Slumlording
By Steve Gillman
Am I really advocating slumlording as an investment strategy?
Yes... and no. There is no doubt that you will often get better
cash flow with low-income housing, and for that you might be
called a slumlord. But I do not and would not recommend renting
out truly dangerous housing or in any way cheating tenants out
of what they pay for.
On the other hand, much of what is called slumlording
is simply providing reasonable housing for those with low incomes.
It benefits the renter and the landlord. You see, tenants rent
not-so-nice places because they can afford them - and that's
the important point here. The alternative? Well, suppose a house
needs paint, has rusty hinges on the doors, and a dirt driveway.
It cost less to buy, and therefore can be rented out for less
while still providing good cash flow to the buyer. But if the
landlord goes ahead and fixes everything, this results in higher
rents, and possibly drives the renter away, or leaves him no
option but to rent something even worse.
Having to rent something worse due to improvements in rentals
is a common scenario, by the way. When I lived in Michigan my
own town enacted rental regulations that included fifteen pages
of new rules and many non-safety-related requirements, like minimum
window ratios of window size to floor space to allow natural
lighting, bedroom square-footage requirements, and rules against
peeling paint - even if the paint was not a hazard.
Such rules are made in the name of low income renters, but
the result was predictable: higher rent. Add regulations against
mobiles homes, and low income families needed to move further
away from town and jobs to find affordable housing. I mention
this to let you know that if you offer an ugly, but safe and
affordable rental, you're providing a real service.
How Much Can You Make?
Naturally, what you can make depends on many factors, including
the rent levels where you are and the price you pay for your
investments. But let's look at an example...
I used to live in a place where a typical two bedroom house
cost $130,000 and rented for $800. In the same area you could
buy a mobile home on a lot for $45,000, and rent it for $550
per month. Notice that the house costs nearly three times as
much, but the rent you get isn't even doubled. This means more
cash flow from the mobile. This is why beat-up old houses and
mobile homes (on land) are such good investments, and a good
alternative for renters, whether or not you call this slumlording.
You will have more risk and management problems with low income
housing. Repairs will come up more often, and rent will be late
more often, on average. This is why you deserve a higher rate
of return on your investment. If not for the higher return, who
would provide low-cost rentals?
Ways to Make More | Related Opportunities
| Tips
Treat your tenants well, and make your rentals safe. Then
you can honestly enjoy a good return on your investment - even
if some want to call you a slumlord.
Here's another little secret: If you renters are really stretching
to afford the rent, stay in touch so you can anticipate problems,
and look for ways to make it easier for them to pay. You can
collect when they get paid every two weeks, for example, so they
don't have to save and plan for a larger monthly rent. If you
have many rentals you can also keep a list of projects that you
need done (painting, roof repairs, etc), and hire those renters
who have skills, paying them with discounted rent. In these ways
you can keep your vacancy rate down and so make better cash flow
over time.
First Steps
Check out the rent charged for various types of rental properties
near you, and the prices these are selling for. Ask around to
determine vacancy rates and the difficulties involved in evictions.
Start crunching the numbers to see if you really will get a higher
return from low-income renters.
Resources
Real Estate
Investing Course - There are several free newsletters and
courses available here. Scroll down to find the real estate course,
which has some additional content about slumlording (low-incoming
rentals).
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