You hear the advice all the time: Don’t look for investment property in bad neighborhoods. Or sometimes, you hear the same advice about low income neighborhoods—in fact, mostly the terms “bad” and “low income” are used interchangeably. That’s a crime—because there are definitely low income neighborhoods that are good neighborhoods to invest in. Let’s look at what separates the two.
Rule Zero: Don’t Trust Your Eyes
It’s easy and intuitive to look at a property and if you don’t like the first impression you get of it, walk away. Unfortunately, real estate investing isn’t that kind of party: If you want to win this game, you have to play strictly by the numbers. This means looking at statistics, prices, and environmental factors, not at the faded siding, broken windows, and missing shingles. Each of the points that follows is a guide about which factors mean “low income” but don’t mean “bad” when it comes to investing in a home in that neighborhood.
“High Crime” Can Mean “Bad”—Or Just “Low Income”
Every neighborhood has a few different crime rates—for the purposes of investing, you want to pay primary attention to property crimes, as they’re going to affect the security of your investment. But far more important are the “quality of life” crimes, like vandalism, littering, and public urination. Why? Because those crimes indicate that a neighborhood isn’t just desperate, it’s also “self-loathing”—the people who live there aren’t just committing crimes to get by, but they’re doing it because they simply don’t care about the neighborhood. (It can be hard to get stats on those kinds of crime specifics; your best bet is to call the local police department and ask them.)
Related: 8 Myths About Section 8, Corrected: Here’s the Profitable Truth
A neighborhood that has prostitution, drug dealing, and other money-making crimes but doesn’t have the “quality of life” crimes isn’t necessarily bad—it’s just low income, and low income-but-good means there’s a potential for a value investment. Genuine “war zones” where the police don’t even visit if you call in a vandalism report because the bangers break every window in the neighborhood every Friday just on principle? Yeah, don’t buy there.
Growth Potential Can Make the Difference Between “Bad” and Just “Low Income”
One of the most important ways of separating a low income-but-good-investment neighborhood from a just-plain-bad neighborhood is by looking at what is going to happen in that neighborhood over the next few years. For example, buying a home in a neighborhood where there is currently a large lot being cleared for the addition of a Costco is significantly better than buying one where the local Wal-Mart just moved out, and nothing is moving in to replace it—even if, at the moment, the Costco neighborhood house looks like the worse investment.
Alternatively, if you can find a neighborhood with a clear downside with a clear expiration date, you could be looking at a winner. For example, imagine a place where it sucks to live because there’s a stanky breeze from a mushroom farm that blows over the whole city—but the mushroom farm just declared that they’ve purchased a new facility and they’re moving a town over in six months. That window, after the declaration has been made but before the move occurs, is your window. Property values are depressed because only desperate people are willing to live there right now, but that will change once the smell goes away, so buy before they shoot upward.
[Bonus: One more subtle way to pick up on a just-starting-to-grow neighborhood is to look at the days-on-market of the homes that are selling in the neighborhood. If the average DoM six months ago was 90+, but today it’s down to 45 or less without a rise in property prices (and the rest of the numbers look good), buy! A downward-trending DoM is almost always a sign of soon-to-rise property values.]
Low Geographic Mobility
Let’s be frank: Moving costs money, which means that people in low income neighborhoods tend to move less often. Look up the net migration numbers in your chosen neighborhood—if they’re very low (below 9%), you may be able to take advantage. Warning: This can be a genuine downside if you land a problem tenant who simply won’t move until the police show up and physically drag him away—that’s a lot of lost rent and probably a lot of vengeance damage you’ll have to repair.
But! If your tenant screening techniques are on par and you maintain yourself as an available, easy-to-talk-to landlord that is willing to deal with an occasional legitimate disaster empathetically, you can keep a hardworking low income tenant paying mostly on time for year after year. Statistically speaking, the best low-income tenants have a reliable if low source of income — often, they’re retired or disabled and collecting stable monthly benefits. Other than the occasional late payment due to something like an unexpected car repair, these tenants can handily turn “low income” into a benefit.
