Investing in the "bad" areas?

[cyber]

I'm currently looking at the NZ market and trying to decide where to buy. Having grown up in Christchurch, my attention naturally turned to this city. While its growth is certainly not spectacular, it is reasonably solid.

I asked a PM the typical question of "where should I buy?". The answer was reasonably predictable. But in "suburbs known for affluency", and stay away from "suburbs known for low socio-economic status", e.g. Aranui, Linwood, Bromly, etc.

However, on paper, the areas perceived as being "bad" look very good, in terms of their gross rental yields. This is all assuming that you can still attract good tenants in these areas that can provide a solid cashflow.

So the question is, have other people successfully invested in these so called "bad" areas? What percentage of applicants would be good, and what screening techniques do you use?

[muppet]

Hi Cyber

Welcome to the forum.

I suggest that you have a talk to a few Property Managers in Christchurch and quiz them about the supposed good and bad areas of the city.

As they have their customers in these areas they should be able to tell you of the pitfalls that they encounter.

Regards

[Marc]

Hi Cyber,

Also ring up the local council and also the police and tell them that you are thinking about moving to the area and would like to know the bad areas. It works for us.

Best Regards

Marc

[Rat]

Listen to the Property Manager. Why ask if you are going to ignore the advice?
Cashflow on paper may look good but what is the average vacancy factor for those areas? How good are your profits going to look when you get tenants who fall behind and then have to be evicted?

Who needs the hassle?

Put in the effort and buy in the good areas. You will have to work hard to get them positively geared but personally I love a challenge. Home and income properties that are side by side or totally seperate are winners.
Good working class areas are fine. They don't have to be the most affluent suburbs.

getting out of the rat race
Rat

[Glenn]

Well I like the poor bad areas of my town.
the rates of return are far better than is possible in the so called good areas. I choose tenants that are suited for the area. In some cases I choose vunerable people. Vunerable can mean mentally impaired, or unlikely to be able to get a house in a good area. These types are not used to being well looked after so they really apreciate the good service I give them. They often will ask me to provide homes for their relations and friends also. Often I hire fridges, washing machines, and TV's to them so make a bit more on the side also.
The smart self opinionated sharp types keep out of these areas. These are the types that can cause more problems.
Also I find over a long time that the capital gains are not a lot different than the good areas. Their capital gains always lag behind the good areas but they also go up by reasonable percentage eventually.
As for the hastle. Well as a property manager I can assure you that the hastles of dealing with owners of top rate properties can also be a hastle because their expectations are justifiably so much higher.
I am still patting my self on the back for encouraging my son to purchase his first IP in such an area. Paid $51000 for a one bedroom flat two years ago, gets $140 Pw and it is now valued at $108000. what is bad about that.
Glenn

[muppet]

Hi Glenn

An excellent posting. It is really good getting the views of a property manager who deals with both sides of the spectrum.

It will be interesting to see what happens when the time comes that CG slows down or stops and interest rates continue to rise, as to what happens to those who have a small yield and whether they are still keen to pour their own money into supporting their IP.

Regards

[Rat]

Fair point Glenn. Positive cashflow is my main focus, capital gain is the icing on the cake...However because I bought in a middle class area just before the boom my capital gain has enabled me to buy a business as well as other Ips.
For example I bought for $350,000 ( motivated vendor) rent $630 a week( Home and Income)
Revalued it 6 months later at $450,000.
Earlier bought for $360,000 in upper middle class area rent now $705 a week. Revalued a year later at $550,000

The icing on my cake is pretty thick!
It enables me to get ahead real fast as long as I keep my borrowing below 80% there is a safety margin for when the market corrects.

Your son has done great. I hope that my kids will do as well.

[Glenn]

Rat that sounds great.
Congratulations or what ever it is one is suposed to say in these circumstances.
The problem is I have been into this investing game for about 12 years now. Apart from a bit of capital gain 93-94 the market has been fairly flat for the best part of this period. I purchased my last property 3 years ago and in hind sight I would have been better off to buy several residential properties rather than one big commercial. But that commercial is bringing in 12% net and will continue to do so for years to come with little effort. I made a small fortune in the share market before 87. Everyone in my Goverment office used to talk about how much money they were making. We were all experts. Then the market colapsed (whilst I was off overseas spending the profits) and the game was over.
So yes it is reasonably easy to make a one off killing when the market is going up. The trick is however to not loose your head and think you can do it for ever or you will have neither head nor shirt.
Real wealth is when money comes in every week for ever.
Then you will be able to get off the rat race and swim. Trouble is people like me enjoy fighting in the trenches too much.
Perhaps one day I will buy myself some swimming togs and take a long swim.

[RentMaster]

I liked the concept of financial freedom which I think came from Rich Dad Poor Dad.

The concept was that if you were to remove your income from your day job, how long could you live on your alternative surplus income (i.e. rent income less expenses) at your current life style before the money ran out.

So if your current living expenses were $1000 per month, and you had positive rental cash flow of $500 per month, and you had $2000 cash in the bank, you could live for 4 months before it ran out. If you alternative income was $800pm, you could live for 10 months. If you surplus income was $1100pm, you could live forever. That is financial freedom.

[wada]

Hey Cyber,

So the question is, have other people successfully invested in these so called "bad" areas?

We have 2 IP in Papakura (PK) which is a suburb of Sth Auckland. When we purchased the IP were in an area deemed as 'bad'. We knew that eventually the overflow from Auckland City prices would trickle down to Manukau and then eventually to PK. After 4 years it did and the properties have increased it's value, along with strong rental returns. It's not FANATASTIC returns but enough to put a smile on our faces.

I'm don't know anything about the Christchurch market but I suggest to buy in an area where you believe will be the next best thing. I know it sounds easier than done, but we've found the Auckland market easier to predict.

So what percentage of applicants would be good

Sorry Cyber I'm unsure what you mean by that

and what screening techniques do you use?

We use a form found in a book titled The New Zealand Landlord's Handbook for tenant applications. We've changed a few things to suit our line of questioning. There is more than likely a downloadable form somewhere on the web. However, if you want to have a look at our version then send a PM with an e-mail address or something and I'll send one through.

Wada

[cyber]

So bad can be good?

Thanks wada for attempting to answer all of my questions. I do have the NZ Landlords Handbook (in a stack of property books recently bought), and will check the information in it on the screening process. Screening seems to be one of the most important things you can do as a landlord. It is much better to be able to recognise applicants as coming from hell before they have a chance of becoming your tenants.

Thanks also to Glenn. You have shown that good deals can come out of bad areas. Good on you for opening your doors to the more "vulnerable" members of the community. I presume you have not had any problems with this strategy.

cyber

[Glenn]

I never said I do not have problems. Goodnes I keep asking Tenancy Services for a bulk discount.
I have figured out how to use the RTA and the Tenancy Tribunal to work for me. There are two basic things in tenancies that the landlord needs.
Money and to not damage the flat so that the next tenant will also pay money.
I either get the money directly from WINZ (not all that many tenants) or if they do not pay then the debtors get dragged through the courts and get an attachment order against their benefit and then WINZ pays the debt off directly. The only one that has ever escaped declared bankruptcy.
For all other issues not related to money such as noise, dogs, overloading, not looking after the property, domestic voilence, and so on I only have one solution. The tenant gets a 90 day notice to terminate the tenancy with no repreive nor appeal.
Glenn