A square is a rectangle, but not all rectangles are squares.
Bad neighborhoods are filled with low-income housing, but not all low-income housing is in a bad neighborhood. Some low-income tenants are bad, but a lot of low-income tenants are good.
There’s a lot of glamour in mansions, flipped houses, and tiny homes, as evidenced by HGTV shows, but when it comes to low-income housing, there’s an undeserved stigma.
Many investors assume that with low-income tenants come late rent payments, vandalism, and all sorts of problems. All of those are real threats, but they’re real threats with tenants of all incomes.
Countering the Drawbacks of Investing in Low-Income Areas
As mentioned above, there’s a huge difference between low-income housing and bad neighborhoods. There ARE some neighborhoods you want to avoid.
For example, I once owned a property that had its windows broken in almost weekly. I ended up remedying the situation by replacing the glass with plexiglass. A better solution would have been to recognize that this low-income neighborhood was a bad neighborhood.
Look out for signs of growth, like new businesses or developments, before you invest. If companies are leaving or if a lot of units are available for rent in the building, it may not be the best to invest in. When construction is making a lot of noise, it brings down property values. That’s the perfect time to buy. Once the construction is done, the new store or amenity will improve your property value.
Look up crime statistics in the area. Specifically, avoid areas with lots of break-ins, vandalism, or violent crimes. Those are difficult to rent or maintain.
Call references for potential tenants. If past landlords liked them, you’re golden. If a past landlord didn’t like them, take the hint and move on. There are plenty of reliable, low-income tenants for you to rent to.
Related: “Low Income” vs. “Bad” Neighborhoods: Yes, There IS a Difference. Here’s What Separates Them.
4 Benefits of Investing in Low-Income Areas
1. Many low-income tenants receive government assistance.
Government assistance means guaranteed on-time, monthly rent payments for the landlord. Unless your check is coming from the government, there are no guarantees in monthly rental payments. Even tenants with the highest of incomes can give you issues.
There are penalties if these tenants are evicted. They could potentially lose their vouchers, which means losing their ability to pay for housing. Most tenants using government assistance will not want to risk that.
It’s naive to say that housing tenants on government assistance is stress-free. However, those tenants are properly motivated to follow the rules set by your contract in ways that other tenants are not.
2. There isn’t a lot of competition in the field.
Look at the quality of low-income housing in some areas. You’ll notice right away that there isn’t a lot of competition in this sector of the real estate market. It’s a landlord’s market in most areas.
I say that with confidence because if there was more competition, landlords would need to add more amenities and upgrades to these units to compete for tenants.
Most tenants don’t have a lot of options to choose from within their price range and requirements. They often settle for units that meet their bedroom requirements but aren’t as conveniently located or as spacious as they’d hoped.
From the landlords perspective, that means that there is a great amount of opportunity in the low-income housing field. When you invest in the low-income market, inexpensive upgrades to your unit can keep your unit from experiencing vacancies.
3. Low-income tenants can offer a great amount of stability.
Tenants with low incomes don’t have the money to be taking off from work to move. Therefore, once you’ve found a tenant for your low-income property, they will likely stay with you for a considerable amount of time. That means you don’t lose revenue from having your unit vacant.
4. Low-income properties are more affordable.
Middle-income properties are often a lot more expensive than low-income properties. Nonetheless, the difference in rent isn’t as extreme. You may be able to buy multiple low-income units for the same price as a moderate income property—and end up making up more money.
You end up earning a greater cash flow for a smaller investment. When you buy two or three units for the price of one, the opportunity cost of a vacant unit has less of an effect than when you have purchased a pricier single unit.
Would you consider low-income investments? Why or why not?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.