Foreclosures and Section 8 Housing

Flake:

See The Sopranos - Season 4, Episode 7.

Haha, sorry but I've seen enough Sopranos re-runs to move onto Boardwalk Empire.

accountingbyday:

I know a few people who have bought as primary residences. They all had pretty good luck, but it was a SLOW process. Also, they were paying $225k for a $300k house, not buying $1k houses so it could be completely different.

I have been looking into this for a while as well, but I'll say that in the Chicago area there are far less awesome deals than you'd expect. I don't see houses for $1k and if they are cheap they usually are in disrepair.

Also worth noting, I'm not looking in nice areas, but I also refuse to do anything in the real slums (lower middle class is more my target). Also, I would only buy if it would be very strong cash flow from Day 1, I'm not throwing good money after anything other than a nearly guaranteed money maker.

I have received one piece of advice many times: Do not buy outside of your metro area. If you're seeing these $1k houses halfway across the country, there's a slim chance that you'll just swoop in, buy the property, and make $ from a distance.

I can see the logic of your not buying from a distance advice. But, my plan was once I have some more investment capital and a full-time job go to a dirt cheap city and go on a buying spree of say 10 or more POS homes and bring my construction partner along to minimize the serious structural problems with the homes. Then once the homes have been upgraded to a livable condition start talking to property management companies and start a bidding war for my property portfolio, since 10 homes has more negotiating power than 1. This provides me the benefit of not having to be a slumlord, and also being able to return to my cozy desk job in finance. However, I admit I may be completely off with the economies of scale here, since 10 POS shit homes may not have that much negotiating power at all with a property management firm. But hypothetically, if this scale proves to be sufficient, with 10 homes at $400 per month in rent, I would have $440,000 per year in rental revenue, of that I would expect 1/3 to 1/2 to go towards continuing operating expenses, which in a worst case scenario leaves me with $220,000 per year in gross profit, excluding the price of the initial repairs, and the $10,000 I spent on the homes.

However, I would assume the bulk of my initial expense would come from repairing these POS homes, but if I can buy for $1000 and make each home livable for say less than $20,000 a piece, I can still turn out a fairly nice income stream, even with less than favorable financing. However, that $20,000 estimate is purely a guess, which is why I would need a construction partner for me to be serious about this.

D M:

Yea, dude, that $20k is a very iffy guess. I haven't had experience, but one of my friends was looking into this. Here's the basics on what he found:

1) The ones selling for a grand are not the best buys. They're really iffy, actually, no matter how much you're putting into it, usually because of the location

2) The best properties to buy are usually in the 50-60k range. They will usually cost about 20-50 to fix up. The ones that you can get for a grand are usually going to cost AT LEAST $30k to fix up, usually $50+, sometimes even $100+

3) You might as well write off the rent, you will use it for maintenance/taxes.

He's got 3 houses right now (last I checked). He's barely breaking even with rent, and he's hoping to make about $50k on each house when he sells (he planned on selling 3-5 years after the purchase, has at least a year left on all of them before they go on the market). Obviously this isn't the same situation as what you're talking about, but I think a lot of the info is relevant,

You are probably closer to being right than me about the initial price of the homes and repairs, but I think your friend's situation is a bit different than my idea. I expect little to no property appreciation and never plan to sell. When buying in the slums, most properties offer a much higher CAP rate than traditional housing because you have to deal with lowlifes and because you expect very little property appreciation. My plan is to use the properties entirely as a second income stream and have the rent checks guaranteed by the government.

Btw, this idea is really screwing me over already, I have a final in 2 hours and I spent the last hour doing research on this idea. I'll get back to you guys later. lol

bortz911:

i think your mistake is thinking you can buy for $1,000. Just a wild guess there haha.

Also section 8 people will trash your FF&E (e.g. buying a new refrigerator every year, etc)

I've seen tiny ghetto duplexes where one side rents for $200/mo. Is this the big payday you're hoping for?

I'm not saying it's impossible but anyway, to answer your question, talk to brokers and look at properties and talk to tenants and most importantly, talk to guys who flip houses in that neighborhood. You'll have to buy with cash to get in at a bargain, too, so make sure you build that into your IRR expectations...

There's homes all over the place for $1000, just check Bank of America's website. But DM has a valid point in that may be a better value to buy a somewhat decent house for $60,000 than it is to buy a complete POS for $1000 and fixing it up. And this is all about economies of scale, yes $200 monthly isn't that much money, but $200*10-operating expenses can make a decent secondary income each month.

D M:

Yea, like I said, probably pretty different situations. But as the above guy noted, you're not going to be raking in the dough. Generally your expenses will be greater for cheaper housing. You're dealing, oftentimes, with less scrupulous people that are harder to track down. So, yea, you might be taking in $400/mo in rent, but what happens when they walk away and take the fridge with them? Or if you have to evict them, and they punch holes in the wall, tear up the carpet, etc. Some people get rich in this industry, but that's because of volume. So, honestly, it's probably not the best idea for someone just starting out.

Oh, and we didn't even take into account the legal aspects of this. Anything regarding real estate will cost you a pretty penny in legal fees. Something like this, where you're dealing with sketchy people, will probably cost you a good bit more in preparation and execution of whatever legal shit needs to be done

Buy the cheapest shit money can buy, then when they trash it it's not a big deal, I'm not talking about fixing these houses up to look nice and selling them, my goal is to do the bare minimum to qualify for Section 8 housing, which guarantees the rent checks by the government. I know the credit rating of the U.S. government isn't what it used to be, but I'd still rather they owe me money than a crackhead. But ABD's original assumption is definitely right about only operating in your own area, this is looking a lot more hands on than I previously thought. Despite legal expenses, repair expenses, and miscellaneous expenses (damage caused by things only a crackhead would do), I still think this has the potential to be a very profitable business model if executed properly, but that is also true of any other business.