hello all. I have been looking for my first rental for a few months now and I haven't had to much luck. I have looked into some areas close to home that are low income but I just don't know if the value is there. What are some pros and cons of buying in these areas? Are they worth the trouble or is turnover rates and tenant destruction to much to be bothered with?
There is no real "pro" when it comes to low income. You better be ready for lots of vacancy, repairs, vandalism and theft, non paying , etc.....
Robert, you will hear a lot of negative things about low income areas, and it is best to go in with your eyes wide open, but it's not all bad. Here's some thoughts:
Advantages of low income:
Lower property investment cost. $/square foot and square footage is lower, so purchase price and repair costs are lower. Our motto quickly became “safe and clean”, allowing us to stay focused on using the cheapest products available in rehab.
Higher occupancy rates. Applicants are often living with friends or family, so are often able to move in mid-month, as soon as the unit is ready. More stable tenants tend to need to give notice, and move near the first of the month.
Lower expectations. Low rent tenants are willing to live with more flaws, fewer extras, and won’t be as demanding about discretionary maintenance and improvements.
Fewer evictions. Low income tenants are more willing to move out when the situation gets bad. We have not had to deal with someone living in the unit rent free for months while we work through the eviction process.
Disadvantages of low income:
More turnover. Low income tenants are not as stable, so they tend to move more often. Even some of our best tenants have become nightmares at move out. Dealing with move out, unit rehab between tenants, and prospective tenants is a huge time, energy, and cost drain.
Higher utilities cost. Water/ sewer/ garbage is about the same cost for a 500 square foot unit as it is for a 3,500 square foot house, so utilities become a bigger percentage of total rent and costs with smaller units.
Collecting rent is time consuming. Very few tenants mail us a check or deposit the funds in our bank account. Some bring the cash to our front door, more have us come get it at their front door, and both involve texts back and forth to coordinate schedules. We often have to initiate the conversation to find out where rent is, and we often have multiple trips to collect partial rent during the first two weeks of the month. We admit part of this is due to our desire to visit the properties more often and our willingness to be flexible for our tenants. It may be possible to set expectations and have low income tenants pay less hands-on, but it is a consideration.
More difficult to screen applicants. Most of our applicants have no bank accounts, have terrible credit, and it is difficult to know where they've really been living.
Lower loan amounts. It is more cost effective to mortgage and refinance one property worth $150,000 than two properties worth $75,000. The inspection and appraisal costs are about the same for a $30,000 house as a $300,000 one.
Easy to over improve. It is so easy to get into the trap of wanting to get the property to the standards you would want to live in. Such spending brings risk of being destroyed by tenants or never getting the value out at sale.
thank you I appreciate the input. I have found properties but there only at a 6 to 8 percent cap rate in low income areas. I just don't know if they are worth that kind of return.
Probably not, I can exceed 9 where it is more difficult to get strong returns (on the west coast). And actuals can often be a bit lower than projected; I buy with 10 in mind and have missed it a little recently. Hoping for a 10 year this year, turnover has been better with the better economy.
@Robert Gailie At a 6-8% cap rate a low income area is not worth wasting your time on.
I know there is eagerness to get started, but for your first property give yourself a chance to get your investing career off to a good start and hold out for a place in a better area.
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