Landlording & Rental Properties

6 Tips You Should Know Before Investing in a Low-Income Neighborhood

Expertise: Business Management, Landlording & Rental Properties, Real Estate News & Commentary, Real Estate Marketing, Personal Development, Real Estate Investing Basics
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For a first-time property investor, a Single-Family Residence (SFR) is generally the wisest “starter investment” — the jam that a young, high-energy investor can cut his teeth on and gain experience that will translate into more difficult, higher-yield ventures down the road. But what if you’re a not-so-wealthy first-time property investor and the homes in your price range are in neighborhoods that, well, are in your price range?

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There’s a strategy to be had for places like these as well. Here’s the basics.

Related: Upgrades Vs Home Improvements In Low Income Rentals

6 Tips for Investing in a Low-Income Neighborhood

Look for Signs of Imminent Investment

Property values tend to happen in response to actualities, not plans — which means that there’s often a period of time between when a planned neighborhood investment is announced and when house prices start to increase. Study your investment range for neighborhoods that have Federal, state, or municipal projects gearing up to improve the place — or for areas that have new business-centered construction in progress. (The latter is great because construction tends to depress land values while it’s underway, but when that pile of bulldozers and 2x4s turns into a new Walgreens, that impact swings hard in the other direction.)

Look for Neighborhood-Level Deal Breakers First

The deal-breakers that should keep an investor from buying any home in a given neighborhood are pretty simple. If property crime is ridiculously high compared to neighboring towns, don’t do it. If the entire neighborhood is in a flood zone, don’t do it. If there’s anything happening neighborhood-wide that you could reasonably expect to either destroy the structure within the decade or make your tenants run screaming away within a few years, don’t do it.

Look for the Jewel in the Rough

Low-income people and families have the same basic priorities as everyone else: a home that is pleasing to the eye, convenient to relevant amenities, and structurally solid. This means investigating the history of each potential home and learning basics: when was the last major renovation? How old is the plumbing? Wiring? Insulation? The roof?

If they’re too old, you’re going to have to redo them, and that’s money. Find a place that looks like rubbish but has a solid undercarriage and is in a decent place, and you can update the visual appeal for far less money than it takes to get a fixer-upper fixed up. Finally, if you can get a place next to a school, shopping center, or highway, you can charge meaningfully higher rent than if it’s in the middle of a suburban food desert.

Make the Largest Possible Down Payment

In short, the larger the down payment you can make, the faster you can turn a profit on a house. The larger the percentage of the final price you can put down, the truer this becomes. So when you look for a house in an inexpensive neighborhood, maximize your cash flow by minimizing your monthly costs (which means paying off as much of your mortgage as you can up front).

Upgrade Security Measures First

As much as you’re going to want to do the upgrades that maximize your rent, it’s also important that you maximize the safety of your property — doubly so in a low-income area. Installing items such as outside lights on sensors and a security door will go a long way towards deterring crime in your properties.

Related: Have Some Pride in Your Low Income Rentals!

Perfect Your Tenant Screening Skills

The problem with a low-income neighborhood is that you’ll end up attracting low-income people. In general, low-income people aren’t much more problematic than middle-income people — BUT only if you screen them properly. This means taking your time to get credit checks, criminal background checks, employment verification, income verification (yes, separately from employment verification!), and — the one landlords love to skip — call ALL of their references, including any former landlords they have listed. Talk to all of them for a minute or two, and listen for any hint that the prospect might not be the upstanding citizen they represent themselves as.

You have to be reasonable — if you kick out everyone that seems vaguely suspicious, you’ll never get a tenant — but you also have to be canny and discerning. The wrong tenants will turn your dream investment into a nightmare — the right ones will have you wondering what all the fuss over low-income neighborhoods was about in the first place.

Do you invest in low income areas? If so, what tips would you add to my list?

Leave me a comment below!

While in the mortgage business, Drew rose to a VP position at the first broker he worked for and then started his own company. In the pursuit of excellence, he obtained several mortgage designations and joined mortgage & several affiliate association Boards. He also did WebX presentations and public speaking. It was during this time he started personally investing in single-family rentals, leading him to also start Royal Rose Property Management with two partners. He also joined the Board of a local real estate investors association, eventually becoming its President. The real estate crash led to an offer from the banking industry to manage a Michigan bank’s failed bank assets they acquired from the FDIC. The bank acquired four failed banks from the FDIC, increasing from $100M in assets to over $2B while he was there. After that, he took over as President of Royal Rose Property Management. Today, he speaks at national property management conventions and does WebX presentations.

