Back to number 1 in burn out.

[cyanide12345678]

Why can you make more money on run down properties where poor people live? That seems counter-intuitive.

You're not making "more money", but as a percentage, you're getting a higher percentage. It's just that you are acquiring the property dirt cheap.

There's 3 basic ways you make money in real estate: cash flow, loan pay down, and appreciation.

D neighborhoods usually have great cash flow, but don't expect much appreciation. Also, the higher cash on cash return usually means higher risk too. When you buy in a terrible neighborhood, it's a riskier investment than a good neighborhood. Higher risk should yield higher reward usually.

Here's an example: let's say you buy two 3 bed 2 bath 2000 sqft homes. One place in a A neighborhood, the other in a D neighborhood.

Neighborhood D:
80k home let's say. Run down neighborhood, crappy school districts, lots of crime, Downpayment 16k. $800/month (you'll notice there's a floor to rents. Even in crappy areas, even with section 8 renters, you have a decent floor to the rents).

So gross $9600 rental income. Let's subtract 60-70 percent for taxes, vacancy, maintenance, property management, cap ex, insurance, mortgage etc. Net monthly cash flow probably 200-300 per month. So let's say $3000 net return.

So 3000/16000 which is your Downpayment; so cash on cash return of 18.7%.

On the other hand, that 2000 sqft home in an A neighborhood is $300,000. Downpayment of 60k. Rental income $2000/month. Much bigger mortgage payment here, so after taxes, insurance, maintenance, vacancy, cap ex, and mortgage, out of your 24k gross, you might only be left with 6000. 6000/60000 is 10 percent cash on cash return. This home while has a lower cash on cash return, but it's more likely to appreciate as people find this area more desirable.

Anyway, the point is, your percentage cash on cash return is usually bigger when you buy cheap crap and don't need a lot of money for a down payment. While the price of an A neighborhood might be 3 or 4 times that of a crappy area, rent usually isn't and has a lower ceiling. For example, most people won't be renting a 600,000 home for 6000 a month. Almost no one pays 6k a month in rent. They would rather just buy a home of their own if rent was that high. So even a 600,000 home is going to rent for 2800 to 3000 usually.

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[thegenius]

I looked into getting an investment property here in the Bay Area and it's so damn expensive that I would need a lot of cash, too much actually, to actually get one.

 

[Apollyon]

I looked into getting an investment property here in the Bay Area and it's so damn expensive that I would need a lot of cash, too much actually, to actually get one.

What about in the South Bay, you know, Oakland?

 

[thegenius]

What about in the South Bay, you know, Oakland?

Yea I could go there. Depending on where it is though. Some parts of Oakland ain't for me, even if I have a company manage the property. I just don't want to go there. I don't want to get stabbed.