It can be tempting to invest in very low quality apartment buildings, duplexes, and other rental properties. The price per unit is much lower, offering the false illusion that if you can turn the property around to make big profits. However, the problem is seldom with the property. The real problem is the quality of tenants living in that part of town.
These are low quality tenants for many reasons. Most of the problems stem from the fact that they barely qualified for low-income jobs. They lack a decent education and are forced to accept minimum wage jobs. As a result, they spend much more of their income on housing than the middle class does.
They have more family members sharing the living space to reduce the cost per person. More people mean more wear and tear on your rental units. Less income on their part makes it more difficult to pay the rent each month. Obviously, that leads to more evictions, which results in more tenant turnover. More turnover means more wear and tear on your rental units.
Low-income jobs also tend to be high turnover jobs. The already tight budget gets even tighter from layoffs and little work. Again, it means more tenant turnover and more wear and tear. Of course, you can try ignoring the wear and tear, the broken windows, the furnace that no longer works, and everything else that is broken. That's definitely a primary strategy for slumlords. To maximize cash flow while minimizing maintenance expenses. However, most municipalities have code enforcement officers that will soon be citing you and fining you for these violations.
Then there are problems with vandalism, graffiti, and crime. As a slumlord, you'll have the police wanting to talk to you about criminal tenants on a regular basis. You'll be financially responsible for repairing vandalism and cleaning up graffiti. Almost certainly, your property insurance will be much higher than in a low crime area.
A slumlord is someone taking advantage of tenants' difficulties in life to maximize his or her profits. It's about exploiting tenants that can't afford a more expensive place and someone that typically has no other option than to accept that no maintenance will be done to a property that will continue to deteriorate until it is condemned. Sure, they could move to another place but that takes money that they don't have and these people have trouble qualifying with a better landlord. At best, another place would be marginally a step up from where they currently live.
If you want to rehab an apartment building or other rental, you'll be much better off investing in an older worn down property in a better part of town. It's almost always better to invest in a low cost property in a good part of town than to look for the cheapest property in a bad part of town.
As always, before making an investment, perform a thorough due diligence. If you're honest about the costs of being a slumlord, you'll quickly see why it's better to invest a little more on the right side of the tracks.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.