How to be a Slumlord

You may not realize it, but the real estate investor who is typically called a slumlord is providing a needed service. Though there are those who are truly taking advantage of people, many who are given this ignoble title are simply providing affordable housing. If a family rents an ugly house, which needs paint and has a dirt driveway, it is a safe bet that they do so because it is the best thing they can afford at the time. If it was not available they would be in worse housing or in a worse financial situation because of higher rent. It is condescending to assume that people are too ignorant to see what their best option is just because they have a low income.

From the perspective of a real estate investor who wants a decent return, ugly homes are an opportunity. Generally unwanted by home owners, they sell for less. They also rent for less, but not too much less, and so usually provide more cash flow than "nice" rentals. This makes sense, since the houses will need more maintenance and rent collection will be more trouble on average (lower income makes it difficult for renters to budget for emergencies AND the monthly rent). If the average return was not higher, not even the most generous investors would want to buy or build these properties.

Looking at the whole picture you can see that an ugly house is an opportunity for a renter and an investor. With that in mind, here are three guidelines for investing in and operating these rentals. In other words, this is how to be a good slumlord, if that is what they call you.

1. Put safety first.

The whole idea of high-cash-flow low-income rentals is to keep your costs down so you can rent low enough for the market and still make a decent profit by providing this service. As a result, you will never put a $800 refrigerator into these homes. You'll probably buy used ones. On the other hand, you should never neglect those things which are necessary to keep the home safe. There is a big difference between having a dusty yard and a broken set of steps.

This isn't just a financial matter. Of course you face lawsuits if your negligence leads to injury - as you should. But this is a matter of human decency as well. Being a wise investor does not exclude being a decent person nor does it excuse knowingly endangering your tenants. Let your rentals be ugly if the savings from that make them affordable for the renters and profitable for you. But don't let them be unsafe.

2. Be open and honest with tenants.

Don't pretend that you have something more than you do. If you have a dump, prospective tenants can see that. Openly admit it and let them know that the condition of the home is why the rent is low.

Don't pretend you're not making money. In fact, let them know that a profit is your goal, and that if and when they can pay more, you're willing to raise the rent and make improvements. Show some respect. They see what they have, and they are only living there until they can afford a better place.

3. Prepare for the unexpected.

It may seem that you cannot prepare for what you cannot predict, but this isn't true. Whatever the specifics are, there will be surprises, and the easiest way to be ready for them is to have some money set aside in a contingency account. When I had a mobile home for a rental, the furnace died one day while I was at work: $1,400. Another time the tenants had to choose between paying the rent and buying medicine for their sick son. You can guess what that meant (I don't know if I would really want renters who would choose to pay rent in this situation). Set aside money.

Why Be A Slumlord?

Suppose a two bedroom house costs $130,000 and rents for $825. Somewhere nearby an old mobile home on a lot will probably cost $45,000 and rent for $600 or so. If the house costs nearly three times as much, but the rent isn't even doubled, which do you think has more cash flow? If you got that you can understand why ugly houses and mobile homes (on land) are often the real estate investors "cash cows."

The downside? You will have more risk and management problems. The rent will be late more often, on average, and there will be more repairs. For these reasons you deserve a higher rate of return, and if you're ready to be called a slumlord, you'll get it. Just treat your tenants well, and make your rentals safe, so  you can honestly enjoy that profit.