Low-Income/High Cash-Flow properties.
I have experienced owning many low income properties over the years. I have come to learn is that it’s not that they are good; it’s not that they are bad, it’s just different. When purchasing these types of properties make sure that you know what you are buying and the type of business model that you are buying into. What I have found is that people like the low-income/high cash-flow properties, because on paper, it appears that you are going to get great cash flow or a great cash return, and like I experienced first hand that is not always the case.
A lot of the lower income properties tend to have tenants who live a month-to-month lifestyle. Meaning, the eviction rate is normally going to be higher and you are going to have more issues with these tenants as opposed to higher income properties. Statistcally you will do more evictions in the lower income properties. Again, it’s just a different business model.
The majority of these houses are going to be older homes, so plan more maintenance issues/costs and probably more call outs with the tenants. Something we have seen is the tenants are normally a little bit harder on the properties. Plan to have a larger make ready or even a rehab many times. Even if they have been in the house for 9 months, 12 months or 18 months, there is probably going to be more damage than you may think as opposed to higher-end properties.
When many of my tenants vacated my lower income properties, they would tend to take parting gifts like electrical wiring, appliances and air conditioning units. We tried everyway to secure them but it’s just something we have never been able to successfully do. Also, when the property is vacant, you are going to have more of a chance of vandalism.
They do look good on paper, which is why everybody looks at them and they think it’s a great return. It’s just different and we see it’s not always as advertised. So, if you are going to buy low-income properties just make sure that you know what business you’re getting into. Make sure that you do have higher contingency funds for things like maintenance, higher tenant turnover and be ready to work more deals to keep the tenant in. We found that by doing that and being more prepared, you are going to be a lot better off. And, if it still looks good on paper with the higher reserves and the higher numbers, then I would say go ahead and continue with the process, but make sure you are going into it knowing what business you are getting into and what that business model entails.
Steve, nice analysis. You are spot on. We had 8 move-outs on 8 units last year, it was brutal. We are making it financially, a little less than expected with upside potential if we can get less move outs, but we weren't prepared for the emotional toll. If we had it to do over again, we would still do some low income, but not have it be all of our portfolio. It's been good to focus on one area and strategy, but think our sanity and blance sheet would be healthier with a more diversified portfolio.
Good points Steve. Thank you for your insights
Good information. I was going to add a couple to my portfolio as well. Good insight to have.
IMO they are way more trouble than they are worth. You might make a little more on the cash flow but the damage these low-income tenants do to your property in my opinion is not worth all of the headaches. Not to mention most of my low income landlord friends spend a great deal of time taking phone calls from tenants complaining about everything under the sun. Then there is collecting rent. A friend of mine packs some serious heat when he goes and collects. I prefer higher end condos in good neighborhoods that command high rents from decent tenants. In 3 years with two units 2 beds 2 baths rehabbed top floor units I have gotten 1 call from a tenant with a small plumbing issue that the association took care of.