Price Isn't Everything When You're Buying A Rental Property

abandoned houses, detroit

Photo: Kevin Bauman

Today I’d like to get your opinion.Is price everything? Also, how much of a role does location play for a real estate investor?

Let me explain.

This week I was presented with an interesting deal that I am considering.

The property’s numbers are great – $97,000 for six units, average rent at $475 per month, which following the 50% rule leaves $1400 for a mortgage payment – plenty to cover the loan payment and provide substantial cashflow. The property is in need of some cosmetic renovations (paint, landscaping) to make it look less “scary,” but I’m not worried about getting them done. Additionally, the county assesses the property at more than double what is being asked.

However, the property had one problem: B street.

If you ask anyone in my area where the “slums” are – 99% of people will say the same answer: “B Street”. B Street is a small neighbourhood where homes are generally the cheapest and primarily used as rentals. The six-plex, while not located at the worst place in this neighbourhood, is still located in one of the most well known “bad” parts of my county, on a busy street near some warehouses.

At this point I don’t know what I’ll do about the property. I have never bought in that neighbourhood – but the numbers make perfect sense and it fits my standards from a maths perspective perfectly.

But is that enough?

Location, Location, Location, Price?

I’ve often heard investors say, “never buy a property in a location you wouldn’t yourself live in.”

I don’t agree.

I think there are a lot of places that I wouldn’t want to live but would be fine for most. I would never again want to move into an apartment (I don’t think they’d appreciate my cats…) but it doesn’t mean I would not buy one. I also wouldn’t want to live in certain areas of my county – such as B Street – but I don’t think that should be the primary reason for avoiding a purchase.

And then there is the issue of safety.

Do I feel safe in this neighbourhood? Would I feel safe talking to tenants, showing units, or performing maintenance?

In fact, I probably would. While I wouldn’t leave my truck tool box unlocked and parked overnight, I don’t feel like I’m going to get mugged by simply being there.

And Then There Is The Issue of Tenants…

However, the major reason I am hesitant of purchasing in this location is not because of the location itself. I’m concerned about the quality of tenants I would be dealing with. With the risk of offending the politically correct in our society, (well, here I go) I believe the lower income tenants often come with significant more hassle than that of higher income.

Now, I’m not saying lower income people are worse. I’m simply saying that they bring with them certain problems not often seen in higher income properties.

Let me clarify what I mean. A good friend of mine owns a small rental property near this one and he often hires me to answer phones and show units when he is out of town. Because his units are cheap ($395), the location, and the unit mix (usually studios or one-bedroom) attract a certain type of tenant. The last time I helped him rent one of his units I took over 50 phone calls in 30-six hours. With each call I explained the property and qualification standards over the phone (as to not waste anyone’s time).

Out of those 50 phone calls about 20 said they wanted to see the inside. I generally schedule as many showings within the same time-frame to eliminate hassles and hedge against no-shows.

Of the 20 who made appointments to see the property, only 10 showed up.

Of those 10, only two qualified and one was interested.

Despite explaining the qualifications over the phone (including minimum income requirements), the other eight still showed up. The other 10 were simply no-shows. At least half of those who showed up made less than $400 per month, and all of that income was entirely from government assistance.

I honestly don’t understand what they were hoping for. They don’t even make enough to pay the rent; some even had the nerve to ask if they could make payments on the first month’s rent and security deposit.

This is highly typical for his property, and probably a good indicator of the future of the six-plex currently under consideration.

Again, I’m not saying this doesn’t happen to higher income properties. In my experience, however, the wasted time and headache in dealing with tenants around “B Street” are vastly higher than other areas.

So What Would You Do?

This blog post was a bit different than the normal ones, but I think it’s an important issue for every real estate investor and one that we all will face time and time again. So I want to open up the floor to you all. What would you do?

Is price everything? Would you buy it? Why or Why Not?

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