Investing in Low Income Areas

17 Replies

Hello everyone,

I'm new to the forum and have been doing a lot of research in buying rental properties.

I currently live in the Philadelphia, but would like to invest in lower income areas such as Chester, Marcus Hook, or Trainer (PA). I'm very familiar with these areas since I grew up near them, but wanted an expert's opinion when it came to buying rental properties in low incomes neighborhoods.

I've heard mixed things about investing in low income neighborhoods such as the quality of tenants, the actual profit gained from renting in these areas can be low/minimal, and crime associated with these environments.

However, I see these areas as an opportunity to at least start my real estate venture. 1.) Housing in these areas is extremely cheap so I could easily afford the homes for sale within the area. 2.) The quality of tenants can determined by properly screening potential tenants. 3.) I could establish security measures for these homes such as alarm systems and upgraded windows and doors to minimize burglary and offer tenants more peace of mind.

First, I would like feedback as to what can be expected in investing in low income areas and if it is truly worth the expense.

Secondly, I would like to know how you obtained your property (I'm referring to your first property - ie how you started). I know there are many avenues in order to buy the property and, again, this is a topic where I'm hearing mixed things. I've heard some people say you could got a traditional mortgage to start off, but I've also heard that people are shying away from this method (traditional mortgages are dead?). I've also heard people taking out lines of credit from their own homes to fund their rental property, but I'm not sure if that's a smart move.

Any advice that you could provide would be greatly appreciated....

Thanks!

Greg

@Greg Gasiorowski low income areas, you can expect them to beat up the units, no matter what.  They'll bust up the windows, floors, and kitchen and bath hardware.  They will let their kids write on the walls, or worse, put up stickers (not wall-clingers, i mean stickers).  Also, they will run the heat in your house at 80 degrees all winter long, and when it gets too hot, they'll open a window instead of adjusting the temperature.

You should account for a large amount of maintenance, or be prepared to fight them over the costs of the things that they damage.

I bought my first property with cash out of my pocket, and an owner-held mortgage note. One more thing to consider while looking in low income areas ... SFH's in low income areas will not appraise well, no matter how nice they are, so you'll have trouble securing bank financing unless you negotiate hard with the seller to get the price down.

@Greg Gasiorowski Welcome to BP.  

As for your question about low income neighborhoods, the first thing you need to understand is you can not change the neighborhood.  Even if you build Fort Knox, the surround area is still the same.  You will not be able to get good quality tenants in a crappy area, they will pay more to live in nicer areas.  There are people that can make money with low priced houses, especially if they focus on Section 8 rentals. But these properties can be very tough to manage, as most of your tenants will be living check to check and almost always struggle to pay the rent.

I started with the focus of buying in more modestly priced areas (definitely not low income areas, but not upper middle class either), and am in the process of changing that.  With my initial units, I find getting quality tenants is an issue and I typically have higher turnover than I want (my units are all duplex houses).  My focus now is upper middle class areas that support rental units. Sure I will have to pay more, but I will get better tenants and higher rents to justify.

I would suggest not following for houses based on price.

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I'm sure you'll have a lot of people telling you about low income renting and the problems which are associated with it, and there is merit to it from what I have heard. But one thing to note is with section 8 tenants, and chasing rent, many times their portion of the rent is small. So the payments you get from whatever entity (PHA in Philadelphia), are pretty much going to be there clockwork. The amount you get is usually a decent rent. And the amount from the tenant you'll still want to collect, but you won't be missing a whole months rent if they slack for a month or two. 

When it comes to investing in alarms and all that, I would think you would be making your margins kind of tight if you are in a low income/low rent neighborhood.  

@Mike Wood @Jeremy Pace

Thank you both for the responses. You basically confirmed the doubts that I already had for the area. The homes were tempting because they were inexpensive, but, of course, there's a reason why there are cheap.

@Mike Wood I have heard it was better to focus on homes that were "middle of the road" because you are absolutely right, the neighborhood can't be changed. With that said, they are trying to improve the area. Over the years, a casino has been built to generate revenue for the surrounding area and along with a new soccer stadium. However, I seriously doubt that things will improve in the area anytime soon. It's just sad because these areas used to be nice places 40-50 years ago.

@Jeremy Pace Thanks for the insight about the maintenance. I would hate to invest my time and money into a home only to see it completely destroyed. Normal maintenance is expected, but I can imagine this area wouldn't be very pleasant for a rental as far as upkeep is concerned.

Thanks again!

@Dewain J.

