Where do most people draw the line when it comes to investing in rougher neighborhoods

18 Replies

Hi guys,

New investor here and just wanted to ask a quick question about what your rules are when it comes to investing in low income neighborhoods?

Ive been doing some research and ive been told that some investors wont go below 50% of the median home value of that city.

So if you had a $300k median home value for a certain city, then most people would only go down to $150k areas as generally they find any lower than that to be war zones.

Just throwing it out there to see what other seasoned investors advise! thanks in advance:)

If my wife can't go to the property while I'm out of the country due to safety concerns then that's my line.  But, that eliminates the rougher neighbirhoods.  

Not seasoned here, but I can share my 2 cents from what I've seen. The best places to invest are in the up and coming neighborhoods, or, if you will, the neighborhoods that have a great shot at growing. That way you can have a property that is going to appreciate a lot more than some other locations.

Getting into these kind of neighborhoods also will raise it's appeal with the kind of tenants you want (over time of course) because the neighborhoods is just going to get nicer and better as time goes on.

Not seasoned as well, but I have consistently heard the same message from Professionals from my local REIA and intend on following their advice....."You have to invest where you are comfortable".

Actually, if you are investing for rentals it is better to stay at or below the median. Not at or above the median. People that are able to afford higher end properties are less likely to make long term tenants.

Flips may be a different story.

@Max Shepherdson  

My recommendation for a new, unseasoned investor is to stay out of low income, rougher neighborhoods. They look great on paper but rarely pan out. Too often a new investor has a bad experience investing in "cheap" low income areas and then come to the conclusion that real estate investment doesn't work and get turned off to real estate when the problem was simply that they bought in the wrong area. There's no mystery as to why it doesn't work. You can't get good tenants to live in bad areas. Always look at the crime rate in any area you are thinking about investing in. If you're financing, there's no need to buy cheap properties in lousy areas. Often the difference in price between a bad area and a good area might be around $20,000 in some markets like Indianapolis or Kansas City. That's only $4000 more out of your pocket for down payment. I'd much rather put an extra $4000 in upfront to buy in a good, performing area. I think the only time it makes sense to buy cheap properties is if you are an experienced investor with a large enough and diverse portfolio that can help absorb the problems you are likely to have with the cheap stuff.

I talked about this very topic on my radio show recently. Here's a podcast to it that might be helpful.

http://www.spreaker.com/user/6739607/pinnacle-perspective-11-22-14

As the former owner of 2 rooming houses (18 tenants total) in one of Boston, MA toughest neighborhoods, I can say that as far as your business model has a reliable system you can do just fine. I like to invest in challenging neighborhoods because:
a) Less competition
b) Better ROI
c) I improve those neighborhoods

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@Max Shepherdson

You'll often find that economics on those areas are great on paper but getting a good tenant is extremely difficult. When buying a property like that it's always good to ask yourself, if the returns are really that good, why is the seller selling? I always assume increased vacancies, delinquencies and repair costs on sub par properties and back into an implied offer price for my desired return. More often that not the price that you end up arriving at is at discount to even the list price. That's the scrutiny you need to give a property though.

But to your original question, once a property is less than 25% of comps in the area assuming similar quality, that's when I get cautious.

IF I can't go to the neighborhood anytime of day or night and feel safe, I pass.

Originally posted by @Andy C. :

If I can't go to the neighborhood anytime of day or night and feel safe, I pass.

 Same here.

Originally posted by @Andy C. :

IF I can't go to the neighborhood anytime of day or night and feel safe, I pass.

 Ditto.

If I would worry about my wife having to shoot someone if she had to check on something at the house I would not invest there.

I started out in low income, partly because it was a lower cost of entry and partly because we wanted to immerse ourselves in the issues of affordable housing and try to make a positive impact.  I think there is a lot to say for walking the areas rather than trying to follow a formula.  See how comfortable you feel (you will feel conspicuous, low income neighborhoods are much more aware of outsiders walking around; feeling out of place is different from feeling unsafe).  Also look for blocks on the edges of nicer areas, with potential to improve, where there is pride in ownership.  Walking or slowly driving the area will give you a lot of valuable info.

It's sometimes surprising to me how biased some REI (and RE brokers) are regarding certain areas. Inexpensive, or should I say affordable, areas are not necessarily infested with crime. In some places, the regional and/or local crime information is integrated via publicly accessible GIS maps. And in some places, like in my area, the maps are integrated into county property GIS overlays. E.g., google "Raleigh crime maps" (just enter your city) then you can enter an address and see a graphical display of your favorite thug hangout. Play around... pick a crime, any crime... and see if your bias is statistically correct or not;)

@Chris Martin  Wow that is an awesome advice. I didn't know you could look up crime maps. Now I got new toy to play around!

First off don't base any decision on general numbers of a city. Every neighborhood and section has its own numbers and any property can be a good investment if purchased and managed properly.  My investments have been in working class neighborhoods valued way below the city median price range and the coc returns have not been less than 30% annually. The gains on sale have been 300% plus.

Low income and higher crime neighborhoods take experience and skills to work in.  Lower income and home values don't always equal proportionately higher crime. I don't have any investments or conduct any real estate activities in these types of neighborhoods but I do have 15 years experience as a Firefighter/EMT in these neighborhoods. People ask why are these buildings even here and why doesn't they city tear them down? Because people live there and they make money that's why.

 If you want to invest in these areas you have to see past your personal life, preferences and preconceived notions of what makes a neighborhood "rough".  Customs, courtesies and facts of life will probably be drastically different than what most people are used to.  Teachers, social workers, cops, firemen, and business owners that work in low income areas know what they are getting into and why they are there. If you don't know what you are getting into or spent any time in the area then you will probably fail. Patience and understanding are probably the biggest traits a person needs to do any kind of work in a low income area.

Originally posted by @Chris Martin :

Play around... pick a crime, any crime... and see if your bias is statistically correct or not;)

And then go to the middle and higher end areas to look at the crime. Look at violent crimes and look at theft. You might be surprised. What the maps don't show is white collar crimes. That would be a fun map to look at!

Originally posted by @Max Shepherdson :

So if you had a $300k median home value for a certain city, then most people would only go down to $150k areas as generally they find any lower than that to be war zones.

I would really like to know what your version of a war zone is.

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