I Made Huge Returns on Low-End Rentals and You Can Too!

64 Replies

I grew up in New Jersey and bought my first property at 18. I didn’t really understand how real estate transactions worked, so I went to the court house and watched several transactions occur. As time passed, I found my first property that was going into foreclosure. I contacted the owner and purchased the property using a quick claim deed. I resold the property before the bank foreclosed on it.

I bought my first rental property in the 90s. I made the purchase in Baltimore. This was my introduction into low-end properties. This is where I realized how large the opportunity and returns were for low-end rentals. Many people do not want to deal with the headache or know how to deal with the headache of managing a property in rougher neighborhoods, so they let these properties go for incredibly low prices. Row houses, in Baltimore, are generally priced at less than $30,000 a piece, but this of course can change across various neighborhoods and blocks. Rents will generally range from $800 - $1,300 a month.

Many people do not want to go into these rougher neighborhoods, but I felt no problem. I have never been assaulted, attacked or even approached while working in rougher neighborhoods.

The most common issues that come with managing properties in rough neighborhoods is that tenants do not want to pay rent. But there are of course solutions to that. When dealing with a prospective tenant, I usually perform an in depth background check and collect copies of IDs/social security cards. If the tenant is employed, I make sure that their employer gets involved. I have the employer and the tenant make an agreement with me that for as long as the tenant works for that company, they will deduct their rent from their paycheck and pay that directly to me. This way, I do not have to chase anyone down for rent.

Working in lower-end rentals require owners/property managers to be more hands on. I speak with my tenants multiple times a month. My tenants typically do not know about HVAC systems or how to make minor repairs, so I have no problem going out and taking care of the issues. Some owners refuse to do any sort of maintenance for delinquent tenants, but I believe this is wrong. Whether or not you are behind on rent, if you have an issue, we will come in and address it. My tenants also change their numbers frequently. I do not know why that is common, but you need to adjust and make sure you are in communication with them, no matter the circumstance.

To those looking to get into real estate, I say to do your research and do not take risks that you cannot afford. Working in the lower-end can lead good returns, but there is no point of taking risks if your credit and finances are not where it should be. An alternative to those who lack money, or good credit, I would recommend you join a partnership. Because I have a strong balance sheet, I typically take all the risks with my partnerships. My partners are set as limited partners, meaning that their liability is solely based on what they put in. The benefit to me taking all the risk is that I will take 10% of the top in addition to the returns I get from what I put into the partnership.

In my career I have owned and managed over 100 properties.

I wish everyone good luck who choose to dive into real estate! The journey may be long and tough, but it is worth it. Feel free to contact me with any questions, I am open to help. 

@Kenneth N. Brown this is interesting perspective from someone who has profited from the low end stuff. I own some class C- (probably class D) apartments in Indiana, and I have been very pleased with how strong the cash flow is. Having said that, I am curious as to whether or not the cash flow play will beat my B class apartments in the Berwyn area of Chicago. Garden style apartments in B class areas tend to allow for stronger appreciation, and I have a funny feeling I will make more, with less headaches, in the long run. 

Do you currently self manage all your lower end rentals? If so, do you ever intend to get a property manager? 

Very impressive story @Kenneth N. Brown ! I've never heard that piece about the agreement with the employers before, that's very interesting. Also, I'm always amused when people call quit claim deeds quick claim deeds :). Best of luck in your future endeavors and hope to see you sharing your wisdom around the forums!

Deduct rent from pay check.. that seems a stretch how you pull that one off.. That seems like an employer would not really want to do that adds to their accounting and liability.  now I get it were the PM can make the mortgage payment for the investors.. I see that. 

but have never seen an employer pay rent for an employee..  Good luck attracting investors to your deals..

@Jay Hinrichs took that from my lips :)

@Kenneth N. Brown Great piece and congratulations for the success so far. I was just wondering the motivation for an employer to get involved in rent payment arrangement with its employee. If each employee does that, that will surely be a big distration.

Have you ever had a situation where a prospective renter/tenant's employer refused to coperate with you on this arrangement and what was his reasons?

Thanks and all the best.

A lot of employers are used to splitting the pay someone earns and depositing it into various accounts such as child support for various baby mommas or savings or retirement accounts.  

I worked for the government and we were able to split our pay into 5 different deposits, and more if court ordered.

