Need Help - Important Question For Landlords Or RE Investors!
Landlords and RE Investors,
I really need your help. Let's say we have a 40-unit building in a bad neighborhood. I take that back, it's in a friggin' ghetto! What percentage would you say I need to deduct for that from the GOI? In other words, let's say I have an 80% occupancy rate. Out of these 32 units, over the course of 1 year, how many will not pay rent but leave, how many will not pay rent and NOT leave resulting in full eviction proceedings, etc.? Are there any statistics on the WORST POSSIBLE SCENARIO.
P.S. The reason I'm even considering the deal is that the numbers look very good - even with 60% collection I'll do ok.
I would appreciate if anyone can share their experiences with properties in bad neighborhoods and statistics on the worst case scenario.
Thank you!
I don't know of any statistics, but I think you'll do ok from my experience. You can actually get around 90%. You simply have to set your rates where you don't have any problem renting them. Then, most importantly, you give notice that you are going to start eviction proceedings on the first possible day after they are late. That way, even if you have to evict, you get to keep the deposit which should offset any lost rent.
I think dvmille is right. In my experience, most tenants is bad areas think that a "10-day notice of termination" means they have to leave in 10 days. It simply means the lease will be terminated. They usually pay or leave. Just be sure to get a deposit up front, with no exceptions. The tenants I have "worked with" about the deposit are usually the tenants I have problems with sooner or later.
Looking at the last 2-3 years of financials for the property may help you out in this case... they will be required for bank loan anyways, do you have them yet? Do you want to manage them... not easy with low end stuff, not for everyone. In some areas, good management companies are very difficult to find, especially for this type of property.
I agree - set your rents at a point where you have a lot of applicants. GET A CREDIT CHECK for ALL the people you want to rent it out to, and if it looks like they care about their credit - they should be a good deal. Confirm Job references, personal references, etc...
You should be fine!
Good Luck!
[addsig]
Vacancy/delequency rates are largely a function of your rental pricing and your initial screening.
If you price the units too high then your vacancy rate will rise.
If you attempt to combat the higher vacancy by lowering standards for your tenants then your delequency rate will increase.
If, on the other hand you price the units too cheap then your vacancy rate will drop. If you get way too cheap then almost no-one will default because they don't want to loose the bargain apartment. However your total income will decline because the units are so cheap.
In addition if you set rents too cheap you'll attract bargain hunters who don't care where they live and don't take care of their apartments.
Playing the game of this balance is largely a function of knowing the neighborhood, i.e. the local market. I always tried to be at a point where about 80% of the same-sized apartments in the market were cheaper than me and 20% more expensive. Good maintenance and good decoration makes this a point where its pretty easy to keep viable tenants.
If it is a very bad neighborhood you might have problems doing a credit check as they may not have any credit. A criminal background check, sexual predator and small claims court (evictions) check should be done.