Question on Becoming a Slumlord

[Rot 911]

And I do mean a slumlord. Housing prices here are not like CA where I can make money off of flipping houses. On the other hand I can purchase a small (5-8 tenant) apartment building in the $130K-150K range that I can rent out and actually have a positive cash flow. I have done a fair amount of research on buying fixer uppers and I have the skills necessary to get them in a rentable condition. I am also quite familiar with problems keeping units filled and landlord/tenant laws. I guess I am just curious as to whether any of you have done/are doing this and your thoughts on it.

[tc-sacto]

I own three single family residences in South Dakota. The mortgage is $550 Rents for $850. However be sure to budget for the following:
Vacancy and Collection: My area 5%
Capital Reserves: for misc expeses and repairs 3%
Management: on average 7% for outside source
Maintenance: day to day stuff 5%
Taxes: your actuall $
Insurance: get three quotes
Utlities: talk to last owner.

For me I net a 9% cash on cash return($130 month net rents after above expensesx12 =$1,560/$17,000 down payment) + any appreciation that may happen.
Luckily my wife runs this as her business from home. Her main job is a stay at home mom. However, she spent 14 years in property management so she is well versed in managing rental property. I would not do this without her, as we live in California.

(once capital reserves reach a target number, I will no longer need to budget this expense. Our goal is 10-15 properties in the mid-west and Virginai over the next 10 years. Then pay them all off over the next 10 years.)

[Joeaksa]

Kurt,

Had a very good friend who lived in Springfield and did more or less the same thing. Difference was that he bought a 5-plex apartment building and lived in one flat and rented the other four out. He was fairly handy but jobbed out the bigger stuff.

Worked out very well and they made money on it, then moved on after 10 years.

JoeA

[Moses]

Unless you are in a special area;


It's a big headache!

[Rot 911]

Originally posted by Moses
Unless you are in a special area;
It's a big headache!

I agree on the headache and aggravation part, I already deal with those kind of people on a daily basis so that will be nothing new.

[Wrecked944]

I'd actually recommend against being a "slumlord". I own two rental units and they are IMO pretty darned nice. So finding tenants was relatively easy, I can charge higher rent which brings in a higher class of tenant, and tenants are less inclined to move. I haven't had a vacancy or tenant problem in two years. I also hired a property manager to handle all of the repairs and to find and deal with the tenants. So far, he has been worth his weight in gold. I found that I am capable of doing the repairs etc - but I am not able to do the repairs etc AND hold down a full time job. So I don't know what I'd do without him.

Also, I'm wondering why you want to buy right now? Frankly, I have the cash on hand to buy more units - but I am waiting for the market to crash before plunking down my dinero. Seems like buying real estate now would be akin to buying 100,000 shares of Enron in August of 2001.

[Rot 911]

Janus the market in Jefferson City Missouri is not the same as where you live. (My brother lives in Woburn). Around here you don't see many homes for rent over $600 because at that price level a person can buy their own home. Here a decent home can actually start at $70K. For example I live just outside of Jefferson City in a very small town. I live in a totally restored 3200 square foot home that was built in 1908. It has a 1500 square foot detached garage built in 1990. It sits on a complete city block (around 3 acres) so I own the city block. I bought it 3 years ago for $169,000 which was pretty close to fair market value. Say you buy a house for $60K around here you wouldn't even be able to rent it for $500 per month. On the other hand there is a huge demand here for low income housing. So my choice is buy nice, but have a negative cash flow or buy low income and have a positive cash flow. It may not be glamorous, but it can be profitable.

[Wrecked944]

Originally posted by Kurt V
Here a decent home can actually start at $70K.

Holy Cow!! Would you consider adopting me and moving me to Missouri?

[gr8fl4porsche]

Hey Kurt,
I have owned a 4-family flat in St. Louis City since 1990.
If you get good tenants and put them in units with new appliances, newer HVAC, and quality sink, shower and toilet fixtures - then it is no trouble at all. I keep the rents low for long term tenants and give them bonuses like garage space and free cable TV.

There is the occasional turnover or bad paying tenant but they never last too long. Give it a try - you can always sell.

[Joeaksa]

Janus,

I lived in Missouri for years. When the housing costs are like this, the salaries are on par. Best is if you can live there and work for a outside company making East or West coast money, then you can live like a King!

It can also be extremely conservative and would be quite a change from your area. Nice place to raise kids but its different. Beautiful wooded areas and lots of lakes and hills.

JoeA

[turbo6bar]

Kurt, I don't do the lower end, but I can see how the numbers would work. As long as you are prepared for potentially more headaches, I think you are on the right track. Be aware that the rental market is the worst in at least 2 decades. Low interest rates and lax lending rules means your best tenants are owning instead of renting. As long as you put reliable warm bodies in those units, I think you can do great.