Thank you for sharing! Very valuable advice. 

@Odie Ayaga I am glad to have joined this forum, and I will look forward to seeing your story as well.  P.S. Thank you for catching the typo :)

@Kenneth N. Brown Can you provide some insight into capex? With such low rents, can you still profit when you have to set aside funds for capex?

I agree with you on how overrated peoples' opinions on low end areas is regarding tenant damage and safety. I have spoken to a few trusted contacts of mine who specialize in this sector, and they reveal that while tenant turnover is more frequent than B class areas, turnover cost is almost nothing because you don't have to make it look nice for the next tenant. They are in poor areas, but not "war zones" with mostly boarded up houses in the block.

In my opinion, the overlooked concern is the capex, which does not necessarily scale down with the lower market rents.

@Jay Hinrichs @Ndy Onyido If a tenant wishes to lease from me, they must have their employer deduct rent. Employers already offer to perform deductions for their employees' paychecks for a variety of reasons: debts, taxes, child support, medical etc. On the employers end, rent has never been an issue. 

Originally posted by @Kenneth N. Brown :

@Jay Hinrichs @Ndy Onyido If a tenant wishes to lease from me, they must have their employer deduct rent. Employers already offer to perform deductions for their employees' paychecks for a variety of reasons: debts, taxes, child support, medical etc. On the employers end, rent has never been an issue. 

 Amazing in all my years of doing this never heard of that.. I get the other stuff its govmit mandated but to do it for a landlord.  ?

anyway great way to keep your collections up..  I know as an Employer myself no way I would do this.

@Paul T.  In all of the projects I look at, virtually no one sets aside sufficient funds for capital expenditures. Renting in low end areas means you must purchase at low end prices. In addition, careful consideration must be taken on what types of materials are used in making improvements. You cannot afford high end materials for low end rentals. However, you also do not want to purchase substandard materials. I like the phrase “takes a licking and keeps on ticking” (from Timex commercials). Use of sturdy materials (although not necessarily the most aesthetic) generally works better than spending on lower quality materials which look nicer. No matter what, you need to balance expenses against expected income.

Originally posted by @Jay Hinrichs :
Originally posted by @Kenneth N. Brown:

@Jay Hinrichs @Ndy Onyido If a tenant wishes to lease from me, they must have their employer deduct rent. Employers already offer to perform deductions for their employees' paychecks for a variety of reasons: debts, taxes, child support, medical etc. On the employers end, rent has never been an issue. 

 Amazing in all my years of doing this never heard of that.. I get the other stuff its govmit mandated but to do it for a landlord.  ?

anyway great way to keep your collections up..  I know as an Employer myself no way I would do this.

 Sounds like it is working for you. Did you check to see if this is legal?

Originally posted by @Kenneth N. Brown :

@Matt R. I work very closely with my attorney. 

 Awesome, I want to share this with some I know who deal with these. I wonder since a lease is a performance contract in a form, what would happen if the place was flooded and not habitable, then the LL deducted rent  with that bad timing, is there extra liability involved or punishable liablity? thanks for checking! 

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

Originally posted by @Lien Vuong :

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

one of my clients owned 165 doors in Alameda CA back before it was the high priced real estate it is today.. and U knew a Jawad property when you saw one it was the ugliest house on the block.. Well his collection system was about as simple as it comes.

he had some pay on the 1st and some on the 15th.. he went to every door every month personally.. they were instructed to Pin the rent in an envelope to the front door.. No envelope he then put a 3 day notice ..  the front doors looked like pin cushions.. but you talk about instant feedback. 

Originally posted by @Jay Hinrichs :
Originally posted by @Lien Vuong:

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

one of my clients owned 165 doors in Alameda CA back before it was the high priced real estate it is today.. and U knew a Jawad property when you saw one it was the ugliest house on the block.. Well his collection system was about as simple as it comes.

he had some pay on the 1st and some on the 15th.. he went to every door every month personally.. they were instructed to Pin the rent in an envelope to the front door.. No envelope he then put a 3 day notice ..  the front doors looked like pin cushions.. but you talk about instant feedback. 

 Now that is some serious self management. 

