Slum or savvy?
Does buying a cheap house in a run down neighborhood make you a slumlord, or is it just good business sense?
While working on a Broker Price Opinion last week I had to do some research in a pretty rough neighborhood in a city I service.
Now, I used to own investment property and I have managed investment property for family interests since I was 18. I have some pretty interesting stories to tell and my last personal investment story is it’s own blog post. I really do NOT want to own investment property right now, but these homes are selling for $15,000. That isn’t a purchase price, it is a down payment! This temptingly low purchase price got my real estate number wheels turning for a little while and I decided that it would make a heck of a great investment.
Eventually, I snapped out of it and remembered that I am too busy raising my daughters and running my real estate career to be buying up property in need of serious repair (besides there is the little issue of the paying for it). But I got to thinking, for the right buyer: these are a bloomin’ heck of a steal!
I mentioned this to a few people who were incredulous and asked me if I wouldn’t hate being a slumlord. I hadn’t even thought of it that way and still don’t. Slumlords are not people who buy up cheap property, fix them up and rent them or sell them for fair value. Not in my opinion, anyways.
Slumburbia…
Then Lani brought this article on “slumburbia” to my attention and I started to think about this issue on a more national base and wondered if other places call buying property in distressed urban areas “slumlording”, too?
A conversation with a local agent brought to light that he is purchasing several homes in the same urban area as my subject property and is very excited about the opportunity.
Here is my two cents, tell me if it makes sense to you, too:
These foreclosed homes won’t do anyone any good sitting empty and rundown. They need owners who can inject some cash into repairs and improvements and bring in some good tenants. To me, “slumlords” are people who keep trashy buildings and expect their tenants to pay top dollar. I don’t know the rental laws in other areas, but Massachusetts is VERY VERY tenant oriented and it is difficult to get away with what I would think of as “slumlording.”
What do you think? Are you a slumlord if you buy up these urban bargains or are you kick starting the economy and being a good hard working capitalist?
What would Ayn Rand say?
SLCUrban
February 23, 2010 at 9:25 am
My opinion is that you are doing nothing for the property if you are doing nothing with the property.
Buying property and boarding it up for the day you can do something with it is just wrong and will only serve to bring more problems to the neighborhood. Buying the property and doing nothing for it while renting it is also just wrong. Many of these homes and properties end up being snapped up by agents and investors and end up rented or land banked, when, if given the opportunity, they could have been bought up by folks who would have rehabbed or torn them down and started over as places to raise families or build business.
Let progress happen and don’t stop it dead in it’s tracks.
Justin Boland
February 23, 2010 at 10:10 am
“Slumlord” is behavioral, not locational.
If you just respond to your tenants, obey health and safety laws, make repairs to the property, and actually physically show up in the neighborhood, then no matter what neighborhood you are in, you’re not behaving like a slumlord.
But.
These properties really aren’t just “urban bargains” — they don’t exist in a vacuum. Their prices are depressed because of serious, systemic social problems: decaying infrastructure, high crime rates, poor education, rampant unemployment, etc.
Ayn Rand wouldn’t say this, but owning property comes with an obligation to improve it, otherwise we’re all just outsourcing costs to the community and pocketing the difference. That’s being Selfish without Virtue. America’s increasingly devastated inner cities need way more than a new coat of paint.
Lesley Lambert
February 23, 2010 at 10:15 am
Justin, thank you for a well worded and very well thought response. I concur.
Brenda Hanson
February 23, 2010 at 10:44 am
Justin, I agree with you. I work with a few investors and have found myself stearing them away from the $5,000-$30,000. I am in Minneapolis and these homes are abundant on the North side of town. Unless someone has the time and money to spend fixing AND maintaining AND finding good renters, it is a dis-service to the community and to the investor.
Lesley Lambert
February 23, 2010 at 12:15 pm
Playing devil’s advocate: isn’t it vital that these properties get purchased and back into circulation regardless of who does the buying?
Garrett Heaney
February 23, 2010 at 1:02 pm
It all comes down to intent. Entrepreneurial investors with the intention to better the housing situation in a responsible way will do three things:
1. Improve the real estate industry by bringing value back to the market as properties and neighborhoods restore their integrity.
2. Improve the quality of life for human beings who desperately need better living conditions.
3. See amazing returns on their investments and truly EARN serious profits.
It’s the win-win-win situation we are all looking for, but it all depends on the investors intent.
Thanks for the great article Lesley.
Lesley Lambert
February 23, 2010 at 1:16 pm
Garrett, thank you for your insights!
Annamarie Pluhar
February 23, 2010 at 2:45 pm
This article comes into my world at the same time I’ve been thinking about this one:
https://abcnews.go.com/Business/comments?type=story&id=9901417. I am sick at heart for the people living in large buildings where the owners are impersonal banks not interested in the welfare of the tenants. I think, “there outta be a law!”
As many of you have said, the distinction is the intent and actions of the owner. When I was growing up in NYC, a “slumlord” was someone who never made improvements and allowed icky things to happen: roaches, rats, unpicked up waste, unshoveled sidewalks etc.
Many people need housing. Many people need good, safe, clean housing. One building alone does not make a slum. One good building does not lift a community from a slum. Buying a cheap building makes good business sense if the building is going to accrue in value and pay for itself.
