Posted by: Martin | July 16, 2010

Lessons from letting to poor people in rich countries

Get Rich Slowly

I just read a three part story on the lovely named blog “Get Rich Slowly” about an investment in a low income area in an American city (I think it’s Indianapolis). It’s about a 23 year old guy starting out in real estate by buying a cheap 8 unit apartment building with no money down, which on paper looked like a great investment. And well, then the problems start. Here’s the story:

Part 1 – How I Bought an 8-Unit Apartment Building with No Money Down and Walked Away with $1000 Cash at Closing

Part 2 – Lessons Learned from Rushing Into Real-Estate Investing

Part 3 -How My Real Estate Investing Adventure Came to an End

An excerpt:

One of the main reasons for the low price was the neighborhood: It wasn’t just a low income area — it was one of the lowest income areas in the entire city. The units rented for an average of $450/month, which included all utilities.

Contrasting it to the Ivory Coast

The tenants in my 6 unit apartment building in Yopougon, in Ivory Coast’s commercial capital Abidjan, pay 15,000 CFA Francs, or 29.33 USD per month.  So, disregarding the water and electricity bills  which are not included in Yopougon, that’s a developed – developing world difference of a factor 15x  (450/29.3).

In the Merits of Meritocracy post I speculated that there would be more problems with tenants in poor neighborhoods in rich countries than in poor countries. The story from Indianapolis does give some anecdotal support to the first half of this theory:

Economically depressed neighborhoods bring plenty of unexpected issues for first-time real estate investors. I had factored in a higher vacancy rate and knew the average tenant would be more transient than normal. However, I hadn’t accounted for the emotional impact of dealing with issues like drug addictions or existing racial tensions.

One of the three paying tenants when we took over was named…Amber (at least that’s what we’ll call her here).

Amber had at least two, completely opposite personalities. The first was of a stereotypical southern belle. She’d greet me with a warm smile, invite me inside, and offer me something to drink or eat. She’d say things like, “I hope you have a Jesus day,” whenever I’d leave. The first three times we met, I assumed she was the best tenant of the whole building.

Unfortunately, Amber’s second personality was less friendly. It involved ranting, screaming, and at least three explicit words per sentence. She’d call and leave 17 voicemails within a hour, each one more incoherent than the last. At times it was so bizarre I felt like pinching myself to be sure I was conscious.

The final straw came one day when we were having a company install new furnaces in the building. Amber intentionally waited until the crew was almost done with the job and dialed the fire department. She claimed that the HVAC company was trying to kill her by piping gas straight into her apartment through the air ducts. As you would expect (and appreciate), the fire department takes any calls of gas leaks very seriously.

Within ten minutes, there were three fire trucks parked outside of the building.  While examining Amber’s unit, she also took the liberty of informing the firemen that the HVAC crew had molested her cat. The biggest problem with her story was…she didn’t even have a cat.

So I hope there are no Ambers among my tenants in Yopougon, but we’ll see!   My guess is that there won’t be people with this type of issues among the tenants, not only due to the screening, but also due to the fact that they tend to be taken care of within extended families in Africa. And if they are not taken care of by a family they are unlikely to have a regular income and being able to pay a deposit.   That’s what happens when there is no all-covering national social welfare.


Responses

  1. Well, it may be a consolation factor to know that there is virtually no mains gas in Yopougon, except to the Industrial zones, but certainly not to the residential zones. The Fire Brigade, now then, there are 5 Fire Stations in Abidjan covering a population of 4.5 million …. so they might have got there, sometime, if you paid for their diesel fuel. But three trucks … don’t be silly, you might just have got one!!

    As for the cat, well, it was probably eaten at least three months ago !!

    And believe me, there are loads of Ambers out there ….


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