Originally posted by @Matt R. :
Originally posted by @Jay Hinrichs:
Originally posted by @Lien Vuong:

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

one of my clients owned 165 doors in Alameda CA back before it was the high priced real estate it is today.. and U knew a Jawad property when you saw one it was the ugliest house on the block.. Well his collection system was about as simple as it comes.

he had some pay on the 1st and some on the 15th.. he went to every door every month personally.. they were instructed to Pin the rent in an envelope to the front door.. No envelope he then put a 3 day notice ..  the front doors looked like pin cushions.. but you talk about instant feedback. 

 Now that is some serious self management. 

 Matt this guy was seriously RICH.. he bought all that stuff in the late 50s to mid 60s for nothing.. that portfolio that his kids inherited has to be work 100 million or so. .. buying hoody houses in the Bay area back then and hold was some serious wealth making machine.

I sold him a Ranch ( when I was a land broker) late 80s in Nor cal for just under a million and he stroked a check for it.. LOL  

It's great that it seems to be working for you and you have a system that makes it profitable. The big downside I see is that you are working very hard for your money, instead of your money working hard for you. I don't want to retire from real estate investing, I want to retire into real estate investing.
Originally posted by @Jay Hinrichs :
Originally posted by @Lien Vuong:

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

one of my clients owned 165 doors in Alameda CA back before it was the high priced real estate it is today.. and U knew a Jawad property when you saw one it was the ugliest house on the block.. Well his collection system was about as simple as it comes.

he had some pay on the 1st and some on the 15th.. he went to every door every month personally.. they were instructed to Pin the rent in an envelope to the front door.. No envelope he then put a 3 day notice ..  the front doors looked like pin cushions.. but you talk about instant feedback. 

Is that guy D.L. of G&L? 

G&L isn't far from my office (in Alameda) and that's where the rent control protests always are. Dude basically bankrolled half of the anti-rent control side of a recent city ballot initiative campaign. He's probably - no, certainly - the most protested single person in this town.

It’s hard enough to get an HR dept to call back and say yes or no if someone works there. I think I’d be laughed at if I asked an employer if they’d hold back someone’s pay for rent.
Originally posted by @Chris Mason :
Originally posted by @Jay Hinrichs:
Originally posted by @Lien Vuong:

I loved your perspective on this and how you have been able to mitigate some of the largest obstacles in owning properties in low income areas! Thank you for sharing your insight, it's a great lense to look through with a fellow investor. 

I too own 12 units in area like this and some of the things that I have made to help with payment of rent is to open a bank account in the local area that is walkable for them to just deposit it into my account. They can never say that it's too far or they don't have stamp! It's right there and every month I have a picture receipt of the deposit transaction!

one of my clients owned 165 doors in Alameda CA back before it was the high priced real estate it is today.. and U knew a Jawad property when you saw one it was the ugliest house on the block.. Well his collection system was about as simple as it comes.

he had some pay on the 1st and some on the 15th.. he went to every door every month personally.. they were instructed to Pin the rent in an envelope to the front door.. No envelope he then put a 3 day notice ..  the front doors looked like pin cushions.. but you talk about instant feedback. 

Is that guy D.L. of G&L? 

G&L isn't far from my office (in Alameda) and that's where the rent control protests always are. Dude basically bankrolled half of the anti-rent control side of a recent city ballot initiative campaign. He's probably - no, certainly - the most protested single person in this town.

Chris those are the kids who inherited..  Art the dad was tough sum BEotch that I know.. but hey 1 mil transaction in 89 with 5% commish I will take it.. plus I got to use the ranch for about 10 years before he finally kicked me out.  had 10 acre awesome bass lake !!

Originally posted by @Kenneth N. Brown :

@Paul T.  In all of the projects I look at, virtually no one sets aside sufficient funds for capital expenditures. Renting in low end areas means you must purchase at low end prices. In addition, careful consideration must be taken on what types of materials are used in making improvements. You cannot afford high end materials for low end rentals. However, you also do not want to purchase substandard materials. I like the phrase “takes a licking and keeps on ticking” (from Timex commercials). Use of sturdy materials (although not necessarily the most aesthetic) generally works better than spending on lower quality materials which look nicer. No matter what, you need to balance expenses against expected income.

 Care to give us some examples and insight into what you've found works for 'takes a lickin and keeps on tickin"? I'm always on the look out for quality but affordable. I know it's not always the cheapest thing, but the thing thats cheapest over time. What have you found works well? 

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