Yea, I have heard small things discussed about Section 8 housing that I'll have to look into further. Thanks for pointing that out. I think you're right as far as the rent profits would go because, if I need to invest the money into the home just to make it "secure" in an unsafe neighborhood, I don't know think it would be worth it in the end.

Unless you can see some sort of gentrification of an area on the way, those slum areas are and always will be slum. And although you can build a great portfolio of properties very quickly, you just built a slum portfolio, full of idiots. You will spend your life listening and dealing with idiots.

I know a guy who owns 35 properties, and he jokes (cause that's all he can do), that they are in a certain war zone in our city. We looked at his portfolio and it was mainly utter rubbish. I've seen cleaner dog kennels.

And here's the thing, although this guy owns 35 properties, he is broke. His rents are way under market, the only people who are willing to rent from him are those that can afford that low rent, he knows the judge who does the evictions on a first name basis, he cannot afford to ever repair his properties, and he is seriously behind on property taxes to the point of losing some of them.

Not only that, but despite being 70, he mortgaged his home recently to cover debts from the slumfolio, to the tune of several hundred thousand! (Don't you just love public records).

Someone asked me the other day about a $23k house, 3/1, rents for $575. It looks like a good deal, but it's the world's ugliest house, right in a middle of a warzone. But it is close to Lowes.

It's only a good deal if you forget that you put $23k in the house, and it returns $400 cash a month in rent for ever more. That's all the deal will ever be. Insure the house, pray the tree lands on it.

@Greg Gasiorowski all 15 units in my portfolio are low income, and I haven't spent any money on making them 'more secure'.  I do allow my tenants to have security systems installed (that they pay for) and I do allow them to pay to have window bars installed (by my handymen, they can't do it themselves, but they do have to pay).

The reason my portfolio is viable is because I'm very close to Market Rent on all of the units, in spite of their location, thanks to Housing Choice Vouchers (HCVs).

Greg, you will get a lot of naysayers.  This blog post contrasting our best and worst year may be helpful:  https://www.biggerpockets.com/blogs/4445/48554-201...

The fact that you know the area is a big asset, this is huge.  The other thing to look at is what kind of time you have to devote if you plan to self manage; this niche takes more time. We do not have many issues with theft and crime; most issues are related to drama they bring on themselves.

Other thoughts:

Advantages of Low Income:

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:

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.

Whether you go low income or not, there is no guarantee of getting a rent check each month, of the property being taken care of, or having a smooth turnover experience.

Originally posted by @Greg Gasiorowski :

Hello everyone,

I'm new to the forum and have been doing a lot of research in buying rental properties.

I currently live in the Philadelphia, but would like to invest in lower income areas such as Chester, Marcus Hook, or Trainer (PA). I'm very familiar with these areas since I grew up near them, but wanted an expert's opinion when it came to buying rental properties in low incomes neighborhoods.

I've heard mixed things about investing in low income neighborhoods such as the quality of tenants, the actual profit gained from renting in these areas can be low/minimal, and crime associated with these environments.

However, I see these areas as an opportunity to at least start my real estate venture. 1.) Housing in these areas is extremely cheap so I could easily afford the homes for sale within the area. 2.) The quality of tenants can determined by properly screening potential tenants. 3.) I could establish security measures for these homes such as alarm systems and upgraded windows and doors to minimize burglary and offer tenants more peace of mind.

First, I would like feedback as to what can be expected in investing in low income areas and if it is truly worth the expense.

Secondly, I would like to know how you obtained your property (I'm referring to your first property - ie how you started). I know there are many avenues in order to buy the property and, again, this is a topic where I'm hearing mixed things. I've heard some people say you could got a traditional mortgage to start off, but I've also heard that people are shying away from this method (traditional mortgages are dead?). I've also heard people taking out lines of credit from their own homes to fund their rental property, but I'm not sure if that's a smart move.

Any advice that you could provide would be greatly appreciated....

Thanks!

Greg

Older post but figure better late then never to answer

This post was for my market ,but this is really for most all markets.

