Nightmare renting to people in a low income area,

[zk]

I own a few rentals out of state. They’re in a low-income area. Actually, they’re some of the cheapest places in a middle class area, so, while my tenants are mostly fairly low-income, the surrounding area is not too bad.

In any case, the price/rent ratios and the eviction laws there are good enough that, even with a certain (probably relatively high) percentage of bad tenants, it’s still more profitable than in better areas. Certainly far more profitable than anything I’ve seen in Southern California. I have a management company do everything, so all I do is collect what’s left over after the management fees, eviction costs, clean up costs, repairs, etc. Really no hassle at all.

Of course, I’ve only had them since August 2012, so not totally sure yet how this will work out long term. And the appreciation potential is quite low on these particular properties.

[barnaby33]

This thread is total housing porn.
Josh

[bearishgurl]

IN SD County, I think you, as a landlord, need to manage your rental propertie(s) yourself to make the numbers work out, unless:

You paid cash for the property, OR

you bought the property more than 15 yrs ago and never removed equity.

For best cash flow (incl inevitable vacancies):

You should have no MR, AND

if you have HOA dues, they are less than $60 mo (SFR) and $160 mo (condo).

I don’t think it matters what area it is located in. “Good” tenants can be found for every area and “lower-quality tenants” likely means you paid much less for the property, so have less at stake if it is trashed or squatted in before you are able to legally evict your tenants. And don’t think for a minute that this can’t happen in a $3000+ mo rental!

Also bear in mind that Section 8 and other gov’t-administered rental-assistance programs pay at least 80% of the montly rent REGULARLY, so it might be prudent to get approved for them. These types of rent programs are not dependent upon the whims of your tenant’s employer and cause tenants to stay much longer than the average tenant.

Bottom line is if buying rental properties in CA TODAY, buy local properties only and manage them yourself.

[enron_by_the_sea]

What does “number work out” mean in context of a rental property?

I always consider getting one and do a mental calculation of

cap rate = (rent – vacancy – tax -insurance – HOA – maintenace – Prop. Management) / Price * 100

In and around Central San Diego county, the result is typically 3% to 6% depending on whether I assign any value to maintenance and prop. mgmt. or not… While it is better than bubble days, that still does not interest me so I give up.

For those, who are into landlording now, what is the flaw in my calculation? or is 3%-6% now considered a good cap rate?

[Coronita]

[quote=enron_by_the_sea]What does “number work out” mean in context of a rental property?

I always consider getting one and do a mental calculation of

cap rate = (rent – vacancy – tax -insurance – HOA – maintenace – Prop. Management) / Price * 100

In and around Central San Diego county, the result is typically 3% to 6% depending on whether I assign any value to maintenance and prop. mgmt. or not… While it is better than bubble days, that still does not interest me so I give up.

For those, who are into landlording now, what is the flaw in my calculation? or is 3%-6% now considered a good cap rate?[/quote]

I think some of us are holding up for increasing renting prices, as it’s been happening and some appreciation, at least in certain areas.

[SD Realtor]

Given the propensity for appreciation I don’t think 3-6% is to bad at all. It simply depends on your long term goals. You can get double digit cap rates with very little appreciation in other places but getting 3-6% cap rates with say 5% appreciation… nothing wrong with that.

[enron_by_the_sea]

[quote=SD Realtor]Given the propensity for appreciation I don’t think 3-6% is to bad at all. It simply depends on your long term goals. You can get double digit cap rates with very little appreciation in other places but getting 3-6% cap rates with say 5% appreciation… nothing wrong with that.[/quote]

Yes I agree about that. Was just checking here to see if my numbers were not off.

But that begs another question. Given that in San Diego, most of your return will come in the form of appreciation, why not buy something that is best for appreciation? Buying a 1/1 condo is probably not the best play for appreciation.

[Coronita]

[quote=enron_by_the_sea][quote=SD Realtor]Given the propensity for appreciation I don’t think 3-6% is to bad at all. It simply depends on your long term goals. You can get double digit cap rates with very little appreciation in other places but getting 3-6% cap rates with say 5% appreciation… nothing wrong with that.[/quote]

Yes I agree about that. Was just checking here to see if my numbers were not off.

But that begs another question. Given that in San Diego, most of your return will come in the form of appreciation, why not buy something that is best for appreciation? Buying a 1/1 condo is probably not the best play for appreciation.[/quote]

True… But some of us are just cheap…

Other thing though is some properties that are more likely to appreciate “better” might also not as well cash flow as good. ….Although does seem it is very tempting right now to focus on the lower end of the cap rate now, and take a slight higher risk on appreciation me thinks.

[ctr70]

I was thinking of buying rentals when prices were down 2008-2011 in Riverside, I’m soooo glad I instead bought rentals close in SD. Especially since I live in SD. SD’s rental market is very strong. I have had flood of interest the moment I put my properties on Craigslist for rent. So far great tenants that pay like clockwork.

If you are in good areas close to the coast you can afford to be very picky with tenant selection, b/c you have so many people that want to rent the place. But out in the boonies or in ghetto areas, beggars can’t be choosers. You have to take what you can get and that can be problems. Even worse dealing with those issues if you are a 2 hr drive from the property.

Some people can handle the rougher properties & do well with them (but they usually got a absolute steal buying them). But a lot of people fall into the trap of seeing the cash flow “on paper”. Problem is after a ton of vacancies and evictions that cash flow “on paper” can go up in smoke. Sometimes the better properties in better areas don’t look as good “on paper”, but get way better tenants, less headache, no vacancies, no missed rent, better appreciation.

