A little while ago I sent out an email about 6 rules for investing in apartment buildings in the ghetto...any ghetto in any city!
Why a ghetto? Because you can cash flow like crazy by getting super cheap properties that nobody wants. As you know, some of these areas are a full out war zone and investing in these areas can be intimidating at best.
In case you missed that email, here are the 6 rules before I give you my additional "add on" rules in a moment...
Here are some "rules" for investing in a Class D ghetto-like area:
1) Make sure you do not buy on a "board up" block. This means that every other house or property is boarded up. Wrong move.
2) Make sure the building is still standing and not actually burned down. It takes Google Earth sometimes many years to "catch up" to the real street images in places like these so...make sure there's still a building there instead of just assuming that, because there's a picture on LoopNet.com, there must automatically still be something there. Sometimes it looks like a building is there until you see that the roof is all burned up. Not a good investment.
3) You usually can't go wrong if your apartment building is located on a very busy street. Yes, people still can get murdered there but your potential tenants would rather live near a busy street than in the middle of the woods where nobody can hear them yelling for help. (That's a joke...actually, maybe not. Truth is, your tenants want to live near grocery stores or the "party store" since many of your tenants won't have vehicles.)
4) Make sure there isn't any major structural damage, foundation cracks, parts of the interior building exposed to the elements, or major water (or storm or any other) damage that will take a fortune to fix. If there are units in the building that aren't rented, make sure they are aren't vacant because they are unrentable for reasons such as black mold, severe fire damage, or other pain-in-the-ass crap that you don't want to fix because it'll take a haz-mat and/or demo team just to deal with the unit.
5) This is the most important: make sure the property is still in service. Any out-of-service or 0% occupied property is a no-no! Now and forever! Understand? Even a 20% occupancy is still workable. However, try to stick with 50% occupied or more as a beginner.
And, of course...
6) Never offer the seller anything remotely close to what he or she is asking. This is one of these areas where you can still get away with being like Monica...the Lowball Queen! Don't feel like you're "insulting" the seller with a lowball offer because, if you think about it, their building being in existence is a insult to begin with. Isn't it an insult that the seller is putting up a property that he/she has done no work on in the last...who knows how long? Or that there's massive trash surrounding the property? Or that it looks like you'll need an African bush tribal dude with a machete to clear some of the "forest" that they've allowed to accumulate in the back of the property? Now that's an insult to any prospective buyer! Howdare they list something like that without at least cleaning it up? So...don't worry about insulting them with a lowball price of at least 25% off the asking price.
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So, now that we got through the basic 6 rules, what are the rest of the rules?
First off, I should mention that acquiring a ghetto property is ridiculously easy...so easy that it can be done with a quit claim deed since the seller wants to get rid of it as soon as possible. No escrow required in most cases!
With that said, managing these properties tends to be the most difficult to pull off. You may walk into a property that has a 50% occupancy and a year later all of your tenants have left.
I had a competitor on a property that I wanted in Detroit that's a whopping 96 units. It takes up a city block. They had no clue on what they were doing and they were adamant about beating me out on the price. So...I let them have it.
Here's how the deal went down...or rather didn't go down for me.
Property was listed at a ridiculous price. It was a bank-owned property. I offered $250,000. They offered $290,000. They got it. I didn't. They turned around and sold it to an associate of theirs, probably telling them what a hot deal it was. They sold it immediately for $470,000 and made a cool $180,000 profit within about 2 months. Nice deal for them.
But let me tell you how the "associates" fared in the deal. Here's the short version of the story: They lost their ass.
The building had only a 40% occupancy back when I was negotiating on it. Even worse, the upper northern corner of the building had severe water damage which parlayed into at least 4 units at the top of the building that couldn't be rented. (This happens a lot with flat roofs in the Midwest and on the east coast. Flat roofing is a stupid architectural design flaw that seemed to carry over generation after generation and never works anywhere there is a lot of rain and/or snow.)
After the "associates" took over the property, the occupancy went from just under 40% to 0% in just a few months.
And they were left holding the bag on a mortgage/debt service of about $24,000 a year, annual taxes of just under $15,000 a year and many other expenses that even an abandoned/vacant building can cost.
Now they're in a desperate situation to sell. They have the price listed as "not disclosed." I'm imagining, however, that they want to get their money back. Unfortunately, a building located in most areas of Detroit that has a 0% occupancy is worth...nothing.
