Milk from Unseemly Ilk: Slumlords

Someone asked me the other day: "Who is buying all these bank owned properties in these bidding wars that are going on?"

The answer is a mixed bag of optimistic flippers and cashflow investors.

For those of you who know me, I am interested in the transformative effect that well-planned and executed real estate investment can have on improving a community.  My personal investment model and experience follows along these lines.  So, when I observe cash-flow investors coming in and purchasing bottom-end property, it becomes a bur under my saddle.

The reason that I become so irked by this is that cashflow on these very low end properties is extremely high for the investor while at a terrible expense to the neighborhood.  These investors purchase a property, make little or no investment in improvements, and then market it for rent to the folks who are the most untenable.  These untenable tenants are typically freshly released felons, drug addicts, or other nefarious types.  However, since they still need a place to live like everyone else, they, unlike everyone else, tolerate the poor condition of the slumlord's house.  Also, wanting to stay under the radar, they arn't likely to complain much about their sour living conditions.

What a dreamy situation for an investor! He gets a cheap property that he is required to invest very little into and gains tenants who desperately need a place to live,who pay a premium because no respectable landlord will rent to them, and who don't complain about how crappy the property is.  Welcome to the slumlord business model.

Our good friend Adam Smith in The Wealth of Nations describes why slumlording is such a profitable trade with a story about the inn keeper:

Disagreeableness and disgrace affect the profits of stock in the same manner as the wages of labour.  The keeper of an inn or tavern, who is never master of his own house, and who is exposed to the brutality of every drunkard, exercises neither a very agreeable nor a very creditiable business. But there is scare any common trade in which a small stock yileds so great a profit.

If you doubt this, talk to the owners of the Budget Inn or the Ogden Lodge here in Ogden.

As an investor, I made the conscious decision not to be a slumlord.  First off, I value my equity and so I take too much pride in my properties to allow them to atrophy.  Secondly, I have chosen not to work with the unseemly demographic that gravitates toward slumlord properties.  I decided that if I am going to be an investor, I had better make the business palettable to my lifestyle.  I also wanted to lift the communities I invested in rather than detract from them.  Am I as profitable as many slumlords? No, I certainly am not. However, I am profitable enough for my business objectives and I sleep well at night.  I also survived the market crash intact.

If you are contemplating becoming a real estate investor, decide what kind of landlord you want to be before you make your first purchase.  Your forethought and preparation will go a long way toward your success.