Your Investment Goals Can Change What “Bad” Is
Some investors are looking to buy a property that they can maintain using the rent and have their wealth build up as the property appreciates over time. Others are looking for a property that they intend to hold for as long as they can continue to pull a solid monthly cash flow out of it. Investors looking for that appreciating property are honestly probably not going to find it in a low income neighborhood (unless you can find one on the verge of a major improvement, as above).
Related: What’s More Costly: Rental Vacancies or Filling Rentals With Subpar Tenants?
But investors looking for high cash-flow can definitely find a killer investment in a low income neighborhood—because rents tend to move less than property values do. So it’s relatively easy to buy a home that costs 50% of the identical home one neighborhood over, and charge only 15% less in rent. The end result is that you can set up a high cash flow investment with relatively little initial investment—at which point, yes, you might have slightly more difficulty with tenant screening and maintenance requests than you would one neighborhood over, but your capitalization rate will be well worth it.
Bonus: The Difference Between Rented and Unrented Properties in Very Low Income Areas
There’s one catch to all of this that novice low-income investors can easily miss: if the home you’re buying is in a critically low income area and there’s not currently a renter, you absolutely must inspect it (or pay someone to inspect it) before you buy it. The reason why is simple: In many very low income areas, an empty house is almost immediately stripped of everything inside that can be sold, including plumbing, HVAC, water heater, appliances, and basically anything made of metal or worth a dime on the street corner.
It’s terribly easy to buy a home that looks like a legitimate structure, only to find out that you need to invest four or five times what you paid just to make it legally livable again. All of which you can avoid by purchasing a home that currently has a renter (and thus a certificate of habitability or whatever your city’s equivalent is). Even a seller that offers written evidence of an inspection on Monday can end up with a home stripped by Wednesday morning—unless someone is physically living there, and you buy the lease along with the property.
In short, you don’t need to be scared of investing in low income areas—you just have to be aware of when “low income” and “bad” don’t match up, and prepare to take advantage of how the two don’t overlap. Good luck!
We are republishing this article to help out our newer readers.
Investors: What’s your take? What’s the difference between a “low income” and a “bad” neighborhood? Do you invest in lower income areas? Why or why not?
Let me know with a comment!
Designing the Life You Want with Brad Barrett and Jonathan Mendonsa from Choose FI
On today’s epic show, we speak with Brad Barrett and Jonathan Mendonsa from Choose FI. Brad and Jonathan share their pillars of financial independence — the 10 things you need to do in order to achieve FI.
We cover beginner-level topics such as frugality and index fund investing, but we also touch on more advanced topics like tax optimization and travel hacking.
This episode went so long — and contained such fantastic information — that we simply could not squeeze it into a regular show. So we didn’t. We made it a two-part episode so we didn’t miss a moment with Brad and Jonathan.
Click here to listen on iTunes.
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8 Pros & Cons of Including Utilities With Rent for Your Investment Properties
One of the many factors that must be analyzed when considering an investment property is the cost of utilities. Usually with every investment property, there will be some utility costs associated with it. Sometimes these costs may be minimal, as they may be with a single family rental. Other times, they may be significant, such as with a 24-unit apartment building with a central boiler for heat and hot water.
As landlords, we want to maximize our cash flow. Maximizing cash flow often means passing on those utility costs to the tenants who use them by including utility costs with the rent. But should you include utilities with the rent? The answer to that question will depend on many factors. Here are some thoughts on the topic.
Related: The Not-So-Obvious Problem with Billing Back Utilities to Tenants
Why Include Utilities?
Related: Why Landlords Should Reallocate Utilities to Improve Net Income
Why Not Include Utilities?
