How to be a Slum Lord
Mon, 04/20/2009 - 23:10.
in
I was recently reading this article about a local slumlord and it brought back memories of a trip I took back in 1997 when I worked for an investment real estate company. My job was to inspect a property, decide what needed to be done to bring it up to speed and then sell it off to investors. When I arrived, I was in for a bit of a surprise.
The place was a dump. I couldn't believe people really lived there. There was mud and dirt everywhere and the exterior was hideous. Inside wasn't much better – old appliances, dirty carpet and an odd smell pervaded the apartment units. I realized that this place was a bit of a slum. My heart sank.
What surprised me was I crunched the numbers beforehand and the property was earning a fairly healthy cash flow. This was one of the reasons we were looking at the place. So, naturally, before I had seen the building, I made certain assumptions about the way it looked – if it was earning money, it had to look fairly decent, right? Well, after viewing the units, I realized then, that there was money to be made by having people live in less-than ideal conditions. I wouldn't call it squalor but I wouldn't live there.
After touring the individual apartments and the grounds, it was readily apparent that many repairs were needed, from new appliances, carpet and fresh paint, to possibly new siding and roofing – even the plumbing was a bit suspect. I decided that I would recommend repairs that would make the place inhabitable according to my standards … sounds reasonable?
Well, unfortunately, the projected rental cash flow to our perspective investors didn't quite match up with what I thought had to be done, so things were scaled back quite a bit. I have to admit, I left the company shortly before the project was completed and I never got to see how it turned out. I think the investors who bought made some good money – actually, I should have bought a unit, but for some reason, it didn't feel right. They were quite cheap and the rents were fairly healthy, thus theoretically earning a healthy cash flow each month. I think the tenants were fairly steady as there wasn't much choice in the lower end of the market even back then.
So here I am twelve years later and I still think about those units. Now, every time I drive by a run-down house or some crappy looking rental housing, I wonder – who owns them?
Well, I can tell you it's probably a smart investor or group of investors who are using an investment strategy – maximizing cash flow by minimizing expenses. They are also targeting a market that admittedly needs to be addressed – low income earners. Not everyone can afford to live in waterfront homes with a gorgeous view – that just isn't the way the world works. I'm not saying that everyone should live in luxury surroundings with marble countertops, but one would hope the basics would be provided.
Would I invest in a slum?
I don't think so. I'm not sure I'd feel good knowing that I was making money off people who were trapped and couldn't afford anything else. If I did invest in low-income housing, I would want to make sure that at least I would live there … that means no bugs, crime or anything like that.
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Slumlording certainly isn't
Slumlording certainly isn't most investor's preferred option, but think about it this way:
1. everybody has to live somewhere - for those who either need to or want to live as cheaply as possible, low cost housing is obviously important. Better housing costs more money and would need to generate higher returns to justify the investment;
2. the fact that a lot of people feel uncomfortable with owning low cost/poor condition housing is one of the reasons why the cash flows/yields are attractive and why there may be a limited choice at the bottom end of the market - the supply is limited. If more people were willing to invest in low cost housing, competition woud drive the rents down or result in greater investment in upgrading properties (or a combination of the two);
3. another reason why a lot of investors avoid low cost housing is that there is less potential for rental income to grow over time than there is with better quality properties;
4. what is considered a "slum" in many richer economies would be considered "middle class" in other countries.
For the record, none of my properties could be classified as a "slum", but if the numbers were right, I would have no qualms about investing in low cost housing.
Respect
You should be proud of yourself. I would not invest in such situations either. For some in the pursuit of cash, they lose their standards and morals along the way.
There is always a way to become wealthy while playing above the line. I always follow the saying of if it doesn't feel right don't do it.
Anyway, Kudos!
How to be a Slum Lord
I used to own a low-end rental property, and aside from the rate of rent not being sufficient to pay for lots of improvements, the sad truth was that when I did spend money to make things a bit nicer (a new paint job, repairs to broken doors, new stove top etc.) the next tenant would leave the property unannounced, owing several weeks in back rent and having done more damage to the house than could be paid for by the rental bond. If I'd made substantial improvements and treied to increase the rent enough to make a decent return on the money invested, allowing for the prevailing vacancy rates and damages, it would have been priced out of the market.
Maybe the people that live
Maybe the people that live in these places seem to appreciate it more then those who live in more luxurious homes. Maybe in the back of their mind, this is the best they have and they will do anything to keep it because the next stop is being homeless and it might be a nightmare for them to go back to living without a home.
Contribution to the problem
In response to some of the other comments, why does everyone feel that powerless that they just accept some people will never be able to afford anything more.
Why contribute to the problem? Try to find a way to help.
Slumlords
(sorry for the delayed response ... work is hectic!)
@Traineeinvestor Great points. People have to live somewhere and it's not always going to be the best accommodation.
@Adam Thanks! You can still make money without screwing people, I like to think. You are also right in that if people don't accept those awful conditions, these type of buildings won't proliferate.
@Tomas Hard to tell what people who live in these conditions are thinking but it certainly beats living outside. Having said that, it's still no excuse to take advantage of people. There has to be a happy medium with making money and taking care of people.
Here in Vancouver, we certainly have our share of slums (Downtown Eastside) ... I wonder how much money they earn? The conditions are sure wretched from what I understand ... is there a way to improve the conditions AND still make a fair return?
Idea
Just a thought, but the way things like this normally make money is with economy of scale. If an investor had enough cash to buy out a number of these properties and convert them to low cost shared housing, resulting in shared facilities, the running costs would be lower hence the rent could stay the same and conditions improve.
Im sure I am over simplifying it a bit, but a possible solution, or something along these lines.
Low Income Housing
@Adam Sounds like a good idea!
Hopefully someone reading
Hopefully someone reading this post understands the difference between being a landlord with low-income tenants and an actual slumlord.
If your tenants don't have to deal with leaks, unpotable (or no) water, hazardous electrical wiring, pest infestation, lead paint, etc. you'll never end up on our blog.
However, subjecting your tenants to conditions like I described above -- I don't understand how you can face yourself in the mirror. And don't you have to worry about being fined by your local housing departments?
Slumlords
@Baltimore Um ... I hope you don't think I'm advocating being a slumlord?? There is a certain ironic tone to this post ... I am totally against the whole idea of slumlords. I hope, too, that people understand the difference between providing good safe, low income housing and slums, which are not acceptable.
No, we understand that
No, we understand that you're not advocating being a slumlord. In Baltimore, however, our slumlords consider themselves "investors" and don't understand how their actions affect the surrounding communities.
Slumlords
@Baltimore It's not just in Baltimore - it's everywhere, I'm afraid. Hopefully, these people will either wake up or be forced to spend a night in one of their buildings.
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