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?

@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.

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

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.

In our experience you will need to: 1) Learn to "Maintain to the Neighborhood", not your personal standards 2) Tenant-Proof everything you can • Hard surface flooring, not carpeting (too easy to trash) • Same basic paint for everything • No garbage disposals for them to break • Only spring-type doorstops also with plate on the wall • Glue rubber mats under sinks to prevent water damage • Sheet aluminum on walls around stovetops, for easy grease removal • Towel racks - screw 1x3 to wall studs, then screw rack to that • Install low-profile downspout ext, not aluminum that always disappear • Plan on cleaning gutters and leaves up in the fall as tenants won't • Avoid garage door openers 3) Have a great application screening process: • Check credit for evictions & convictions, utility collections • Focus on employment/income stability • Require bank or debit card statement - you'll be surprised what they spend their money on! • Make surprise visit to their current home to see how they treat it - that's how they'll treat yours! • Deliberately have a few challenges in your screening process - it will weed out "entitlement mentality" problems 4) Allow payment plans, but create system to track when payments due, so they don't keep falling further behind • You will need to call them on due dates or they will fall further behind • Be prepared to give a strong NO when asked if you will change rent due dates to "make it easier" for tenants to pay rent based upon their SSI or paycheck dates. This shows total lack of budgeting and is a sign they will only fall further behind with more excuses. 5) Have a defined eviction process, but build in 3-5 days of flexibility for inevitable slow-pays. 6) Find handymen that live in an area only 1 Class higher than your property. Sending a Class A handyman to a Class C or D property will waste your money. Send Class B to C and Class C to D. They will also get along better with the tenants.

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.

@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.

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!

@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!

@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 appreciation2. 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

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

Low income neighborhoods?

Mario Cuartas

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

5y

@Oscar Padilla

I agree Oscar, I think the sketchy neighborhoods seem a lot scarier when looking out state. I think the key when looking out state is to build a good reliable

Team of real estate experts that you can work with; that will greatly reduce the stress and anxiety of out of state investing.

Low income neighborhoods?

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