Curtis, the problem with the lower end assets, they are such a more hands on investments , just more of a headache. Which I'm about to tell you why. Yes, on paper the entry price point looks great. So folks are only seeing one side of things. Lower end properties tend to be higher maintenance, higher expenses, and much higher turn over rate. Another factor is the rental prices aren't making sense, while still continuing to rise. We owned 37 of these exact type of homes (lower end in RH SC during the timeframe of 2004 -2009). So I'm speaking from experience, these type of assets tend to burn holes through investors pockets. Most folks start here, (1) Because they do not know any better and (2) The price point is much more attractive. These are what I like to call recycled product, which usually has a 5 - 8 year shelf life or in better terms the game of hot potatoes- who or which investor is getting stuck holding the bag. Easy way to look at things are any institutional, or Hedge funds buying in this asset class. Now they are mostly buying A - B asset. Their is a reason Wall Street, and most private money are parking their funds into higher class assets. Most times this is why newer investors, jump in because its all that is left on the table for them ( lower end )

The information above from Cindy is great. I've spoken with Cindy here on BG a few times. I told most folks here on BG and in many seminars that if I sit at computer long enough I can dig a lot of great information up to prove what a great city Charlotte is. We are Atlanta's little teenage brother growing up (fast) We are all lucky to be in a booming city basically still many years of growth left

I have to disagree on this being a good buy and hold market. From 2009-2013 this was one of the best buy and hold markets. Today we are facing an over priced market, rental returns are much less. I have some left over stock still holding from 2009. I was buying from $40k to $50k range. Same house now priced in $100k - $120k pre-rehab price range. I was also buying in 4 states; NC, SC, Georgia, & Florida. With that being said, "one man's junk is another man's treasure." So for out-of-state folks with (ex: California or NY) they tend to have much higher entry points. So buying a house here from $100k $150k with 1% rental rule. Still makes this a very attractive market for out-of-state or international folks. This does not mean we have a great buy and hold. For me personally, it says we are lucky that we still have a lower entry point then most folks markets.

If we jump in and really become bit more analytical. It is cheaper to build than buy today. We will be building new construction rentals for a few years. I am seeing this as similar to the 2000-2004 market. So the box Vinyl Village type homes is the current build (mixed in with townhomes, duplexes, quads).

Now back to your 10% Cap rate this is why most international folks are going to get burnt, and other folks will as well. When investing in these lower end asset classes, folks brought in cities like Detroit and Michigan. Promised a 20% return on the properties. I challenged folks to show me that over 5 years period (I am sure those returns are a lot less). Keep in mind this has nothing to do with the homes. It has everything to do with our economy, salaries for the lower income bracket, and a renters mentality. No security in those type of jobs with very little insurance benefits so job changing is common among lower end renters. It is very hard for someone paying 35 to 45% of their income to pay rent. I know here comes that chatter, well property management will handle that, right? We owned a management company from 2009 -2013. We lost our asses with that side of the company. I did it mostly for our turnkey clients. Good Rule of Thumb for any management folks who want to get in the business. Get 300 homes plus or get out of the business. Not profitable with out the inventory.

Now back to low end assets, very rare you are every going to sell, and get retail prices in these areas. How many USA folks move to rental areas? Once a area is over 50 % or more rentals, values will eventually drop as will the area. We have artificially inflated prices, in most of the areas with cash sales to out-of-state folks, or local cash buyers. Basically most people are showing up to the table and all we have are scraps left! This is not just here; Kansas City, Indianapolis as most markets to just a name a few are going through same thing. I still jump on 3 to 5 webinars month with out-of-state folks seeing what they are selling. So limited sales potential down the road for every one.

I was working with these turnkey groups for a few years. We all setup table and booths in LA, San Fran, and other markets. Selling our cities, and our turnkey deals. Me and a few of the guys we got smart and jumped into the international markets. I still play there my self and see a strong demand for the turnkey product (just not worth it for me). Folks if someone was to start a local solid turnkey business (5/month ) there is a good demand out there for this product.

Now for the lack of inventory. We had a few smaller hedge funds here in 2011-12 buying before most folks realized. Then the big boys like invitation homes (Blackstone which is a large wall street fund for folks who don't know ) came in purchased 7000 plus homes in little under a year. Most of the vinyl villages, anything built 2000 above; 3bed 2 bath or larger was their focus. Banks are realizing they can go into the property now . Taking a lipstick approach to rehabbing. Sell it them selves as well. So that's a few reason for the lack of inventory.

Just my two cents,

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Alex

Originally posted by @Greg Gasiorowski :

...

I ... would like to invest in lower income areas such as Chester, Marcus Hook, or Trainer (PA). I'm very familiar with these areas since I grew up near them, but wanted an expert's opinion when it came to buying rental properties in low incomes neighborhoods.

I've heard mixed things about investing in low income neighborhoods such as the quality of tenants, the actual profit gained from renting in these areas can be low/minimal, and crime associated with these environments.

However, I see these areas as an opportunity to at least start my real estate venture. 1.) Housing in these areas is extremely cheap so I could easily afford the homes for sale within the area. 2.) The quality of tenants can determined by properly screening potential tenants. ...

