Posted by Jim Locker on January 15, 2001 at 16:46:09:

I did a doubletake when I saw the annual gross rent you listed for 34 units in low to moderate income neighborhoods. Where are you? I don’t consider $577/mo to be “low income”, but then my area is not a high cost area.

The valuation indicated for the properties is straight slum valuation. The numbers you present here look enormously attractive.

So, I have a couple questions. What kind of shape are these properties in? You are not listing any maintenance costs; what will you be getting into WRT roofs, foundations, plumbing, etc? The numbers you list will easily support these things unless you have to do them all at once, but you need to know what you are looking at.

Second, what are the neighborhoods like? War zones? If so, are you willing to deal with that kind of tenant? You know, I hope, that if the neighborhoods are war zones you will NOT get good tenants.

You say you have been an investor for one week. If you are looking at a war zone, you had better think real hard about it. That kind of tenant wears down the toughest of us, and you must not neglect the physical danger that you yourself might encounter.

If this woman is willing to part with these properties for this kind of price, there is something very unattractive about them. Make sure you find out what it is.

I think you are preparing to take a very big bite - possibly too big for a beginner. Make sure you do your due diligence, and good luck to you.


Posted by FREE SPIRIT on January 15, 2001 at 16:07:13:

Hi all! Need some help from the experts on this one:

I saw an ad in paper - 5 properties for sale by owner, I responded to the ad and found out she has 34 individuals properties all for sale. These are low income housing properties located in low to moderate income community. All are within the same area. She faxed me over a list of the properties and addresses, rental income, taxes, insurance, and sewer expense. She wants approx. $17k for each property which is approx. $578k. All positive cash flow properties, some Sect. 8 rentals. Now here are the real facts:

Asking $578,000
Annual Rental income: $235,580
Annual Expense (disclosed): $ 52,524

I would say in that area the properties are valued at around 15,000 to 35,000 on 1 and 2 unit (duplex homes)

My initial offer: $510,000 ($15k each)

Payable as follows: 1st Mtg. $459,000 @11%, 30 yr. term
2nd Mtg. $ 51,000 straight payout
payble within 12 month of closing with payments due Qtrly @ $12,750.00. (this represent 10% down paid in 1st year)


$578,000 (17k each unit)

Payable as follows: 1st Mtg. $520,200 @ 10%, 30 yr. term
2nd Mtg. $ 57,800 straight 5 yr.

Now the net cash flow after 1st mtg., 2nd mtg., tax, ins., sewer and 5% Vacancy rate the monthly cash flow comes out to be around $9,200 to $10,600 roughly. Depending on the option chosen, and taken in consideration cash flow would increase after 2nd mtg. is paid off within the 1 or 5 year period. Is this a good deal, or am I dreamin? I just started investing 1 week ago. It’s only my second offer. No answer from the owner yet, just submitted today. Be easy on me guys, did I make her a good deal or what?

She’s a hardballer’ I can tell, but seems eagar to get out of the real estate management business, at least in this market.



Posted by Nate on January 16, 2001 at 10:41:29:

I would look very carefully not only at the expenses as stated, but at the expenses that aren’t stated. Tax, insurance, and sewer are only a few of the numerous expenses you would incur in managing 34 units in a low-income neighborhood.

  1. You will need a substantial budget for maintenance and repair. Without knowing what shape the properties are in, I can’t begin to guess at this, but you will need to be aware that there will be substantial ongoing maintenance due to damage by tenants, neighbors, friends, etc.

  2. Your vacancy allowance of 5% is probably too low. I don’t know what part of the country you are in, but Steve (who is in Baltimore) feels you’re lucky to get 9 months of rent a year. That would be a vacancy rate of 25%. I have been in many other markets where a vacancy of 10% to 15% in lower-end, older, junky properties is typical.

  3. In addition to vacancy, you will need to budget for collection loss (bad debt, people skipping out on you). Figure another 2% to 3% of gross rent for that.

  4. Managing 34 scattered-site rental units in a low income area is a full-time job. Are you prepared to commit yourself to it? If not, you will have to hire someone to do it for you (collect rents, make sure properties are maintained, show vacant units, screen tenants, etc). If the neighborhood is unsafe, you might want to hire someone to do it in any case.

I am not saying not to pursue the deal, but I am echoing Steve and Jim’s advice to be very cautious and examine everything carefully before assuming it is a good deal. If the seller is savvier than you are (you seem to believe as much, and if you have only been involved in real estate for a week I’d venture to say you are right), you will have to ensure you are not being sold a bill of goods. And remember, if she is so anxious to get out of the business…WHY? Why doesn’t she like, and why would you?

Good luck.


Posted by SCook85 on January 15, 2001 at 19:56:38:

I wholeheartedly agree with Jim. Many times these things seem to good to be true and they usually are. I don’t want to discourage you from going forward because this may really be a deal, and your seller may really be motivated- I don’t have enough facts to tell you that. But I come across deals such as the one you are describing all the time, and they are to good to be true. In most cases the sellers will not finance the deal because they know you won’t be successful. If they will finance they want a substantial downpayment.

In low income areas you are in many cases lucky if you collect your rent 9 months out of the year. If the properties are section 8 then you will collect your rent for the year, but you never know what shape your home will be in after the year.

There are many drawbacks to dealing in low income neighborhoods, the biggest drawback being that good tenants are almost non existant. Are you ready to deal with that?