Investing in the Ghetto

Is there any money to made investing in the ghetto? Although there may not be an exact definition for what constitutes, "the ghetto", you know what it looks like when you're there. These are the parts of town that have very depressed property values, extremely high crime rates and tons of vacant or boarded up homes lining the streets. Is there any real estate investing opportunities in those areas? That's what you're about to discover:

 

 

Is Investing in the Ghetto Profitable?

 

The most important distinction about the ghetto as it pertains to real estate investors is that cash flow rates are typically extremely high. Property prices tend to be very low in comparison to the rental rates. It can be quite shocking to see just how high rental rates can be in such bad parts of town. Therefore, the big profit center for investing in the ghetto is in owning rental property and collecting strong amounts of cash flow each month.

In most cases, properties do not appreciate much, if at all, in the slums. However, in some rare instances, a city may actually revitalize a depressed area and what used to be a war zone may turn into an artsy, trending locale over the course of time. So a side benefit of owning rental property in the ghetto is that in the future, it may turn into the next big area. And then your property values will sky rocket. But don't bet on it. If it happens, then consider it icing on the cake.

Many new investors fear becoming landlords because of all the horror stories they have heard, even in good parts of town. Then, you should suggest owning rental property in the most dangerous parts of town and then they run for the hills! To set the record straight, landlording is comprised of three main responsibilities; collecting rent, handling maintenance requests and visiting the property ever-so-often.

 

(1) Collecting Rent:

 

Collecting rent can be difficult no matter where the property is located and if tenants don't pay, you may have to evict. What ghetto investors typically do is rent their homes to Section 8 tenants. Section 8 is a government program that pays the tenant's rent for them. So as a landlord, your rent check is coming from the government, not the tenant. Assuming your property passes Section 8 inspection and is maintained up to Section 8 standards (and the government doesn't go broke), you can all but remove the concerns of collecting rent when leasing to Section 8 tenants.

 

(2) Handling Maintenance Requests:

 

Next is the responsibility of handling maintenance requests. There is an old Chinese proverb that says, "Those in the free seats hiss first." With Section 8 tenants, since they aren't the ones using their own hard earned money to pay the rent, they can actually have more maintenance requests and create more maintenance headaches. What some Section 8 investors do is set up a 24/7 phone number that their tenants can call and it forwards to their 24/7 handyman so that if a call comes in to fix a toilet at 3AM, a handyman takes the call and heads out to the property and fixes it. Since homes in the ghetto leased to Section 8 tenants cash flow so well, there can be enough money to afford this additional expense.

 

(3) Visiting the Property:

 

Finally, as a property owner, you should check on your properties now and again, for all kinds of reasons. Perhaps you are uncomfortable driving around the ghetto? That would be a good reason NOT to invest in the there. Personally, I have driven the ghettos of several cities and never been concerned over safety issues. But my wife feels quite differently. She doesn't want me driving through the worst parts of town. And since "happy wife, happy life," when deals in the ghetto come across my desk, I flip them to Section 8 investors who love those types of deals. For some of you, doing business in the slums may not be scary at all to which case becoming the owner and leasing the deals out on Section 8 may be a great way to build a tremendous amount of monthly positive cash flow.

 

Obtaining Loans

 

One of the biggest drawbacks to owning ghetto homes long term is obtaining loans to purchase or refinance your cash out of them. Most mortgage companies and banks that lend on real estate have minimum loan origination thresholds. Oftentimes houses in the worst parts of town sell for less than the minimum threshold mortgage amounts. Therefore, in many cases, in order to acquire properties in the ghetto, you have to pay all cash. Most Section 8 investors pay all cash for the properties they purchase.

 

Renovations

 

If you plan on flipping properties to Section 8 investors, then keep in mind that fixing up the property is usually a bad idea. First, because Section 8 investors will do their own renovations in order to get the property up to Section 8 standards. Second, because you don't want to renovate and try to resell the property to a retail buyer since there are very few lending options for prospective retail buyers in the ghetto. Just get the property under contract and then flip to a new buyer.

To learn more about the Section 8 requirements for your local area, search your county departments for the one that handles Section 8 housing. Also, to get a quick glimpse of what Section 8 houses are on the market in your area, go to GoSection8.com. That's how you invest in the ghetto; either rent to Section 8 tenants or flip to Section 8 investors.