Well, the quality of your tenants is somewhat determined by the neighborhoods in which you rental property is located. I expect the better quality tenants in the Philadelphia suburbs would be aware that the neighborhoods you mentioned are not the best, and that type of tenant will seek better neighborhoods if / when they can afford to do so. 

So, screening too stringently in some of those lower income neighborhoods could substantially reduce the size of the tenant pool for you, to the point where you might be searching for the proverbial needle in the haystack. And in a smaller haystack, it still is s challenge. I believe your standards will have to be lower due to the type of neighborhood. 

Now, there are landlords who are managing property in those areas; I suggest you look them up (via public records for example) and try to understand how they go about the tenant selection process. I am not in any neighborhoods like that, and even then I have to weed through a lot of suspect wannabe tenants to get tenants that are acceptable.  

Greg,

I use to invest in buy and holds in Gary, Indiana. Other cities don't get much worse that that! I can currently pick up homes for $2k-$10k, all day long. Yes, they need work, but not as much as you'd expect. The average is probably $7k. I don't know your area, but Gary will most likely be a hell hole for another 15 years. So, don't look for appreciation, if your area is the same. Be very very careful on tenant selection. You need to run criminal background checks, you need to "attempt" to get names of all the people that will be staying in the house (good luck with that!), talk to previous landlords from as far back as possible and most of all, have a dynamite property manager. Property management companies have a tendency to put "anyone" in a property, just to get their cut. That is extremely dangerous in low income areas. We use to physically collect the rent every month. This gave us a good idea as to the condition of the home. It's a major challenge to find quality tenants in those type of markets....a major challenge. On the upside, if you can get properties for $15-$20k all in, your minimal investment is paid off very quickly. Also, some tenants are subsidized up to 100% of the rental amount. They don't want to lose that benefit. So some of them are good people or will try to care of your home. People in low income areas, for the most part, won't take care of a home, the way you and I would. 

 I know people who still invest in Gary and they do it strictly for the cash flow, because of the low cost of the properties. But it takes a special breed of person to go into that market. It truly does. The headaches and disappointments are many. Also remember that if you do need to evict someone, they know the ropes inside and out, forward and backwards. You need to have a good attorney and pray to God they don't tear it to pieces before they leave! I hope this helps you and feel free to contact me if you need any more information. 

Scott

i interest in low income neighborhood, Frankford. I would say I have done well. Yes there are issues but there is no such thing as a free lunch. I would check to see how many sales have occurred in that area in the last six months prices they sold for avg rent etc all properties need a landlord and kind u said it's a great way to get your foot in the door . one advice find a local handy man doesn't matter if he is a crack head he will do the work and do ur right at a fair price is ask that matters.

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I have a triplex in Philadelphia's Frankford section. I have 2 tenants that pay every month on the first, and never ask for anything. The third pays late every month, but he does pay, and he keeps the place in good shape. The two that pay on time every month have been there 8 years and 10 years. There are good people in these neighborhoods

Originally posted by @Greg Gasiorowski :

Hello everyone,

I'm new to the forum and have been doing a lot of research in buying rental properties.

I currently live in the Philadelphia, but would like to invest in lower income areas such as Chester, Marcus Hook, or Trainer (PA). I'm very familiar with these areas since I grew up near them, but wanted an expert's opinion when it came to buying rental properties in low incomes neighborhoods.

I've heard mixed things about investing in low income neighborhoods such as the quality of tenants, the actual profit gained from renting in these areas can be low/minimal, and crime associated with these environments.

However, I see these areas as an opportunity to at least start my real estate venture. 1.) Housing in these areas is extremely cheap so I could easily afford the homes for sale within the area. 2.) The quality of tenants can determined by properly screening potential tenants. 3.) I could establish security measures for these homes such as alarm systems and upgraded windows and doors to minimize burglary and offer tenants more peace of mind.

First, I would like feedback as to what can be expected in investing in low income areas and if it is truly worth the expense.

Secondly, I would like to know how you obtained your property (I'm referring to your first property - ie how you started). I know there are many avenues in order to buy the property and, again, this is a topic where I'm hearing mixed things. I've heard some people say you could got a traditional mortgage to start off, but I've also heard that people are shying away from this method (traditional mortgages are dead?). I've also heard people taking out lines of credit from their own homes to fund their rental property, but I'm not sure if that's a smart move.

Any advice that you could provide would be greatly appreciated....

Thanks!