    Susan Goldthorp investor from Mims, Florida
    Replied almost 5 years ago
    This is a great article, I have been working with low income properties for 10 years and agree with everything you say. Timing of the market also affects the pool of tenants available in low income areas, when rents go crazy you have a much bigger pool of good tenants to choose from. When the economy tanks the better tenants will move to the more affluent areas they can now afford. Just something else to keep in mind.
    John Casper from New York City, New York
    Replied almost 5 years ago
    Hey Susan, With 10 years of experience behind you, I was curious to bounce economic theory off of you. In respect to your last advice, “When the economy tanks the better tenants will move to the more affluent areas they can now afford. Just something else to keep in mind.” Isn’t it also understood that when the “market tanks” and credit dries up, home ownership becomes less accessible and as a result, it drives up the rental market with higher demand. Just curious what you thought since you seem to contradict this. Best, John
    Susan Goldthorp investor from Mims, Florida
    Replied almost 5 years ago
    I take your point, however my experience has been if you have a property in a really depressed area the only time you get a pool of reasonable tenants to choose from is when they have been forced out of other areas because the rents have risen above their ability to pay. As soon as rents soften a bit they will choose to go back to those areas, they can afford again. There were quite a lot of accidental landlords who were forced to rent out rather than sell their properties if they had to relocate, this could have the effect of softening rent in better areas, also people were “doubling up” creating more vacancies in certain areas.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Great discussion!
    Jeff Miller from Nashville, Tennessee
    Replied almost 5 years ago
    In the paragraph titled “Look for the Jewel in the Rough,” you wrote that low income people desire a home that is, “convenient to relevant immunities.” Unless there are some houses that provides immunity from the flu and other contagious diseases, I think you were going for the word AMENITIES. Otherwise, good topic.
    Allison Leung from Denver, CO
    Replied almost 5 years ago
    Hey Jeff: Good catch! It’s been edited.
    Drew Sygit from Birmingham, Michigan
    Replied over 3 years ago
    @JEFF: thanks for catching and Allison, thanks for correcting.
    Karen Rittenhouse flipper_rehabber from Greensboro, NC
    Replied almost 5 years ago
    Great post, Allison. We started out acquiring only higher income properties – they’re prettier, typically get better tenants, and appreciate where the less expensive areas tend not to appreciate. However, once we ended up with a bunch of low income properties (we purchased a package), we found them to be more of a “jewel in the rough” than we’d expected. They are much quicker to pay off, making them cash machines. If your property is kept up, tenants tend to stay because they are not going to be buyers so why would they move? Tenants in our higher income homes, on the other hand, move much more often for things like job relocation and because they become buyers. As you recommended, we avoid high crime areas, but we’ve found the low income properties to have many benefits. Also, the supposed “appreciation” of higher end properties over time really just keeps up with inflation anyway, which you can do through rent increases on the others. Thanks for your article and here’s to lower income properties!
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    KAREN: glad you liked our article enough to comment:)
    Uyenchi Ho investor from San Jose, California
    Replied almost 5 years ago
    Thank you for the article. @Karen Rittenhouse, you brought up a great point regarding benefits of owning rentals in low income areas. I have rentals in higher income / better schools areas, but those are accidental rentals (we bought those properties to live in but have been moving up so we became accidental landlords.) I’m considering buying my first rental – as an active investor – and because of astronomical prices of properties here in Silicon Valley, I want to start small with a rental in the low income (low crime) area. I was a bit weary about this, but your comment regarding these renters would not likely becoming buyers so they stay longer. I also agree about being able to pay off these properties faster and turning them into cash machines. That’s my goal.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    UYENCHI: keep us updated on what you buy!
    Alex Craig from Memphis, TN
    Replied almost 5 years ago
    Here is a tip…when they go vacant, there is a good chance of vandalism. Security cages get stolen. I suggest pulling your AC, Furnace and H2O tank. Another tip…throw out any logical way to reason with most of these tenants.
    Kurt Schwemmer from Colorado Springs, Colorado
    Replied almost 5 years ago
    Burned much? 🙂
    Alex Craig from Memphis, TN
    Replied almost 5 years ago
    Not so much me. But I see others get drawn to the #’s and take massive losses after their first eviction, then vandalism experience. The #’s on these homes look great, but they certainly require high intensity management. Give me a boring 10% return on a A property any day of the week.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Great points!
    Kurt Schwemmer from Colorado Springs, Colorado
    Replied almost 5 years ago
    Why make a big down payment? Shouldn’t one keep their cash for the next property down payment? On the other hand you’re locking in a cash flow dependent on your down payment for the next 30y…
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    There’s more than one way to invest:)
    Jon Russell investor from Glacier, Washington
    Replied almost 5 years ago
