Low socio-economic neighbourhood?

[Branca]

Hi everyone, I'm an inexperienced investor with only one property under my belt which is in a sought after area and easy to find nice tenants.

I am looking for cashflow positive property which is scarce in my town, and I have found one - but in the WORST neighbourhood in my town. It's the neighbourhood most notorious for being full of beneficiaries and unemployed etc etc.

The area is a little rough and full of mostly state and ex-state houses but it has the essentials of schools, kindergarten, public transport etc, plus HousingNZ and the council are re-developing part of the neighbourhood to improve it. It has nice and nicer suburbs adjoining it.

I realise such a property would need active management by us and careful tenant selection out of the small range of tenants who would consider living there... solo mums with rent paid by WINZ perhaps?

In my reading I have come across two main viewpoints about this type of rental investment. One being that with careful management they can be a great, low-outlay cashflow positive investment (stepping stones to bigger and better things); the other that the tenants are too much of a headache and to totally avoid these neighbourhoods.

I inspected the dwellings today and even though they are 1960s or 70s ex-state houses which haven't been updated (except for aluminium windows), they were actually in pretty good condition, I guess partly because they are so solidly built. In spite of so many years of taking a hammering they are still well livable, not smashed up and really just need a good clean.

As an extra bonus, this property has plenty of land and street access to either subdivide or put a minor dwelling on.

So, for those of you with experience of owning these types of properties... any advice? Pros and cons? Things to watch out for? How do you increase your chances of finding and keeping tenants who 1) pay the rent and 2) don't wreck the place, when your property is smack bang in the middle of the ghetto?

Thanks in advance!

[ZimbabweanKiwi]

I am facing a similar dilemna and I also look forward to responses to Branca's thread.

ta

[Niall]

Branca,

When you buy in a rubbish location you should expect rubbish tenants. A cash flow positive yield on paper, may not materialise if the property is trashed, vacant, or rent is missed.

I work in Wellington so dont know your area but a ghetto is a ghetto no matter what city its in.

Stick to your knitting, Buy the best property you can every time.

All the best,

Niall

[Winston001]

The basic rule for real estate is Location Location Location. An investor hoping for capital appreciation over a number of years will always do better in a good location.

Having said that, there are active investors who do very well out of cheap houses. You need to be on your toes and very strict about damage, missed rent etc.

The other variable is that a ghetto today might be middle-class in 10 years. When I were a lad Ponsonby was the place they did dawn raids to catch overstayers. So don't be put off, make your own decision.

[Branca]

I suppose part of the equation then is asking 'what sort of investor am I'. Not getting much capital gain doesn't scare me off, as I'm investing for cashflow. Am I ready to be strict and on my toes, and deal with incidents promptly?

I suppose 'ghetto' is a pretty strong word. In the relative affluence of NZ, this neighbourhood is a poor neighbourhood, and has some of the hallmarks of a ghetto. But it is not a total slum. There is the odd house with unmown lawns, but on the whole it is neat and well kept. But I know that with a property like this there is an increased risk of trouble from tenants, and that is the risk we must either avoid or be prepared to manage.

As cashflow investors our challenge is to find anything at all in our town as house prices are so out of whack with rents. If we avoid the poorer neighbourhoods we might not be able to buy another property in the forseeable future. Part of me wonders if we might take on the risk for a couple of years while we subdivide and/or move another dwelling onto the land. At that point if we were not enjoying managing the property we could sell it.

[Dunning]

Can you be a hard arse? If you are managing the properties yourself and they are in a less desirable part of town attracting less desirable tenants you need to be a hard arse or get them managed by one.

[SuperDad]

My opinion: Don't do it.

[Aston]

Been there, done that... never again.

I know that everybody is different and everybody has different stategies for investment but I couldn't think of a single valid reason to buy in such an area again.

I have purchased some really good cashflow properties... 14% + eg. But after years of hassles and dealing with utter nitwits of tenants I have come to the conclusion that it just wasn't worth it, financially or otherwise.

Strangely enough though I have moments of weakness whenever I come accross an adverstisement for such a property. Whenever this happens I get out the press clippings of events that occurred at one of my properties or streets in which I used to own property.

I have had to deal with arson, suicides, wilfull damage, stolen chattels, totally unreasonable requests for maintenance, not to mention many police callouts in the middle of the night, to noisy parties, strangers lurking on my property etc etc. The list goes on, I hope I've been able to convince you.

The people who will be your tenants will be the dregs of society, why would an otherwise sane person choose to be their landlord? At one stage my insurance company asked me "can you give us one good reason to extend cover on your properties" ...

Just forget it.

I'm with SuperDad... Don't do it.

[ZimbabweanKiwi]

I guess I for one needed Aston's argument to bail out on the idea. Aston says, the prices can be very attractive e.g. one unit has come down from $145K to $126.5K. In my case I have been looking at a block of 8 flats. For some reason 5 units are on the market and they are owned by different vendors. I have spoken to all the 5 different agents handling the sales as to why each owner is selling and hoping that under the new REA act I would be told of any problems with the building etc. I have been watching and waiting for the last 2 months. The only flaw I picked up was on the titles where the 4 ground floor units have are numbered different to what's on letter boxes/doors i.e. what's number 4 on the titles is number 1 on the door and vice versa. I would have thought that this is just a minor administrative issue that landowners can amongst themselves.

Oh.. the property is in Christchurch's Aranui suburb.

ta.

[Baywatcher]

You also talk about subdivision or subsidary units in the future. This costs the same in the cheapest streets as the most expensive ones. Very hard to get a return on the 45k plus for subdivision then building costs in the cheap and nasty suburbs. Thats why you see lots of large sections in these areas.

[Branca]

Thanks so much for the words of experience and wisdom, just what we needed. Trying to take an objective look at myself to see if I'm a hard arse or not. Concluding I am more of a wannabe hard arse than a real one!

[Glenn]

I know nothing about your local natives apart from when they jump ship and swim south. Ours being the first land in site a fair few struggle ashore here.
Frankly like all wild animals they can be trained and made into useful tenants that pay every week.
The big problem landlords have with investing in bad lands is expecting the tenants to have the same values as the nice people in the good areas.
I would take 10 poor area tenant problems to one good area problem any day. Most of the people at the bottom of the heap know they can not go any further down. The people in the posh areas have so many expectations and make so many lies when things go bad.

By being sympathetic and obliging giving your tenants above average service such as fixing things quickly you will find most of your low decile area investments will pay you well. Sure you might have a bit more picking up muck and cleaning up than the good stuff but hey one can get over that. You do have to learn to take no excuses for non payment of rent.
Things like having cancer, children sick, police stories and so on are not and excuse to not pay the rent. Once the tenants figure you do not buy into this sort of stuff they might even stop telling you and just get on with living their own life without you interfering.

I have not noticed a great reliable difference in capital gains between the bad and the good areas over a long period of time. Some do really well and some poorly.

[DaveW]

Why not invest in middle of the range. ie. middle class family homes in average middle class suburbs. Families are always good to rent (and on-sell) to. You create your own cash flow opportunities.
Dave

[Glenn]

Why not invest in middle of the range. ie. middle class family homes in average middle class suburbs. Families are always good to rent (and on-sell) to. You create your own cash flow opportunities.
Dave

Have you not read it.
It is written in the scriptures that the poor will always be with us.

[DaveW]

Have you not read it.
It is written in the scriptures that the poor will always be with us.

But it doesn't say they will always be housed.