While you can potentially make a little more money including utilities, their inclusion can be a real killer of your time and can increase the level of stress in your life. For me personally, I am looking for more free time and less stress, so it is a no brainer. I will rarely look at buying non-separately metered properties anymore, nor do I generally include utilities in the rent. But that is just me.
Your market or your style may be different. You may have to include utilities, or it may be common practice to include them. Either way, that is one of the beautiful things about the real estate business—there is no one or right way to do it.
We are republishing this article to help out our newer readers.
Do you include utility costs with the rent? Why or why not?
Let me know what works for you with a comment.
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Yes, There IS a Difference. Here’s What Separates Them.
You hear the advice all the time: Don’t look for investment property in bad neighborhoods. Or sometimes, you hear the same advice about low income neighborhoods—in fact, mostly the terms “bad” and “low income” are used interchangeably. That’s a crime—because there are definitely low income neighborhoods that are good neighborhoods to invest in. Let’s look at what separates the two.
Rule Zero: Don’t Trust Your Eyes
It’s easy and intuitive to look at a property and if you don’t like the first impression you get of it, walk away. Unfortunately, real estate investing isn’t that kind of party: If you want to win this game, you have to play strictly by the numbers. This means looking at statistics, prices, and environmental factors, not at the faded siding, broken windows, and missing shingles. Each of the points that follows is a guide about which factors mean “low income” but don’t mean “bad” when it comes to investing in a home in that neighborhood.
“High Crime” Can Mean “Bad”—Or Just “Low Income”
Every neighborhood has a few different crime rates—for the purposes of investing, you want to pay primary attention to property crimes, as they’re going to affect the security of your investment. But far more important are the “quality of life” crimes, like vandalism, littering, and public urination. Why? Because those crimes indicate that a neighborhood isn’t just desperate, it’s also “self-loathing”—the people who live there aren’t just committing crimes to get by, but they’re doing it because they simply don’t care about the neighborhood. (It can be hard to get stats on those kinds of crime specifics; your best bet is to call the local police department and ask them.)
Related: 8 Myths About Section 8, Corrected: Here’s the Profitable Truth
A neighborhood that has prostitution, drug dealing, and other money-making crimes but doesn’t have the “quality of life” crimes isn’t necessarily bad—it’s just low income, and low income-but-good means there’s a potential for a value investment. Genuine “war zones” where the police don’t even visit if you call in a vandalism report because the bangers break every window in the neighborhood every Friday just on principle? Yeah, don’t buy there.
Growth Potential Can Make the Difference Between “Bad” and Just “Low Income”
One of the most important ways of separating a low income-but-good-investment neighborhood from a just-plain-bad neighborhood is by looking at what is going to happen in that neighborhood over the next few years. For example, buying a home in a neighborhood where there is currently a large lot being cleared for the addition of a Costco is significantly better than buying one where the local Wal-Mart just moved out, and nothing is moving in to replace it—even if, at the moment, the Costco neighborhood house looks like the worse investment.
Alternatively, if you can find a neighborhood with a clear downside with a clear expiration date, you could be looking at a winner. For example, imagine a place where it sucks to live because there’s a stanky breeze from a mushroom farm that blows over the whole city—but the mushroom farm just declared that they’ve purchased a new facility and they’re moving a town over in six months. That window, after the declaration has been made but before the move occurs, is your window. Property values are depressed because only desperate people are willing to live there right now, but that will change once the smell goes away, so buy before they shoot upward.
[Bonus: One more subtle way to pick up on a just-starting-to-grow neighborhood is to look at the days-on-market of the homes that are selling in the neighborhood. If the average DoM six months ago was 90+, but today it’s down to 45 or less without a rise in property prices (and the rest of the numbers look good), buy! A downward-trending DoM is almost always a sign of soon-to-rise property values.]
