Stay Away From War Zones Unless Management and Cash Flow are Your Only Game

Stay away from "War Zones". Unless you know what you're doing.

A War Zone can easily be determined by driving through (quickly) on a Saturday night. Are there police throughout the neighborhood? Are there frequent shootings? High crime? Drug running and gangs in the open? Multiple cars parked in the yard--some on blocks? This is a war zone. You would never accept cash for the rent in a neighborhood like this.

Most of the houses in this area are rentals. These homes can be bought dirt cheap, but you better hire someone to collect the rent, and you better plan on chasing after the rent every month. Also plan on major damage when tenants move out.

Who should invest here? First of all unless you have LOTS of experience managing these types of properties stay away. Your best bet is not to own them at all! That's not to say you can't make a really good living in these areas. You absolutely can! These units are cash cows. But why be in the chain of title? And why tie up valuable resources?

If you want to make money in War Zones rather than focusing on owning properties, focus on controlling them. Offer a long term master performance lease to a burned out landlord. Perhaps with an option for you to buy later. Then get your feet wet with very little risk.

Just know that while these properties do throw off lots of cash flow when properly managed, they will never appreciate by much. You would never want to try to "flip" or "rehab" a property in a War Zone.

Maintain a very strict but fair policy with your tenants. Work with the local municipalities, the police and local urban renewal groups to help revitalize and clean up the area. Run thorough background checks of prospective tenants! Do it right and your tenants will provide you with a good lifestyle. Do it wrong though and you're in for a world of hurt.

Cash Flow vs Appreciation

Here's a simple fact to consider. Appreciation is a feel-good speculative number. It is what might be...maybe...if you can sell at the right time to the right buyer. But you just never know until you collect your check from the title company or attorney how much "appreciation" you really got when you sold your property.

Unfortunately too many speculators and flippers discovered that appreciation can be a negative number as well and can eat your financial statement alive.

Cash flow, on the other hand is money in the bank. Another way to put this is "Cash flow is what is, not what might be"

Just food for thought...

Financing and Management Determine Cash Flow

Of the two financing is probably the most important. With bad financing it's easy to create a situation where the property will never cash flow until it has been paid off (which may be sometime after you have gone bankrupt and/or lost the property to someone else).

On the other hand, with good financing virtually any property can be made to cash flow.

Often there is a trade off between properties which are most likely to cash flow and those most likely to appreciate in value. Never speculate on appreciation. Make your business model to only buy properties for cash flow and let appreciation be the icing on the cake when you sell.