
I bought it for 35K and sold it in 2 weeks to a hedge fund for 57K that will renovate it and put a section 8 tenant in it. I guess the hedge funds have picked up on this profitable tactic too! Remember though, if it needed less work, I would have kept it.
What do think? Have y’all had investing experiences with properties similar to what I described? Lemme know, we’d love to hear from you below.
Enjoy the Journey!