    Great article Drew! I appreciate any discussion on investing in Low-Income neighborhoods as this has been a very profitable AND rewarding part of my small business. I agree with all of your points except for Making the Largest Down Payment Possible. In my area, we invest in Low-Income neighborhoods for a balance of Cash flow and ROI. Appreciation and Equity come in a distant 2nd place since I have no intention of selling in the next 15+ years. Humbly, here are my additional tips… 1. Keep an eye on the water bill. Short of neighbors reporting something, this is the quickest way to learn that your lease to a family of 4 has turned into 10 or more “extended” family members. 2. Treat your tenants with the respect they deserve. They key in these rentals is to limit turnover of good tenants and to move swiftly on the poor ones. I have long term tenants that I truly care about and will happily work with when times turn rough. I also have tenants that receive a “3-day pay or vacate” notice on their door on 6th of most months. 3. Finally, find a good door contractor or become really good at installing interior doors yourself. I don’t what it is about men and punching holes in doors, but it’s epidemic!!!! Each door is $150-$200 to replace times 10-12 doors on move out……
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Thanks Jon! If the doors are such a problem, why not invest in steel ones?
    Dave
    Replied almost 5 years ago
    Above you state: “So when you look for a house in an inexpensive neighborhood, maximize your cash flow by minimizing your monthly costs (which means paying off as much of your mortgage as you can up front).” If you are able to get a 30 year loan on a cheap property wouldn’t it be better to put as little down as possible in order to keep more cash in your pocket? Especially since the mortgage would be so low anyway. Than ks, Dave
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Correct, an oversight on our part.
    Janice Harvison investor from Saraland, Alabama
    Replied almost 5 years ago
    Thank you for posting this article. My husband and I bought our first rental property in one of these neighborhoods in August 2014. We paid cash because we had it on hand and were nervous as first-timers about taking on debt on a house in addition to the one we live in. We made repairs, and it was rented on November 1. Our tenants are on a fixed income due to disability, and they moved from a less-desirable house in the same neighborhood (where his mother also lives), and they gush about how they love our house. I think our next investment will be in this same neighborhood. A CVS is being built closeby right now within walking distance. Two other investors I know love this neighborhood, so that made us feel even better about our investment. As soon as we pay off the roughly $10K in repairs, we will be building up funds for the next one!
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Congrats on your investment, hope the other ideas shared here help you get even further ahead:)
    Scott Weaner rental_property_investor from Yardley, PA
    Replied over 4 years ago
    Sounds like you already have the funds for your next investment…the equity in the first one!
    Mark Alphonse investor from Vermilion, Ohio
    Replied almost 5 years ago
    Thanks for posting this article as I plan on doing some investing in low income areas. Where I live it is really all there is if I want to keep it close to home and keep it affordable.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Mark, thanks for bringing up another point we didn’t mention originally — if you’re going to invest in a low-income area, the closer it is to your home or work, the better! We’ve found that one of the keys to success in these areas is close monitoring to nip problems in the bud.
    jmp
    Replied almost 5 years ago
    Good article, we invest mostly in distressed areas in TX. We much prefer to owner finance our houses than rent. We have no maintenance concerns, and we carefully screen our buyers. So we get good paying people. Reply Report comment
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    Another great alternative!
    jmp
    Replied almost 5 years ago
    Good article, we invest mostly in distressed areas in TX. We much prefer to owner finance our houses than rent. We have no maintenance concerns, and we carefully screen our buyers. So we get good paying people.
    Bryce Jamison from Durham, NC
    Replied almost 5 years ago
    You say put the biggest down payment down you can. Much of the articles I’ve read on BP suggest leveraging as much as you can. I’m sure you’ve seen the example where someone buys 1 100k house or puts 20K down on 5 homes. He gets a much larger ROI with 5 houses. This is a subject I’ve been wrestling with. On the one side is Dave Ramsey who wants me to save enough cash to buy the house outright and on the other I read articles about borrowing as much as you can to use other people’s money. I get that the more you put down the lower your mortgage, and I understand maximizing ROI by putting less down. Is there a correct answer, or is it all a matter or risk tolerance? Any feed back is greatly appreciated.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    BRYCE: it all boils down to the risk you can live with. Putting more down is safer as you get a smaller payment to cover when the property is vacant. Leveraging more allows you to grow faster, but as the real estate crash showed us, over leveraging can come back to haunt you.
    Mujangi Kabamba investor from Midlothian, VA
    Replied almost 5 years ago
    Great article and thanks for sharing with everyone. I truly love all comments: highly informative. I have not yet purchased a piece of investment property, that will be my very next move. After reading the article and given what I have in hand, the only avenue I have is low – income neirghborhood.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    MUJANGI: thanks for commenting, go get your first deal!
