BiggerPockets

Why Buying A Low Cost Sfr In Low Income Areas Can Become A Gold Mine?

Many new and some not so new Real estate investors (REI), find themselves contemplating about whether to buy or not to buy properties in low income neighborhoods. This is a valid concern, since there is a lot to learn. What to buy? Where to buy? And is it worth it? The first two questions are research related. If you do your homework, your due diligence and rely on good and reliable sources and resources, you can find the right property in the right neighborhood. Once you have, the only question left is, is it worth it? The answer to that big question is YES and here is why:

If you bought your property in a low income neighborhood during the years of 2002-2007, it is very likely that you are not in a good place right now. Unfortunately it will take, years and years for that property to regain the losses, especially if you used a loan to acquire that property. It is, however, a different story if you bought that property in the past year or so. Even more so if you bought it cash. In this case, it is quite unlikely that you will lose your principal investment, and if you equate your cash flow with interest income, you are far ahead of any investment of that sort. For example, let say, you bought a property free and clear for $25,000 including the rehab costs. ( I know it's possible because I repeatedly did it myself in the past year four times over)

Now, let say that you rented it out for $600 a month.

50% rule NOI @ $300 a month which an annual NOI of $3,600

That is more than 14% interest on investment.

Try to get that at your local bank, CD,
Municipal bonds etc.

Now you ask, what happens in case of inflation? You could argue that interest goes higher and therefore the yield on interest producing investment would rise, wouldn't it? True, but so is the rental income. It is also very likely that the value of your property will rise as well.

The only drawback of this type of investment is, off course - liquidity. It is not easy to get your money when you need it comparing to the other form of investments.

Some may contend that a much older house means more maintenance. Not so. I would argue that buying a 15-20 years old house may present a bigger problem than buying a 30 years old house or older. The reason is cycle. House components are primarily built to last between 15-25 years (Especially modern houses). Plumbing, roofing, electrical, etc. start showing signs of wear after that period. If you buy a house that is 15-20 years old, chances are, you would have to start upgrading and renewing. However, if you buy a house that is older than that, chances are, that some of those upgrade have already been made.

Another factor is price. Buying a newer house (15-20 years old) in a middle class neighborhood would cost more, would require a loan and may need upgrades that are aligned with the standards expected in a middle class rental property. That can potentially burden you financially even more. On top of that, cash flow is questionable. I, myself have couple of those and they are good investments for the very long term.

Buying a low income house really cheap, gives you the financial freedom and the leverage to upgrade without such burden. For example: My first house in Birmingham, AL, was purchased from HUD in the late 2008 for $15,000 (That house, by the way was a foreclosure that was previously purchased at $52,900 in 2005). The total rehab cost was $9,000 that included, exterior and interior painting, new plumbing a new roof and a new AC unit. That property was rented to a section 8 for $650 a month only two weeks after rehab was completed.

Spending that money on those new components, shaved some good chunk off any future maintenance and therefore my future balance sheet. Even if I had spent another $6,000 putting a new electrical system, insulation and whatever you can think of, I could still consider it as "Cost of purchase", keeping my total expense within the $30,000, retaining the 50% rule, and the house would be almost new.

Comments

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  Robert Mayo — over 2 years ago

  Do you worry about asbestos and lead lawsuits on older properties?

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  Eddie Ziv — over 2 years ago

  Generally, no. Asbestos is harmless if undisturbed. So far, neither, me nor any of my investors encountered problems with asbestos during rehab. My tenants are notified as part of the rental agreement that the property may contain lead paint.

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  Jon K. — over 2 years ago

  Eddie, what do you look for to ensure that your low income neighborhood isn't also a war zone?

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  Eddie Ziv — over 2 years ago

  I've been roaming the areas and get myself familiar with. I check the street, they way people take care of their houses, their yards, the cars they drive, making sure that there are no or very little abandon houses or cars, no trash on the sidewalk, etc. If I target an area, I sit in my car around 6pm and see who arriving home from work. If those are professional people, such as, mechanic, hospital workers, and so, I know the area is ok.

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  Chris Michel — over 2 years ago

  Eddie, do you perform scheduled visits to these properties to check on the condition while they are rented?

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  Eddie Ziv — over 2 years ago

  I happen to visit Birmingham because I have investors whom I help finding houses there, but although I drive occasionally near my houses, I really don't see a reason. My PM does a great job keeping them in line. I just came back on Saturday, and found some great investment properties.