[ctr70]

In my opinion there was a short window to buying rentals on the coast to get a decent cash-on-cash return on condos, sfr’s and and 2-4’s. That was late 2008-end of 2011. I think the window is mostly closed once again. You might be find a deal in a bad area here and there, but for the most part the deals are way worse now. To me not worth it for the pain of buy & hold. And this fact doesn’t really even reflect in the overall median numbers. But you could “steal” properties from late 2008-2011 and get spectacular deals when there was still some inventory, more fear in the market, banks were not doing through appraisals on short sales, etc… You could get really good deals and in good locations. But now it is a way different market. Decent deals are flooded with offers the day they hit the MLS. There is now no more fear, banks are doing better appraisals on short sales, there is no inventory, etc… Real estate is no longer scary to buy. Certain submarkets and property types are up 30%+ in price since that time.

On landlording I think checking past rental history is key. The KEY is to talk to PRIOR landlords, not just current landlord of the place they are moving out of. Current landlords may just want to get that tenant out of the property. You have to be careful though you are not talking to a “plant” by the tenant. If you check the last few years and the tenant has never missed a rent payment, your odds are pretty good.

[ctr70]

[quote=bearishgurl]IN SD County, I think you, as a landlord, need to manage your rental propertie(s) yourself to make the numbers work out, unless:

You paid cash for the property, OR

you bought the property more than 15 yrs ago and never removed equity.

For best cash flow (incl inevitable vacancies):

You should have no MR, AND

if you have HOA dues, they are less than $60 mo (SFR) and $160 mo (condo).

I don’t think it matters what area it is located in. “Good” tenants can be found for every area and “lower-quality tenants” likely means you paid much less for the property, so have less at stake if it is trashed or squatted in before you are able to legally evict your tenants. And don’t think for a minute that this can’t happen in a $3000+ mo rental!

Also bear in mind that Section 8 and other gov’t-administered rental-assistance programs pay at least 80% of the montly rent REGULARLY, so it might be prudent to get approved for them. These types of rent programs are not dependent upon the whims of your tenant’s employer and cause tenants to stay much longer than the average tenant.

Bottom line is if buying rental properties in CA TODAY, buy local properties only and manage them yourself.[/quote]

Excellent post BG! I would add when much better deals could be had on the CA coast back in late 2008-end 2011, you could still make a condo cash flow very nicely even with a $250 hoa, since rates are so low and prices back then had over corrected back to 1999/2000 in some cases (yet getting 2013 rents!). And with a condo you have lower home insurance and much lower monthly maintenance costs (no landscape, exterior painting, roof, etc…).

[ctr70]

[quote=SD Realtor]Before reading these tips, understand you cannot discriminate against any type of tenants. Here are some things I do….

– Don’t rent to students
– Rent only to single people or families. Maybe a committed couple.
– Rent only to people who have steady jobs. Part time work is not steady.
– No roomates at all.
– Any new tenants in the home not on the lease is an instant default. Time to evict.

I have had plenty of tenants with problems on their credit report. Even a few who had their home foreclosed on or short sold. More important is verification of their income and cash flow. I verify that the income they claim on the rental application can be traced to deposits in their checking account and that liabilities on the application match large withdrawals out of the checking account. I ask them to explain discrepencies.

While checking on previous rental history is important, never deem it to be reliable.

Low income areas are not a problem unless you as the landlord lack the will to strictly enforce the lease. This was the original posters (friends) problem.[/quote]

Excellent post. All sage wisdom!

[ctr70]

[quote=enron_by_the_sea]What does “number work out” mean in context of a rental property?

I always consider getting one and do a mental calculation of

cap rate = (rent – vacancy – tax -insurance – HOA – maintenace – Prop. Management) / Price * 100

In and around Central San Diego county, the result is typically 3% to 6% depending on whether I assign any value to maintenance and prop. mgmt. or not… While it is better than bubble days, that still does not interest me so I give up.

For those, who are into landlording now, what is the flaw in my calculation? or is 3%-6% now considered a good cap rate?[/quote]

I buy condos, SFR’s and 2-4’s so I don’t use cap rates as they are more for larger apartments. I use more cash on cash return. How much down payment do I have + fix up to make it rent ready, and then what is my monthly positive cash flow + loan amortization pay down. From late 2008-end of 2011 you could get better than 10% cash on cash return on leveraged condo’s, SFR’s and 2-4’s. In come cases WAY better then 10%. And that isn’t even factoring in appreciation. Where are you going to get that type of return year in and year out? With appreciation that return can go though the roof. It already has for 2008-2011 rental buyers who bought well.

A lot of people do not factor in loan amortization into their return, and with these low rates it is HUGE. With a $350k loan 30 yr fixed loan at 3.75%, over just 5 years your tenant pays down $34,729 towards the loan principle for you. And loan amortization not taxed! So you get that huge loan amortization pay down + the positive monthly cash flow.

Also if you really scoured the market and put a lot of time in & became a really good buyer, you can find properties with hidden value and then add value. This can add to your return big time. There might be something you can do to greatly increase the rents, or you may have bought on the edge of a rapidly gentrifying area, or you can create extra parking, etc…

These are reasons why I think applying standard vanilla “cap rates” to certain regions for mom & pop type rental investors that buy condos, sfr’s and 2-4’s, doesn’t really work well.

Of course personally I don’t think the cash-on-cash return is nearly as good anywhere on the coast of CA vs. what it was in that short window from late 2008-end of 2011.

[Author]

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