Low income neighborhoods?

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Low income neighborhoods?

Mario Cuartas
Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes

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?

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Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
5y

@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.

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  • Account Closed
    Seattle, WA · Member since 2021 · 18 posts · 8 votes
    5y

    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.

    4Reply
  • Brent Benoit
    Contractor · Evans City, PA · Member since 2019 · 15 posts · 12 votes
    5y

    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

    Brent Benoit

    7Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    5y

    @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.

    12Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @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.

    0Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Brent Benoit

    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?

    0Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Jill F.

    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”?

    0Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    5y

    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.

    7Reply
  • Steve RozenbergPro Member
    Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    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 

    0Reply
  • Ehab Shoukry
    Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes
    5y

    @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. 

    Good luck!

    Ehab

    3Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Steve Rozenberg

    Thanks for sharing your experience. What is the name of your book, I want to check it out. Are you still in this space?

    1Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Ehab Shoukry

    Thank you for sharing your experience. Turning $50k into $100k is not bad at all! That is definitely a huge win. I guess when you gain appreciation like that, putting up with the ups and downs of low income tenants is 100% worth it.

    0Reply
  • Steve RozenbergPro Member
    Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    @Mario Cuartas Failing our way to Millions: Building an Empire

    2Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    5y

    @Mario Cuartas check out "Evicted" by Matthew Desmond.

    0Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Steve Rozenberg & @Nicholas L.

    Thanks for the names of those books. I will definitely check them out.

    0Reply
  • Matt Leber
    Rental Property Investor · Orlando, FL · Member since 2015 · 353 posts · 269 votes
    5y

    @Mario Cuartas I have a couple rentals in Central Florida that I would consider low income neighborhoods that I rent out through section 8. I can tell you that if you screen well and take care of the property, communicate well with the tenants then low income rentals can be a valuable part of your portfolio is your goal is cash flow. Appreciation will be slower but that is icing on the cake. I have also had these tenants tell me how grateful they are that they found a nice clean place to live with their family and how much of a blessing I have been to them by providing suitable affordable housing. It’s weird to run a for-profit business and be considered a blessing, but that’s truly what it has been, a win-win for both me and the tenants.

    4Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Matt Leber

    Thank you for sharing your experience with these rentals. Do you manage the properties yourself? If you have a property manager, is it hard to find a manager to take these on? Your experience is exactly what I would aim for on every rental, ensuring a a clean and safe property for anyone to live in regardless of location and income.

    1Reply
  • Matt Leber
    Rental Property Investor · Orlando, FL · Member since 2015 · 353 posts · 269 votes
    5y

    @Mario Cuartas I self manage them. But I bought them knowing that the margin is there to hire a property manager if at any point I feel like it becomes to much of a burden. I wouldn’t buy one that I was forced to self manage in order to make the numbers work. My advice if you self manage is to look for properties that are simple, small, and tenant-proof them as much as humanly possible.

    If you go with property management, some PMs may be unwilling to take them. But some PMs will specialize in managing low income. Just will need to call around.

    1Reply
  • Oscar Padilla
    New to Real Estate · Santa Cruz CA, United States · Member since 2020 · 21 posts · 22 votes
    5y

    @Mario Cuartas I am interested in Low-income neighborhoods as well. It seems like a win-win situation for both parties in providing clean living spaces while still making a profit.
    I am trying to be cautious about purchasing my first rental property, but something that's convincing me more and more to pull the trigger as long as I have a good property manager in place while also putting more aside for repairs and maintenance.
    When I compare B to C class neighborhoods that are out of state to my community, it turns out where I feel comfortable and safe turn out to be worse statistic wise than the B to C class out of state neighborhoods I am looking at. Also, I live in Ca, Where trying to invest in rental properties under 200k is more of a dream than a reality.

    0Reply
  • J. Mitchell Bernier
    Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes
    5y

    @Mario Cuartas yes there is a niche in this type of investing. Most of our portfolio is comprised of these lower income homes. You are on the right track on how you analyze these deals. You need to allocate more for capex, regular maintenance, but you will able to get a house for cheaper so it all evens out.

    We look for brick or concrete homes, that are slab foundations. Under 1100 sqft. 2/1’s or 3/1’s. When we buy them we immediately put down LVP flooring through out and try and update the roof and A/C. We look for rent rule of 1.5%-2% after we add the costs of immediate repairs. So we buy for 30k, spend 10k on repairs, and rent for any where between 600-800 a month.

    Hope that helps and good luck!

    3Reply
  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    5y

    @Mario Cuartas

    It’s rarely the landlord that creates disgusting units. People are sometime horrible. I once had a tenant leave a voicemail on our phones that they burned the house down. Seen so many cockroaches you couldn’t see the floor. Once saw a house turned into a dog fighting house. Right in the living room. None of this had to do with the landlord. Low income housing can be profitable, but also can be very hard and you can do everything right and still get bad tenants and lose money. Drugs and crimes are rampant in these areas. Nice tenants at the start three months can be shooting heroine and selling their own furnace. Also, saw that.

    The only way I’ve seen this works is with volume so these types of people can balanced with the nice SSI older couple that doesn’t move for 15 years.

    Management is the absolute key here (still no guarantee though) at least in my Indianapolis market.

    Good luck!

    0Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    5y

    There isn't a correlation between how much a landlord take cares of a property to how well the tenants take care of the property. Zero correlation. 

    That said, I do totally agree with you that we need to figure out as a society how to help those who are less fortunate a decent place to call home. Affordable housing is an option for sure but many other factors will also have to play a pivotal role such as how we build. 

    Katerra is one of my favourite companies and they are redefining how we build and those approaches can also reduce the cost of construction, mainly the labor cost piece, which mainly could help provide more affordable housing. It is all linked! 

    4Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    Yes I own dozens in desperate low income areas . Stabbings shootings drugs high crime ,evictions and Late payers are all part of the fun!! . I started in this because it’s all I could afford but I developed and refined my strategy and I’m ok with it because it pays the best .I would probably have less headaches in c or b class but I can get amazing returns in the hood .it is most certainly not for everyone and requires a special type of management . It is not uncommon for me to buy a house for well under 10k and get 600-700 a month in rent pretty easily .

    0Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    @Mario Cuartas

    One thing I can tell you about these areas is you’d be wasting your time trying to be a do gooder of sorts improving the community and enriching these people’s lives . That would most certainly be a futile vain effort . As others mentioned the problem is more related to the people themselves not the buildings . There’s a ton of drug and mental health related problems with the folks in these areas that it would never matter how much you cared ! They are all nuts and sadly they will screw you if they sense weakness

    You could fix them up great and put fine finishes on the units only to find a year later they are trashed out and full of roaches . You’ll be far more profitable by just keeping the building livable and letting them marinate in their own filth . It’s not your job to improve the community ! That’s the mayors job !Your job is maximum profits and You have to be ok with being a savage like them to survive .

    0Reply
  • Melissia Larson
    Member since 2021 · 4 posts · 1 vote
    5y

    @Mario Cuartas

    Pros: you can get the properties cheap and make minimal updates (no granite expected), helping a community with affordable housing, many stay for a long time as they are renters not buyers, many like to pay rent in cash, good tenants will give you solid referrals when you have vacancies.

    Cons: If your screening sucks they will cost you more than you earn, it’s hard to find management companies that want to deal with low income properties/tenants

    0Reply
  • Mario Cuartas
    OP
    Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
    5y

    @Matt Leber

    Thank you Matt. What are you go to steps to tenant proof a rental?

    0Reply
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