Distressed Rental Property: Just because you CAN doesn’t mean you SHOULD

If you haven’t been faced with this situation yet, you certainly will at some point.  Perhaps you’ve already jumped on that deal that was “just so cheap it had to work” already.  Perhaps you told yourself “yeah, it isn’t a very nice property but I can buy it for next to nothing and ONLY charge X-amount a month in rent…anyone can afford that…right?” 

“DON’T DO IT…IT’S A TRAP”

I know you don’t want to be a slumlord (at least I sincerely hope you don’t).  You probably have the best of intentions.  You probably plugged the numbers into an investment calculator and were amazed by the cashflows you could receive for this property even at below market rents.  Take it from me, DON’T DO IT…IT’S A TRAP.

“For the most part they either didn’t pay or didn’t stay”

I once bought a property with two detached units that was everything the aspiring landlord looks for.  Extremely cheap.  Low money down.  Owner financed.  Tenants already in place.  Sounds like the perfect property that all the GURUs tell you to look for in their expensive courses, right?  WRONG!  The truth is that the property wasn’t nice at all nor would it ever be nice unless twice the ARV (after repair value) was spent on a rehab.  Remember the “Tenants already in place” part?  They naturally were evicted for non-payment within the first six months.  Also, the units didn’t always attract the kind of tenants you want.  I did get lucky a few times, but naturally those people moved onto much nicer homes relatively quickly.   For the most part they either didn’t pay or didn’t stay.  I did end up making a SMALL profit on the property when I sold it with owner financing and it did cashflow throughout the time I actively managed it, BUT when you factor in the maintenance, high vacancy rate, cost of multiple annual turns and overall time spent babysitting the property…it wasn’t anywhere close to enough.  I intentionally haven’t ever done the math down to the cent, but I assure you that the guy working at the fast food drive-thru is paid more for his time.

“YOU’RE WELCOME” 😊

While it was a nightmare property, I do have to admit that it taught me lessons that I’ll carry with me throughout my investing career…in that aspect it was an extremely profitable venture.  I just wish I would have learned those lessons from someone else’s cautionary tale and not lived it myself…YOU’RE WELCOME 😊

“Distressed properties attract problem tenants”

When you’re looking at your next investment property you might want to consider the following along with the analysis of the numbers:

  • Is it nice and welcoming (or can it be with minimal investment)?  Nice properties attract higher quality tenants.  Distressed properties attract problem tenants.
  • Is it in a nice and safe neighborhood?  Nice, safe neighborhoods attract higher quality tenants.  Ugly, dirty and unsafe neighborhoods attract problem tenants.
  • Is it (or will it be prior to being rented) relatively low maintenance.  Factor in needed repairs when making your offer and then MAKE THE REPAIRS.  You don’t need to be patching things every month.  That’s a second job…not passive income.
  • Would you stay there?  I’m not asking you to LIVE there, but if you wouldn’t at least stay there then you shouldn’t feel comfortable asking anyone else to either.

“Don’t be a SLUMLORD!!!”

In short…spend the extra money on quality properties in good neighborhoods and you’ll be far more likely to consistently enjoy quality, long term tenants.  Don’t buy properties JUST because they’re dirt cheap.  Chances are it’s cheap for a reason and a headache you don’t need. Don’t be a SLUMLORD!!!

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