Does anyone have an investing strategy of buying and holding property in low income neighborhoods?
I have heard the saying, “the poor” need housing too. I am curious if anyone has made a niche out of this type of investment strategy? If so, what should I watch out for? Do you just estimate more for caps x, maintenance, and other reserves?
The other day I walk through a property in a not so nice neighborhood, and it was absolutely disgusting. I could not believe those people lived in such horrible circumstances in the USA. I also thought, “how shameful on the property owner who allows his tenants to live in such terrible circumstances”. After seeing that, I got this over whelming desire to provide affordable housing in low income areas and actually take care of tenants. Maybe low income tenants do not take care of their rentals because the landlords don’t take care of them. I am a big believer in the invisible hand, so I fill like if great land lords treat people great, they will return the favor. Is my thinking flawed? What do you think?
I'm a new investor myself, and I am most certainly not going to take that risk for my first rental. Skills of tenant screening, performing due diligence on a neighborhood and property, understanding the macro-level economics, and even managing a PM take time to acquire as I'm learning more about it myself. My understanding is that tenants can really make or break your REI experience.
Hello Mario, I am soon to close on a single family home in low income section of a small city near me. Butler, pa. I am picking up this unit, freshly made over from a friend of mine. I didn't say rehabbed, because it was just carpet and paint (it's got a new roof because it needed one and he had it listed on the MLS before I talked with him). The best case scenario for this home is a section 8, or HUD voucher tenant. Then you know you'll get paid. I have been made well aware of what I'm getting into and aren't scared. I'm told every time you change tenants it'll mean all new carpet and paint on the floor, walls, and ceiling.
I also plan on being the best landlord I can be, and as helpful as I can. Some people live in self destruction and that’s the way they are. You can only help those that want help.
So why get into such a possible mess? Because the numbers work and the property cashflows!
Why would someone sell this place then? Because my friends portfolio is moving into bigger and nicer places, also flipping. He started out with the four green houses, and is trading them in for the big red motel.
hope this helps
@Mario Cuartas I have some properties in "D" neighborhoods. My first 8 units were in the second poorest neighbor hood in Akron. I have found that by-and-large people do treat nice, well maintained properties better than dumps and there are plenty of very nice people and good tenants that are poor (My average length of tenancy in the 53 months that I've owned these properties is 41 months) BUT... especially if you are buying places to renovate, you will meet some fundamentally broken people. I hear people all the time gripe that the government should not give handouts to able bodied people but the sickest tenant I ever inherited was able bodied and he was very creepy and utterly unemployable. The maximum SSI disability check is $750 per month-- you know a person can't live on that so they'll have to be doing something else or have some other kind of support. Many of these disordered people can't manage to keep a roommate so that's not often an option-- family support is usually non-existent (That's probably how many of them got so broken.) I get calls all the time from caseworkers trying to get their client out of a rooming house situation. You the landlord can't fix broken people and you can't fix the whole neighborhood. My advice would be to study up on cluster-B personality disorders and avoid them like the plague. Look for a long term work history (the nuttiest ones can't hold jobs longer term). I don't think I'd buy a fixer building with in place tenants in a "D" neighborhood in the middle of this eviction moratorium you might get stuck with a crazy train.
@Albert Le thanks for your input. I am closing on my first rental in a nice area, but have seen a lot of opportunity In a worse part of town. I am definitely weary myself, but I also want to make sure I am not passing up potential opportunities to both make great cash flow but also make an impact on the community.
This is helpful. I guess as long as you are going into it with the right expectations, then you won’t be surprised by the outcome. I appreciate your perspective. I am assuming section 8 housing follows specific guidelines based on the state you reside in, but how difficult is it to get section 8 tenants?
Great points. There are great people everywhere, regardless of their economic status. I can also appreciate your guidance on watching out for the crazies. You mentioned that social security only covers up to $750, so do you feel that when rent is over that, let’s say $800, it helps to weed out some of those crazy tenants that “cannot be helped”?
In Akron, $750 wouldn't be in a "low income" area; it's right around the median rent here in Akron for a 2 bedroom. We have found that rents over $750 will get you young professionals just starting out or older people with good solid blue collar jobs. SSI (supplemental security income) is for poor disabled people without enough work credits for SSDI (social security disability income). Poor, old people can get SSI in addition to social security. Low income housing here starts around $400-$500. I guess the answer to your question is yes, but here you wouldn't be doing low-income at that price point.
The other thing I think is important to know, if you want to operate in the low-income rental space, is that you are going to need to be flexible about rent. 10-15% of our low income tenants are on a payment plan at any given point in time. These tenants have NO access to credit. Unlike many of our competitors, to avoid churning our units and then filling them back up with new people in the same financial position, we have found it to be good business to work with tenants having a temporary financial crisis. These tenants reward us by paying on plan and staying for a good long while.
I think you are making a lot of assumptions about tht business model.
At one time I owned over 40 low income homes and my Management company that I owned managed over 150 of those types of properties.
Management company that I owned managed over 150 of those types of properties.
I can tell you that they are very time intensive and very mean to the Heavy. It is a tough business model any city you go to.
I actually wrote and published a book about my experience of owning them and losing thousands of dollars in the process.
i’m not saying they don’t work, I am saying that if you get into that business model make sure you understand what you’re doing and have the right expected outcome
@Mario Cuartas I started my investing career buying 8 homes in low income areas. Many of the tenants were section 8 which in my experience have a high propensity for neglecting the home. After all, when people get anything for free they tend to not appreciate it like when they pay for it.
I did however take the time to fix up the houses and put better tenants in there but it still is not profitable as it may look on paper.
I will say that if you are really interested these are critical principles to keep in mind.
1. If you are buying in low income areas at least pick an area that is up and coming so that you can benefit from appreciation
2. take the time to make sure your houses are nice because you will at least be able to get better quality blue collar type tenants
3. If you can find dual income tenants that’s better because you will have a better chance of rent being paid every month.
I started in low income areas so I can’t knock it but fortunately the $50k houses I bought I was able to sell for $100k in three years. Also I used that money to buy better properties in nicer areas so trading up is a good strategy.