Low Geographic Mobility
Let’s be frank: Moving costs money, which means that people in low income neighborhoods tend to move less often. Look up the net migration numbers in your chosen neighborhood—if they’re very low (below 9%), you may be able to take advantage. Warning: This can be a genuine downside if you land a problem tenant who simply won’t move until the police show up and physically drag him away—that’s a lot of lost rent and probably a lot of vengeance damage you’ll have to repair.
But! If your tenant screening techniques are on par and you maintain yourself as an available, easy-to-talk-to landlord that is willing to deal with an occasional legitimate disaster empathetically, you can keep a hardworking low income tenant paying mostly on time for year after year. Statistically speaking, the best low-income tenants have a reliable if low source of income — often, they’re retired or disabled and collecting stable monthly benefits. Other than the occasional late payment due to something like an unexpected car repair, these tenants can handily turn “low income” into a benefit.
Your Investment Goals Can Change What “Bad” Is
Some investors are looking to buy a property that they can maintain using the rent and have their wealth build up as the property appreciates over time. Others are looking for a property that they intend to hold for as long as they can continue to pull a solid monthly cash flow out of it. Investors looking for that appreciating property are honestly probably not going to find it in a low income neighborhood (unless you can find one on the verge of a major improvement, as above).
Related: What’s More Costly: Rental Vacancies or Filling Rentals With Subpar Tenants?
But investors looking for high cash-flow can definitely find a killer investment in a low income neighborhood—because rents tend to move less than property values do. So it’s relatively easy to buy a home that costs 50% of the identical home one neighborhood over, and charge only 15% less in rent. The end result is that you can set up a high cash flow investment with relatively little initial investment—at which point, yes, you might have slightly more difficulty with tenant screening and maintenance requests than you would one neighborhood over, but your capitalization rate will be well worth it.
Bonus: The Difference Between Rented and Unrented Properties in Very Low Income Areas
There’s one catch to all of this that novice low-income investors can easily miss: if the home you’re buying is in a critically low income area and there’s not currently a renter, you absolutely must inspect it (or pay someone to inspect it) before you buy it. The reason why is simple: In many very low income areas, an empty house is almost immediately stripped of everything inside that can be sold, including plumbing, HVAC, water heater, appliances, and basically anything made of metal or worth a dime on the street corner.
It’s terribly easy to buy a home that looks like a legitimate structure, only to find out that you need to invest four or five times what you paid just to make it legally livable again. All of which you can avoid by purchasing a home that currently has a renter (and thus a certificate of habitability or whatever your city’s equivalent is). Even a seller that offers written evidence of an inspection on Monday can end up with a home stripped by Wednesday morning—unless someone is physically living there, and you buy the lease along with the property.
In short, you don’t need to be scared of investing in low income areas—you just have to be aware of when “low income” and “bad” don’t match up, and prepare to take advantage of how the two don’t overlap. Good luck!
We are republishing this article to help out our newer readers.
Investors: What’s your take? What’s the difference between a “low income” and a “bad” neighborhood? Do you invest in lower income areas? Why or why not?
Let me know with a comment!
Source link
Flat-fee real estate agency Purplebricks secures $177 million investment to fund U.S. growth
Flat-fee real estate agency Purplebricks expanded into the U.S. last year after building a successful business in the United Kingdom and Australia, and after securing a sizable investment from European media giant Axel Springer, Purplebricks’ U.S. expansion is about to shift into overdrive.
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Should I Buy Many Cheap or a Few Pricier Homes? An Analysis
I get this question all the time: “Should I buy cheap property somewhere else with higher cap rates or more expensive property where I live?”
I wanted to buy cheap property once. It’s very tempting. So is it a good idea? Let’s run some numbers and find out.
Most investors turn to cap rates to decide which property to buy, almost like a magic wand. But cap rates can be deceiving and should be used with caution because there is a lot they don’t take into account.
What is a cap rate exactly?
Cap Rate = Net Operating Income/Sales Price
Related: The $30k Rental Property: How to Finance & Profit From Cheap Real Estate
Real World Example
We’ll use two very different different homes for this example.