I have been investing for 5 years, but I draw on my parent's experience of 20+ years. I feel buying fixer uppers is the best route. It maximizes my investment dollar, builds instant equity (after repairs), and keeps my mortgage low. The last property I bought was a 3/2 (1050 square feet). Price was $56k. After 6 weeks of repairs and $4000 in materials, I estimate it is worth $85k easily (cheapest home in the neighborhood is listed for $95k). I don't have a mortage on it, but if I did, the P&I would sit around $375/month. It is currently rented for $875/month.

Since you did not present any numbers, I'll offer generic advice: treat this like a business & go for the long haul.
good luck,
jurgen

[john70t]

In Michigan I've seen a lot of property "for-rent" and the same is true, I believe, in San Francisco/Bay Area right now......... so it's a renters market for right now.

When I was in S.F. I noticed a lot of homeowners rented out the extra 2 rooms/+ for morgage... even while depreciating the property/gaining lending history/and basicly getting free rent++....which seems like a very good investment over the long term.
If you can get a multi-unit, or one with easily-rentable rooms, for the same price as a single-family........why not?

[john70t]

My own voodo real estate thoughts:

Plus's for property searches are: proximity to colleges/major freeways/thoroughfares/churches/historical districts/goverment buildings/major new development(where single family can easily be converted to dual/commercial).
All these are stability factors that shouldn't change drasically in the next 10 years and are independant factors.

Minuse's include: groups of 10 or more chillin' in the middle of the street on a summer wednesday night, bad paint/paralelagram-houses neighborhoods with new cars, being inbetween projects at the end of a transportation peninsula where the neighborhood property value depends on the national economy, as well as parks and schools which can turn into "hangouts" quickly.

[Rot 911]

bump for more input! Thanks for all the responses so far!

[lendaddy]

Actual slumlording? Not for me thanks. I have a buddy that does it and there is simply NO WAY. The people you have to deal with, coked out or high or drunk all the time. Rooms filled with trash, etc.. Now I'm not sure if that's what you meant by "slumlord", but that's what a real slumlord is

The ONLY upside I saw is your check usually comes from the Government so it's on time and always cashes.

He also does rentals near colleges and Universities. These are THE BEST! Rent only to girls(students ofcourse), I repeat only to girls. They will take care of the place (usually) and the check will often come from their parents.

my $0.02

To add on edit:

Another great spot is near Hospitals. Walking distance to Hospitals, young docs and nurses make great tennants. They are never there and pay on time.

[johnco]

My parents owned at one time 148 houses, apts, trailer spaces. Over the years some were sold so now I think they have maybe 68-70 left. It's a headache, but the return is pretty good for the effort. Years ago I got a friend started in real estate with an investment of $45,000 for a set of 5 apt units instead of that cd with 3.5% return he was on his way to get. He sold those 2 years later for $90,000. reinvested that, and in 5 years he went from that initial investment to owning property worth over 1.5 mil. Instead of apts though, he bought mobile home parks. He now owns at least 75 spaces at $100-150 a month. He hasn't worked a regular job since. Trailer park rentals means no grass cutting, no worry about destruction of the apt unit, no a/c problems, it's too expensive to move a trailer so they stay forever. And you can always clear off the trailers and sell lots or build homes later. Houses and apts are so much more work. He also does great with rent to own. He buys something like an $800+- trailer. Buyers give him $1500 downpayment, $200 a month towards purchase, $100 a month rental for the space, etc.. 6 months later, they move out and he sells it again. And again.....wash, rinse, and repeat. come to think of it... I think he owes me a consulting fee. lol

[Wrecked944]

Johnco, that is very interesting stuff. I haven't been as successful as your friend, but I can definitely report that real estate has done more for my net worth than 15 years of 9-5 wage slavery. I am very intrigued by the idea of doing mobile homes. I must confess I had never considered it - probably for reasons of snobbery. But now that you explain it, the benefits are obvious. I have, so far, preferred townhouse condos for the low maintenance and high quality tenants. But you've definitely got me thinking.

[johnco]

It costs a bit to set up a new park so buying an exisiting setup is the way to go. About the only maintenence is cutting grass on empty lots now and then and sometimes clearing stopped up plumbing if you get an assclown that likes to flush towels or something. Tenants own the trailer so there's nothing you need to repair. Otherwise, just sit and collect the rent. Recently my friend has been buying condos in Florida, having a couple vactions and then turning them over for a handsome profit. The Ba*tard!

[304065]

Kurt:

Do nothing further until you read, from cover to cover, the following book: How to manage residential property for maximum cash flow and resale value.

http://www.johntreed.com/HTMRP.html

It is the best single volume I've ever read on the subject, and one of the best, most practical business books there is.

[Dantilla]

I own rentals, and have flipped some fixer-uppers.

Go for it. But go into it with both eyes wide open. The absolute best way to get rid of a lousy tennant is to not rent to them in the first place. Screen the snot out of people before giving them any keys. It is far better to have an empty unit than wish it was empty so you could find somebody else. Set your standards high, and do not compromise. I've got a great bunch of people paying me money every month, who like to live in my buildings.

Oh, and I show up at the rentals in the Chevy pick-up. Not the Porsche.