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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