Why do so many people, especially professional investors, gravitate to junker properties? There are several answers. But first, let's discuss the term junker property. Junkers, as we jokingly call them, are simply lower grade, typically physically distressed houses or apartments.
They don't have to be in lower income areas, although they often are. I have seen smaller, rundown houses in modest areas, that I would still call junkers. More typical though, they are located in the older, lower income sections of town simply because these areas are more economically distressed, and there aren't as many investment dollars flowing into these areas.
Due to a multiplicity of factors, lower income sections of towns and cities are distressed. These locations are buyer's markets. People avoid these areas because they are higher risk to both capital and persons. Higher risks means the marketplace reduces the property values to compensate for the risk and potential hassle factor of owning there.
Cheaper purchase prices means easier purchases for buyers. Many folks say price is all relative; just add some zeros. True to a point. But, regardless of what anyone says, lower priced houses are easier to buy. In some areas of the country, you can buy junkers for about the same price of a new or used automobile!
Being a buyers' market, astute buyers can demand better terms and prices. I know several investors for example who simply won't pay interest on owner financing if they are buying in the junker areas. There are just too many other good deals our there to pay interest. It is – my way or the highway.
I think the most difficult thing for investors, especially new investors, is determining what level or quality of location one should invest in. Over-
paying for scum property in dangerous areas is dumb. In my area, there are just some areas I'm not comfortable with. Others may be, but I'm not.
An investor friend of mine recently showed me a $11,000 house he bought in a fairly rough area, where 3 months ago the elderly homeowner was murdered. He was okay with the area and the house.
Personally, I wasn't comfortable there. He's a professional landlord with 55 tenants (35 buildings). I can't argue with his personal strategy (it works for him), but it is a bit dicey for me. For 15 years he worked for Arby's Restaurant chain – now he does full-time, lower-income landlording. He's very sharp and very hard working. He does NOT procrastinate, and he isn't afraid to jump right in. The other day he showed me an 8 unit for which he paid $40,000. Again, not a great location, but with his hands-on management, the building produces a VERY healthy cash flow.
I think most new investors should learn in the better areas. New investors don't know what good deals are. Overpaying for junker property is lethal.
PS. Most wholesalers buy and sell in junker or semi-junker areas. Vena Jones-Cox says a large portion of her houses wholesaled are to section 8 type landlords.
There are very few books that focus on this market. If interested in exploring this more, check out my book, Perpetual Income.
Part III coming soon…