That's right. Nothing. Zippo. Zero.
They'd do better if they burned the joint down and collected on the insurance money. Much better, actually. (And don't think investors don't do stuff like that because they do. All the time, believe it or not!)
So, what did they do wrong?
At the risk of offending people, I'll tell you anyway because it's the reality of the business, folks. And if you don't want to know the reality, get into a different business.
The area in which this building is located is 100% African-American. The "associate" who bought the property is Arab-American.
Both races in this area of the country pretty much hate each other with a passion which resulted in the remaining tenants in the building moving out to stick it to the new owner.
And stick it to him they did!
Because let me tell you what happens to a building that goes into the "0% occupancy state" in an area like this and why it can go from worth "something" to "nothing" virtually overnight.
You see, the second an apartment building or other commercial property (and even residential properties) become vacant, vagrants begin to strip out anything of value in the building from copper wiring to door knobs to even toilets. Yes, you read that correctly. Everything methodically gets stripped out within just weeks after a complete property abandonment. Everything!
Then...somebody or a group of somebodies (in most cases) will go in and torch the place down...for fun and entertainment. Or because they're high on PCP and think it's cool to watch a building burn up.
Or because they hate the mother****** who bought the place. You know, the Arab-American "associate" who bought the building?
By the way, this was the very same building that I had done a proforma on that would have cash flowed at a kick-ass $13,774 per month on a 95% occupancy...even paying their ridiculous $400,000 they were asking! Yes, that's right, it would have cash flowed $13,774 per month or $165,288 per year by bringing the occupancy up.
And even if I did nothing but let the place be with it's 40% occupancy, I would have cash flowed around $2,400 per month or just under $30,000 a year...for doing nothing but keeping things "status quo" with the joint.
And yes, these figures are after all expenses, taxes, and mortgage are paid out.
So, yes, it would have been a freaking great deal.
But now we have a vacant building. (Look it up on LoopNet.com when you get a chance. It's in Detroit and it's called "Cabot Apartments." Beautiful building that's about to be completely and permanently destroyed until the city bulldozes it to the ground in about twenty years.)
Click here to join my next (and last) Multifamily Apartment Building Mentorship Group!
How would I have been able to do better with this deal?
Well, first of all, the on-site property manager really took an instant liking to Ronnie when I sent him over to inspect the property for me. The manager (an African-American gentleman) was really rooting for us to buy the property, had some really kick-ass strategies on building the occupancy (which included having an "in" with a local half-way house of working ex-convicts who were required to get immediate housing upon release to stay out of prison), and was willing to do whatever it took to keep the building in operating order. (He made that clear to us because he didn't want to lose his job or his apartment!)
Then the "associates" took over. I'm sure they either made unrealistic (and disrespectful) demands of the current building manager or got rid of him completely to opt for a management service.
And no management service worth its salt will bother with properties in the ghetto. They will literally do nothing for you or your building.
If you are going to nab any of these super lucrative properties, you're going to have to understand some very simple rules. Yes, I will offend some people by telling you this but, guess what? These are the rules. I didn't make them. I'm just relaying reality to you.
1) If your property is in primarily an African-American community, you better either (a) be African-American yourself or (b) find yourself an African-American property manager (preferably on site) who has a "built-in" rapport with your current tenants. This same rule applies for Asian-American, Arab-American, etc. properties.
2) On-site management is required. Period. No way around it. You can't have an outside property management service. It won't work. You have to have an on-site guy do maintenance and be on the property at all times! This will include giving him a free unit and a small salary.
3) Offer your on-site manager bonuses. You should offer him bonuses for leasing up the property to certain thresholds like to 50%, 75% and then 100% as well as offering him a referral bonus for leasing to his own associates, friends, and family who qualify.
4) Respect your property manager. Ask for his advice and suggestions on things often. The more respected he feels, the more pride he'll take in taking care of your building.
5) Stick with older folks for both management and for tenants. Young punks won't watch after your property or take care of it and will make it into a giant frat house which is a major legal eviction nightmare!
If you stick to these rules, not only will you have an easy time acquiring a profitably property in the ghetto but you'll be able to make it cash flow for yourself for many years to come rather than losing your ass like the "associates" had.
See you at the top!