Is a rental in a low income area worth it?

Question

My wife and I are looking at purchasing our first rental. We have an area 30 minutes away where homes are very inexpensive. Not the best area, but the numbers work out to a 17% ROI. Does anyone have experience renting in impoverished areas? What are the potential downfalls? What are the pros and cons? Any advice would be greatly appreciated.

James Galla · Answer

@Adam G. Cameron, judgment-proof as in not having the assets to sufficiently and expeditiously cover the costs of an adverse judgment.

Let's say you've got this multimillion-dollar estate that you decide to rent to me, a high school drop out working $7.25/hr on a 40/hr work week, and I've got no prospects of advancement. Let's say I keep at my lease payments, which were tailored to be affordable at my income ability and potential. However, when my lease term nears expiration, I cause $750,000 worth of damage to your property. Assuming you don't have landlord insurance, you're sitting on a $750k claim against my $7.25/hr wage. You aren't going to be made whole given the vast amount of the claim against so little assets/worth.

More realistically, you may own a property worth $40k with a need for $10k to address tenant damages while the tenant doesn't have $10k laying around or stashed in his/her pillow. That $10k doesn't materialize out of thin air, so you'd experience difficulty in collecting.

Hope that helps!

Adam G. Cameron · Answer

@James Galla

I appreciate the input! What do you mean by judgement proof?

James Galla · Answer

@Adam G. Cameron

A potential downfall is your tenant destroying the place and causing you a years worth of rental income to put it back in it's original condition all while being judgment proof.

Tenants will also constantly lie to your face about pretty much anything that advances their position, so you have to do extraordinary due diligence.

I'd also prepare to be taken advantage of, assuming you allow for it. For example, if you provide free laundry, prepare for your tenant to do some laundry parties or start a laundry business out of the house.

Property managers may also not have the best treatment of the property since they understand the property would be in a lower value area, so I'd prepare for some excuses such as damage/poor screening not being their fault because the tenant pool is not good enough.

That being said, you can still make a lot of money in lower value areas.

Jacob Sampson · Answer

I tend to avoid those areas but I know of people that make good money.  You need to be comfortable not spending much money on the properties and being very strict and evicting quickly.  The pros are, as you pointed out, the numbers can look pretty good.  The cons are they will be significantly more effort until you get one of those rare tenants in the property.  Then you pray they stay forever.