Author Topic: Rentals in depressed area  (Read 1101 times)

Steeze

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Rentals in depressed area
« on: June 09, 2018, 08:39:28 AM »
Looking for thoughts and resources on buying rentals in a depressed market.

The story is that my best friend (and also a family member)  recently moved back to the area we grew up. He works in construction and has a side hustle doing property management, landscaping, and pest control. I was talking with him about properties and rent in the area and found that there is several multifamily buildings for sale which are meeting the 1.5-2% rule. Many of them fully occupied with leases. I went and looked at a few and found a couple that wouldn't need any major renovations. (I also evaluate existing conditions for commercial properties as part of my job).

My hesitation comes from the area. It is a collection of old Mill towns that have suffered decreasing population over the last 30 years. Population has stabilized in the last 5-10 years. Income is below average, unemployment is above average. Housing prices are lower than they were in 2010. This is an area that I do not expect to attract new businesses or jobs in the near term. Not a place I would personally live.

Positive aspects of the area are two established colleges, a hospital, and a modern art space that attracts visitors from NYC and Boston. If it weren't for these I wouldn't even consider.

The numbers work - they cashflow better than most deals I have evaluated. I could easily pick up 8-12 doors here. I have a property manager I trust, and a network of contractors in the area. Tenants are those that cannot qualify for loans on the otherwise cheap housing that is available for sale. Rents are about what you would pay on a mortgage.

What are your thoughts on investing in an area that is depressed, an area you wouldn't live, and don't really believe will ever improve?

For example, 4 family, 550-650 per unit/mo, 120k. Needs 20k in repairs. Expect 85% occupancy.

makinbutter

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Re: Rentals in depressed area
« Reply #1 on: June 10, 2018, 03:40:27 PM »
I have a rental that matches your description.  Things are all well and good, and it does - indeed - turn out income matching the 1.5% rule... but that said, I fully expect that I will never be able to sell it.  Who is going to buy the damn thing?  Also, evictions and random delinquency drags down the return quite a bit.

If you have a solid PM in place and can deal with the nonsense (and the purchase price - 120k?) represents an amount that wouldn't completely wreck you if you had to dump it for $70k or something, I would say... go for it.  Just don't put ALL your eggs in the depressed-rental-basket.  Treat this one like a junk bond of sorts, and reinvest the proceeds into either stocks or higher-quality rentals.

If you do buy it, report back here.  Also, can you nudge down that 120k?  Presumably that is the asking price.  Since you're pretty agnostic on ownership, why not try to pick it up for 110k?

One thing to watch out for, though, that I didn't look carefully enough at before pulling the plug (n00bie mistake at the time): confirm that the utilities (Esp. water) are submetered.  Your returns will take a gigantic kick in the balls from having to spend quarterly water bills at $400 a pop.  Ask me how I know :)

Letj

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Re: Rentals in depressed area
« Reply #2 on: June 10, 2018, 05:22:56 PM »
I would suggest buying it only if you will do a lot of the maintence yourself. Low income rentals are notoriously difficult to manage. Ask me how I know. I have over 50 but we manage them closely and do most of the work. You will only attract for the most part low quality tenants with lots of drama and poor housekeeping skills. Be prepared for high turnover, higher than normal evictions and having your place completely trashed. However, if you manage well and keep your cost down you should do well. Try to get it low enough so you can refinance once you close and take out whatever you’ve put into it.

tralfamadorian

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Re: Rentals in depressed area
« Reply #3 on: June 10, 2018, 05:46:47 PM »
Personally I wouldn't do it for bread and butter rentals. Vacancy and repairs are going to dig into your profits to an extent of where it is not worth dealing with the high maintenance tenants that come with areas such as you describe.

Regarding the colleges- are they growing universities with a healthy endowment and a significant portion of the student body lives off campus? If so, then maybe depending on whether the rents are significant higher than those you stated above.

For the hospital and arts center. Do people come from outside the area and stay overnight? If so, do the towns allow airbnb? If so, has there been any noise (articles in local paper, etc) about disallowing them? If not, is there enough room in the market for you to add more units?

Steeze

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Re: Rentals in depressed area
« Reply #4 on: June 11, 2018, 08:27:48 PM »
Thank you for all of the great replies and advice.

To answer some questions:

- I suspect the price could come down 10-20k, it's been on the market for a few months and is owned by an investor that is liquidating his portfolio of 5 properties.
- one of the colleges is well funded and very expensive, but is in the next town over (5 miles). Properties and rent in that town are much higher, and the students that attend can afford it. I do not suspect I would be attracting students. The other school is mostly local kids that drive from the surrounding towns, more of a commuter school.
- air BnB is allowed, but there is a ton of competition. Looking at what was available over the weekend, rents were 60-120 a night, but many of the places were much nicer than these apartments. The higher end homes in the 120 a night range were booked for the weekend, while the lower cost options were available. I do not suspect the town will rule against airbnb. The town is "open for business" and wouldn't do anything that would negatively impact economic activity.
-as for maintenance, this would be a hands off property as I am not in the area often enough to be effective. I could get involved in renovating the empty unit, or in other units as they turned over, but on a daily basis it's not possible. I would be paying for that service. I would be screening tenants, signing leases, completing evictions, and managing collections.
- as for cash invested, I would try to cash out refinance asap, then assume I will own it and never sell. Not a realistic flip, more interested in the cash flow. If it dropped 50k in value and for some reason I had to sell, it would suck but it's not going to kill me (my wife might?). That's life, can't be afraid to make money right? I can make that money back in my 9-5 in 2 years.

Thanks again, I appreciate the feedback!


Letj

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Re: Rentals in depressed area
« Reply #5 on: June 12, 2018, 10:57:20 PM »
If you don’t live in the area, I wouldn’t recommend you get involved in low income rentals.

tralfamadorian

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Re: Rentals in depressed area
« Reply #6 on: June 13, 2018, 06:41:50 AM »
as for maintenance, this would be a hands off property as I am not in the area often enough to be effective.

Okay, so it sounds like student rentals and Airbnb are out. That leaves you back to bread and butter rentals in a declining market, which are never going to be hands off even with management.

Neo

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Re: Rentals in depressed area
« Reply #7 on: June 19, 2018, 12:54:41 PM »
There are a lot of people making a LOT of money on "depressed rentals". I know people who have made millions on nothing but Section 8, for example. It's all about your risk tolerance, how much you're willing to work, what you are comfortable with, etc. The only thing in your post that gives me hesitation is the declining population. That, to me, is definitely a concern. Low income in a stable area isn't anything to run from; just depends on your goals.

Car Jack

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Re: Rentals in depressed area
« Reply #8 on: June 21, 2018, 07:41:14 AM »
How are the state laws biased?  My in laws did this kind of rental but lived in the building.  Tenants would decide they no longer wanted to pay rent and would go to government legal aid.  They pay nothing for free advice on how to live rent free and drag my in laws through a year of costs and hell before getting evicted.  They finally got tired of their "charity" rentals and sold that house and bought themselves a single family house and got out of rentals forever.

Another family member has a 3 unit house.  Got so sick of rentals, they stopped renting.  2 units have been empty for at least 30 years now.