Greg

 Hi Greg,

I invest in lower income areas, so I think I can offer a bit of advice.  Buy the "crappiest" place in the "nicest" neighborhood.  That helped me out tremendously.  I currently invest in St. Louis, and my most expensive property was $60k.  I have a property management company weed out all the tenants I don't want, and allow tenants who are simply low income, not "Jerry Springer episode" types.

Now, that being said, I've found a lot of diamonds in the rough, BUT I'd say for every 10 houses I look at, maybe 1 or 2 are worth looking at further.  I want my tenants to feel safe, secure, and concentrating on raising a family, going to work, and paying the rent.  If they can't feel safe in the neighborhood, they will bolt the second they can.

Now, me personally, I originally funded my rentals by cashing out my 401k.  I paid a TON in taxes for that, and it was a financial risk, but it did pay off because I did my homework first.  After that, I simply rolled the profits into the down payment of the next house and the next one.  I also added a few bucks of my own to be able to buy properties faster.

I almost NEVER spend the profits on anything but repairs, down payments, and an emergency fund. (I took the wife to see UP and I took my cousin to see Star Wars: The Force Awakens with the profits).  To give you an idea, I've made maybe $120k in profits over the last 5 years, and I've spent a whopping $210 on "treats" for me with the profits.

That is the main reason I've been able to grow as fast as I have.  If you want to know more, please feel free to ask!

My advice:

Don't do it.  The first rule in real estate is location, location, location.  If you buy in a 'war zone' your property will NEVER appreciate.  It really comes down to how much effort do YOU want to put into your real estate holdings.

I have SFRs in good neighborhoods with good schools, etc.  At the present time I have 9.  It takes me about 20 minutes a month to send out all the chase quikpays and do bookkeeping.  My tenants call a home warranty company for fixes, pay the first $75, and these properties basically 'self run'. 

A good friend of mine and I JV on a 4 plex a few years ago. In contrast, we had someone break into the washers and dryers on numerous occasions, a drug dealer, a pot smoker, a gal who had boa constrictors, and more issues in a month than my 9 SFRs had in a YEAR. A reality show would have had less drama.

We eventually sold after a year at a very slim profit, AFTER putting in 40k of improvements (new h2o heater, AC units, roof, etc).  It was literally putting lipstick on the pig and hoping someone would buy it. 

Unfortunately you get what you pay for.  You have to decide if YOUR time is worth that type of effort for that type of money.

In contrast, my former partner LIVES off this type of 'chaos'.  He has 24 doors presently that average about $200-$250 a door positive cash flow, based on 100% occupancy.  But he is HOPPING all the time and this IS his job.  He doesn't buy for appreciation, but cash flow only.  His ROIs, especially compared to mine, are 'killer'.  But there is obviously a price to pay.   

Since I still have a good career, his 'model' is not an option for me.

Alan

It all comes down to the investors personality. There isn't a magic wand that makes low income profitable. All the stories are horror stories are real and if they are too much, then low income isn't for you. This is what you need:

-Not afraid of physical confrontation
-Capable of doing the rehab and tenant flip yourself
-Nose for bullsh*t
-Firm

1. Changing a neighborhood: You can "modify". To a certain extent it depends on how much time you want to invest. I met our local drug dealer in the middle of street in front of everyone in the neighborhood to fight, he later moved, and so did our drug traffic. A hard working mom moved in. I have over 100+ calls to the local police submitting information. I met with the county sheriff, Police chief, I made maps, I organized a neighborhood watch, even established a roaming patrol at night.

2. Reality of what your selling: Low income will take whatever you give them. If they have nothing to take then what's the problem? I strip everything down, PEX plumbing, cheap everything, I do not install A/C compressors, window units only, I do not install the furnace unit I have a deposit. I assume every tenant will destroy the property. Look for rent to own.

3. Options not punishment: They will eventually not pay, which will lead to eviction. I pay them to move, instead of trying to chase down cash I will never get back. By leveling with them, giving them their deposit back, and as a byproduct possibly prevent the final destruction finale because the landlord isn't so bad.

4. Everyone complains: rich or poor. I would rather hear complaints from a low income tenant than a complaint from a recent law school graduate. All landlords are lazy and make mistakes to some extent. I would rather mistakenly fair the low income than the high income.

5. Transparency: Low income really do not care about trim features, or gas fireplace inserts.

6. Financing kept me up at night: I prefer to worry about a little extra work cleaning a place up, opposed to still having work and while a note is due in addition to soliciting and showing a property to a picky demographic that has options.

7. If you by enough in one area it is possible to dictate the overall attitude in the area. This is impossible in higher end areas. It requires more work although, there is cashflow to be made.