Erion Shehaj
February 23, 2010 at 4:48 pm
Taking that devil’s advocate position a bit further: What about the case when the landlord started with the correct intentions, the right behavior and repaired the property appropriately but then the tenants eventually trashed or vandalized the property or even created the environment for rodents etc.? Personal responsibility is a two way street
Just something to think about.
Justin Boland
February 24, 2010 at 1:11 pm
Actually, personal responsibility is NOT a two-way street.
Although that is a very popular saying in America, the fact that it’s usually spoken by politicians on TV should give you pause.
When other people break the law, that actually doesn’t exempt you from breaking the law. Personal responsibility works very much the same way. If there is a driver swerving on the Interstate while they talk on their cell phone, do their makeup and plan their week on a personal calendar, that doesn’t mean that everyone else on the highway can abandon their own duties.
Personal responsibility is very much a one-way street — you’re either going in the right direction or you’re not. But it’s always and only on the shoulders of one single person.
So, if your tenants are a problem, what does that change about your personal responsibilities? Exactly nothing.
JRRivera
February 24, 2010 at 9:32 am
I agree, a slumlord is a person who rents out sub par housing for par pricing.
It’s hard for me to keep my hands off of these “distressed urban areas.” If you want REAL cashflow, this is the place to play when you’re on a budget.
Think about this for just one second…
If you have $35k sitting in the bank earning you maybe 2% interest that’s $700 per annum.
Take that same $35k, spend it on a rental that you can rent for $700 per month and you’ve got a return of $8,400 before expenses. So let’s say you have taxes, insurance, repair reserves, property management and some vacancy you can easily make a 10% net return on investment ($3,500.)
I think that’s good business.
Nashville Grant
February 24, 2010 at 12:20 pm
I completely agree. Class C housing is always in demand and if that area has the potential to appreciate like Brooklyn a decade ago, that’s just good business.
Lisa Oden
February 24, 2010 at 9:55 am
Great article Lesley! My definition of slumlord has always been someone who receives rent for a property while neglecting the property and tenants. Doesn’t matter where the property is located.
Erion – I get what your saying. It is really sad when a landlord does all of the right things and still the tenants destroy property. Unfortunately, that is one of the risks which go with the territory, and one of the big reasons so many people don’t want to be landlords.
All we can do is act responsibly and treat people with respect and dignity. I wouldn’t want to take money from someone, if the property was in such a condition which I wouldn’t have my own family live.
Lesley Lambert
February 24, 2010 at 10:41 am
I like seeing all the different angles that you all have taken. I agree, these can be a very smart investment for the right kind of buyer…that is what got me thinking about this in the first place. Lisa, I always felt the same way about my rental property when I owned it. I wouldn’t rent out anyplace that was in a condition that I wouldn’t tolerate myself.
Al Lorenz
February 24, 2010 at 2:37 pm
How do you rent a sub-par property for a par price? That seems to be so commonly accepted as possible in this discussion, that I would love to hear how it is done. Most markets don’t have low vacancy rates. Even if they did, if people are willing to pay, isn’t that what defines the market price? If rents are too high vacancy goes up so high that any gains are lost. So, how do you do it?
If I have 10 units that rent at $700 per month, gross receipts for that building are $7000 per month. If I raise rents to $750/month, I now gross $7500 per month. But, if I get even one vacancy, in now gross only $6800 per month. So, Please tell me how I can charge too much for a unit. I believe Ayn Rand would say I cannot. Thanks!
Lesley Lambert
February 24, 2010 at 3:33 pm
I am surprised at some of the things people have read into this thread. I never mentioned land banking or any of these other “marginal” ownership behaviors. The property that I was looking at would require a massive cash injection to make it habitable, so no danger of someone buying and renting it as is.
Personally, I find it to be a business decision. If you are in a financial position to move some of your liquid assets into these properties, fix them up and hang on to them for a few years minimum then you will see a higher than average rate of return (probably). I would have no moral issue with this as long as I was a responsible landlord in the duration, regardless of what my eventual plans were for the real estate.
Does owning real estate have moral obligations?
Al Lorenz
February 24, 2010 at 3:37 pm
I believe there is a responsibility to act ethically and profitably. If it makes business sense, do it.
Joe Spake
February 24, 2010 at 3:57 pm
Lesley, maybe I am answering the wrong question, and maybe I am a snob, but investor properties, while they generally do have occupants, do not shine as favorable light on a neighborhood as legitimate owner-occupant properties. Speaking here from a well documented investor Mecca, I cannot site a case where investors buying up foreclosed houses at bargain prices has improved the quality of life in any neighborhoods. If there are such cases, where investors have improved the quality of life in neighborhoods, especially “slumburbia” neighborhoods, I would love to see some case studies.
Joe
February 24, 2010 at 6:50 pm
We have several rental properties. If landlords took our approach to landlording (is that a word?), there would be no slumlords. We have always managed our properties as if we would live in them, or at least would have lived in them in some stage of our life. For instance, we have 5 children and we certainly wouldn’t live in one of our duplexes we manage now, but we would certainly have considered one of our duplexes back when we were newly married and/or only had 1-2 small children.