Buying inexpensive, low-income houses looks excellent on paper until you count the cost in terms of time and money.
I’ve owned as many as 350 low-income houses at one time with 143 tenants on Section 8. These are exactly the type of properties you want to avoid as they will never have predictable income long term and they are not the type of properties that appreciate in value.
Worse, who are you going to sell them to after you rehabbed them the third time? The short answer is: not a would-be homeowner.
So the No. 3 most common mistake real estate investors make is buying the wrong type of property.
It wasn’t enough for me to screw up my personal portfolio once. I had to do it twice in different parts of the country. Both times it netted me the same result as I built a portfolio on sinking sand. First in New York, then in Detroit Michigan, parts of Ohio and Indiana. I cut my losses prior to the City of Detroit filing bankruptcy and have since built a new portfolio in Atlanta, Georgia.
When you are feeding off the bottom of the real estate barrel with low-income housing, it’s easy to become disillusioned with cash flow houses. These types of houses always require more maintenance and more management. The clientele you get for tenants are a “protected class” for liberal politicians that act like they are the “protectors of the poor.”
You can have the best intentions to help and serve people, but I found out the hard way that you can’t help people who won’t help themselves or people who think the world owes them a living. When you have this type of mindset from a tenant, you are going up against the Al Sharptons and Jesse Jacksons of the world. Underneath my alligator skin is a sensitive, caring person who truly wants to help people and sometimes it seems like the people you try to help the most are the first ones to rain on your parade when they think they can get something for nothing. There is NO free lunch out there and I suggest you avoid doing business in any area and/or neighborhood that relies on any type of government assistance.
The first question I ask myself when I by a house is, “Who will buy this house from me for more money than I paid?”
If you are in the ghetto, or a low-income area that is marginally better than the ghetto, then you will only sell to another investor. Why? Because people who want to be homeowners don’t want to buy in these areas either. If they qualify for financing, they are getting out as fast as they can. People buy for emotional reasons when it comes to buying a home for their family. That’s why the houses I select for purchase have good curb appeal, are in good areas and the surrounding neighborhoods are well kept by primarily homeowners. Buy houses where people want to live; in subdivisions, near schools, churches, jobs, and shopping.
Promoters sell these low-income houses based on a rate of return that is fictitious and never materialized to unsuspecting investors. I get calls to find houses for $30,000 to $60,000 and I simply tell people that I won’t buy this garbage.
First, I don’t want to buy anything that I wouldn’t keep myself, so these types of houses are immediately ruled out. Second, my property manager won’t manage houses in these types of neighborhoods and, by the way, these types of neighborhoods are in Atlanta, too. I initially purchased several houses that we would never touch in today’s market. They are not good for your portfolio for long- term cash flow houses, for predictable cash flow and future appreciation.
I’ve seen people offering houses all over the Midwest and parts of the South with rates of return over 40% if you use financing and get a mortgage. Financing your purchase always adds risk as your portfolio and is only as good as the tenants who reside in your homes. A few months of vacancy or repairs will destroy your “hoped for” return and you will also dig into your pocket to pay the mortgage. And, you will never sell these houses for what you paid for them.
Disagree with RJ’s point of view? Or, agree? Post your thoughts below in the Leave a Reply area.
[hs_form id=”3″]
0 Comments