    Andrew Syrios from Kansas City, Missouri
    Replied almost 5 years ago
    Great list! I would add one recommendation; shy away from large houses or units in such areas. Yes, you need to screen diligently, but a bad tenant can still slip through the cracks. It’s more likely in such areas that you’ll get someone who will destroy your unit. The extra rent for the square footage you’ll get won’t make up for the much larger turnover expenses, at least in general.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    ANDREW: good point, you actually don’t want to buy any property outside the “norm” for any area unless you have a rock solid plan to develop it. Buying the biggest, smallest, fanciest, etc., rarely generates any additional worthwhile ROI.
    Ali Alwash from levin
    Replied almost 5 years ago
    great informative comments and article love it. I am new to this community and am trying to learn about real estate, as I am in the middle of deciding to save my money for a business or to invest in my first rental home while waiting for the business to become a reallity. As the business i have in mind may hapend in 6 months or may be 2 years. What would be your advice regarding this matter? Also I am condidering buying a rental house in a low-income area.
    Drew Sygit from Birmingham, Michigan
    Replied over 3 years ago
    @ALI: We’re not really business coaches, so can’t give you advice on which on to spend your money on. If you decide to invest in real estate in a low-income area, just be sure you fully understand the challenges and have a plan to address them!
    Jerred Morris investor from Austin, Texas
    Replied almost 5 years ago
    I thought this post was going to promote ultra low income/war zone properties but I was pleasantly surprised. Great tips on low income properties. I typically buy properties that are outside of the war zones but not in the high rent district. My tenants on average stay for 5 years+ because they can’t afford to move or purchase a home for themselves. I tend to agree with the large down payment as well and prefer a 15 year mortgage.
    Jerred Morris investor from Austin, Texas
    Replied almost 5 years ago
    I thought this post was going to promote ultra low income/war zone properties but I was pleasantly surprised. Great tips on low income properties. I typically buy properties that are outside of the war zones but not in the high rent district. My tenants on average stay for 5 years+ because they can’t afford to move or purchase a home for themselves. I tend to agree with the large down payment as well and prefer a 15 year mortgage.
    Drew Sygit from Birmingham, Michigan
    Replied almost 5 years ago
    JERRED: thanks for the feedback! What’s your biggest challenge in these areas?
    Mel Jones from Washington, DC
    Replied almost 5 years ago
    I am saving up for my very first investment, and I’m a little nervous! In your post you said that a single family unit was the way to go, but I am leaning toward a small multi-unit, so I can get the most ‘bang for my buck’ with first-time homebuyer credits and perks ( like fixer-upper grants) that work for up to four or four units (depending on where I buy). Is buying a small multi-family property a bad idea for my first time? Anybody’s input is welcome 🙂
    Drew Sygit from Birmingham, Michigan
    Replied over 4 years ago
    1-4 family is technically a SFR as they qualify for FNMA/FHLMC/FHA & VA financing. That said, proceed with a bit of caution if you plan to need the other rents to make ends meet. As Rusty stated, the numbers on 2+ units sound great, but the reality is a bit more difficult. Find a good mentor and pay them if you must — it’ll save you a lot in the long run.
    Rusty Scott from Indianapolis, Indiana
    Replied over 4 years ago
    Are you planning to live in one of the units? I assume so since you mention first time homebuyer credits. If so, that’s fine. If not, I would not recommend a MF for your very first one. They are, or tend to be, much higher maintenance as they attract a lower quality tenant. Not true in ever market and every location, but generally so.
    Ronald Wentz investor from Cleveland, Ohio
    Replied almost 5 years ago
    Thanks everyone , Great tips for low incoming housing, my plan is to purchase my first rental in about 4 months. Low income housing is were, I will have to start to build some leverage. Cleveland ,Ohio offers some decent value when it comes to low income housing.
    Drew Sygit from Birmingham, Michigan
    Replied over 4 years ago
    RONALD: the Cleveland area shares many similarities with the Detroit area — meaning there are many high risk, high reward deals. Just be careful you fully UNDERSTAND the risks as we’ve seen many investors seriously underestimate them.
    Ben G. investor from Indianapolis, Indiana
    Replied over 4 years ago
    I think tenant screening would be the most important factor when deciding on whether or not to buy in a lower income area. Might be smart to see how long some of these rentals stay on the market, which could indicate the type of tenants applying. Great advice especially for those interested investing in Indianapolis. It’s one of the most affordable large housing markets in the country so naturally there is a lot of opportunity for some of the lower-priced homes.
    Drew Sygit from Birmingham, Michigan
    Replied over 3 years ago
    @BEN: Don’t forget about investing in Detroit:) Flexible tenant screening is important as we’ve found most applicants for homes in low-income areas are not even going to have a 600 FICO score. We just approved someone with a score below 520, with logical reasons of course.
    Jeff Hensel lender from San Diego, CA
    Replied over 4 years ago
    Good article. Thanks for sharing. The only I didn’t agree with was the need to have a downpayment as large as possible.
    Drew Sygit from Birmingham, Michigan
    Replied over 3 years ago
    @JEFF HENSEL: good point. That point didn’t come across as we first intended:)