Expensive Property
Dirt Cheap Property
Based on the analysis, the cheaper property has a lot better return on the income invested. What most people don’t put into cap rates is the cost of major repairs which tend to be similar between really cheap and more expensive houses. Let’s see how that changes things.
Here is an example of prices for different components of a house and how fast they wear out.
8
$2000
$21
20
$4000
$17
15
$700
$4
10
$500
$4
10
$500
$4
15
$1500
$8
10
$3000
$25
15
$700
$4
20
$3500
$15
30
$15000
$42
30
$5000
$14
$157
More expensive property:
Less expensive property:
So, to make the same monthly profit while paying off the loan as a $270,000 house, you will need three $30,000 homes. That might not be bad. Considering that you are putting 20% down on each investment, you will make more monthly profit per dollar invested when buying the cheaper homes. It doesn’t end here. There is so much more to consider.
Appreciation
What about appreciation (increase in home value over time) if you want to sell one day? Let’s say appreciation is 5% for the more expensive home (that’s why homes are more expensive in those areas) and 3% for the cheaper home (that’s why prices are cheaper in those areas).
If you wanted to sell in 20 years, the cheaper home would be worth about $54,000 and the more expensive home about $720,000. A little after year three, you will have made more in just appreciation (not including profit or pay down) on the more expensive house than the cost, appreciation and profit of the cheaper house. By year 18 you will make more in appreciation every year than the cheaper house costs. To get the same appreciation return using cheaper homes, you will need to buy and manage 13 ($390,000 in cheaper homes) of them.
Let’s look at how much your time spent managing was worth in just appreciation assuming three hours a month per house over 20 years. The cheaper house will be worth $75/hour and the more expensive home $995/hour.
Management Time
Let’s say you pay the houses off and want to retire on that income. If you manage the more expensive property, you will make $2,400 a month (assuming the value of money never changes over time). You will need 5 cheaper properties to get the same amount of cash flow. In other words, you make 5 times more per hour of work with the more expensive house.
Going the more expensive route gives you a lot more time to do things that truly make you happy. That’s why we invest in the first place, right?
Related: Why Buying Cheaper May Come with a Hidden Price Tag
Economy of Scale
At the front end, cheaper properties are very tempting because they can bring in more money per dollar. At the back end, the more expensive properties bring in a lot more per amount of work and per year from appreciation. Whichever you choose is up to you.
I’m sure some of you are thinking, “Well, I can’t afford an expensive property.” My advice to you is to buy what you can afford as long as there is cash flow. Over time you will be able to gain equity and save up money so you can buy something that will increases your income per hour.
Things to keep in mind:
“Happiness is not something ready-made. It comes from your own actions.” —Dalai Lama
We are republishing this article to help out our newer readers.
So, what do you think, investors? Have you opted for cheap homes or have you gone the pricier route?
Leave a comment, and let’s talk!
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Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly |…
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities) Frank Buys Philly | Building Opportunities
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly |…
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities) Frank Buys Philly | Building Opportunities Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne….
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities) Frank Buys Philly | Building Opportunities
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities) Frank Buys Philly | Building Opportunities Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportuniti…
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities) Frank Buys Philly | Building Opportunities
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities ~ Frank Buys Philly | Building Opportunities
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne…) Frank Buys Philly | Building Opportunities Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities Fronts are done !! Gonna be closing up nex…
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities
(Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne…) Frank Buys Philly | Building Opportunities
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne… ~ Frank Buys Philly | Building Opportunities
Fronts are done !! Gonna be closing up next week. Gonna start marketing these next week and get sold before completion. #philly #19125 #phillyrealestate #developer #buildinganempire
Fronts are done !! Gonna be closing up next week. Gonna start marketing these ne…
Fronts are done !! Gonna be closing up next week. Gonna start marketing these next week and get sold before completion. #philly #19125 #phillyrealestate #developer #buildinganempire