Do rentals in "bad neighborhoods" cash flow better?

Question

In upstate NY $200,000 buys a clean turn-key two family house in a desirable area. I'm not sure what the units would rent for but likely at least $1,000/month each. That means unless a substantial amount is put down (way more than 25%), the property probably won't even cash flow by the time the mortgage and upkeep is considered.

On the other hand, a $25,000 down payment on a $100K two family house in the "hood" will likely still have units that rent for at least $700/month. That leaves considerable cash flow because of the small mortgage.

Is it worth dealing with the downsides of buying and renting in the less desirable urban areas?

Paul Moore · Answer

@Tim Lyons in my 21 years of real estate investing I noticed that investors gravitate towards nicer and nicer properties in better locations as they get more experience. There must be a reason for this and I think the respondents above made that pretty clear. Good luck!

Eric Bilderback · Answer

Absolutely not.  The best cash flowing assets are homes in nice areas where rents have appreciated.buy a home in a nice area that pencils in 3 years that thing will be cash flowing nicely and there will be much less chance of drama.  Don’t buy a dump you fight with everyday and in three years nothing has changed.

That my advice,

Jay Hinrichs · Answer

for the uber hands on local owner .. many make this work.. for the passive ( or wants or thinks rentals are passive) investor high risk .. and paper proforma's rarely match reality..  or another way to look at it.. is you get what you pay for.

OR use logic your money is made on tenants where do the best and most responsible tenants want to live.

Jill F. · Answer

@Tim Lyons I own a couple properties in a "D" neighborhood (the first 8 units that I purchased). These units cashflow a couple hundred dollars a door every month. The biggest 'pro' to buying property   in a 'bad' neighborhood is that the entry fee is low relative to purchasing property in other types of neighborhoods and the cashflow is high relative to the initial investment required IF it works out that you can profitably manage "D" neighborhood properties.

Both properties and neighborhoods can be graded, The properties I mentioned above, were "C" properties in a "D" neighborhood , they were well built1930 buildings that had been decently maintained with a few updates by a plumber that owned them for 60 years. My *AVERAGE* length of tenancy in these buildings is 44 months. My last unit turnover was in Oct. 2018. It turned out that I can manage and make money in "D" neighborhood properties (probably because I spent a number of years living in them). I think that many landlords fail in this space because the refuse to bow to reality. In this space, even if the lease says something is the tenant's responsibility, you may still have to be the one to fix the problem in "enlightened self interest" if the tenant does not have the resources to fix it. If you don't want to churn, have a policy for offering payment plans, and have a reasonable exterminator on speed dial for bedbug infestations. I have more "neighborhood" problems than "tenant" problems in these properties like petty theft, vandalism, and trash dumping.I also own some "D" properties in a "C" neighborhood that I bought super, super cheap from a slum lord that owned them for 30 years and half-*ssed everything he did. I wish we hadn't bought them. They were full of *REALLY* crazy people. We've had to just about gut the buildings to make them habitable-- we're still working on them. On the upside we're getting close to done and I have a waiting list wanthing to rent the units.

Moving forward, I'm not buying in "D" neighborhoods because I now have enough money to buy in better neighborhoods where I'm likely to have way better appreciation in addition to cash flow and I'm not buying "D" properties because the only way to make it cost effective is to DIY a significant portion of the work and we're too old for that now.

Theresa Harris · Answer

The type of house and location determines the type of tenant.  Buy a place where you'd want to live and where there is pride of ownership and you should attract a good tenant.

Cheap houses are cheap for a reason and generally speaking you will not attract a good quality tenant, you will have higher turnover and more repairs.

Do rentals in "bad neighborhoods" cash flow better?

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