buying homes in "bad" neighborhoods to rent

9 Replies

I see a lot of homes in my city in lower income neighborhoods. 25k-40k homes. I could see myself purchasing 3 homes at least and renting out for $650 each to give me a $1950/month income . Sounds GREAT to me but scared of the idea of running into trouble with tenants in that area. Any advice on how to handle it? 

Or I can buy 2 homes in somewhat better neighborhoods and rent for $750 a month and take the lower income

It depends on your own personal experiences and strategy. Just be aware that the bad neighborhood's cash flow might be negated by a lower quality tenant who might require more costs in terms of evictions, vacancies, repairs, etc. A higher quality property might attract a better quality tenant who will bring less headaches, and less associated costs. 

One way to handle it is using Section 8. 

I know a war vet that I originally met over at the Section 8 office who has 11 properties in C- neighborhoods and never had issues with his section 8 income, meaning he got his payments, and therefore was able to keep up his properties. Now, of course it wasn't passive income. 

When it comes to the rougher neighborhoods, you will be working for it and really have to stay on top of things but in return, it could be a great way to build up a cash flow portfolio and move up to less management invensive type properties. If you're going passive, I would avoid SFR altogether and try to find a multi-unit 4 unit and do Sec 8 and at least all your properties are in one area under 1 title.

Good luck. 

Originally posted by @Swat Khan :

One way to handle it is using Section 8. 

I know a war vet that I originally met over at the Section 8 office who has 11 properties in C- neighborhoods and never had issues with his section 8 income, meaning he got his payments, and therefore was able to keep up his properties. Now, of course it wasn't passive income. 

When it comes to the rougher neighborhoods, you will be working for it and really have to stay on top of things but in return, it could be a great way to build up a cash flow portfolio and move up to less management invensive type properties. If you're going passive, I would avoid SFR altogether and try to find a multi-unit 4 unit and do Sec 8 and at least all your properties are in one area under 1 title.

Good luck. 

 That's interesting... How does section 8 work if I was to go that route? Do they pay me a certain percentage while the tenant pays the rest? Also how do I go about my homes qualifying for section 8?

I think the process is easy enough. Just walk over to or visit your local housing department and make an inquiry. Let them know you have properties available and exactly what type, one bed room, two bedroom, 3 bedroom etc. Tell them where your properties are located because it is my understanding that the housing departments will now start to pay rent according to the particular zip code your properties are in. You can ask but I just heard that. Its just a matter of letting them know you have properties for rent and would like to be a section 8 qualified vendor. I am sure they will have some list or guideline for your properties like making sure you have a modern grounded electrical system, good plumbing fixtures, American with disability access etc. 

@Kellen Bradford , if you view the target neighborhoods as "bad", you should not invest there.  If you are uncomfortable talking to and being around people in those "bad" neighborhoods, you should not invest there.  If you think most people in those "bad" neighborhoods don't behave the way you think is appropriate, don't invest in those neighborhoods.

Invest in neighborhoods where you feel comfortable.  Invest in neighborhoods where you are happy walking from your prospective rental property to the nearest neighborhood corner store.  Invest in neighborhoods where you would feel comfortable having lunch with the people in that neighborhood.

If you're going to manage the rental property yourself, the last thing you should do is invest in a neighborhood where you don't feel comfortable being in, and where you don't feel comfortable talking with the people who live there.  Don't invest where you can't connect with the people who live there. That's a recipe for disaster.

Glad to see some positive Section 8 discussion here. It can be a great program for the landlord as long as you get the right tenants, and not just in bad neighborhoods.  The whole point of the program is to get good people out of bad neighborhoods. Obviously it doesn't always work out that way.

Just keep in mind that real estate is a free market. Those houses are cheap because no one else wants them. How much do you value your time and energy? You'll need to factor in more maintenance than better neighborhoods, and more vacancy. If you're willing to work hard and have the time to do it, go for it. Personally, I prefer the lower ROI and lower stress of better neighborhoods.

 

@Kellen Bradford

 Also, $650 a month for a house is almost always going to be a loser, even with no mortgage payment.  After taxes, insurance, maintenance, vacancy, and occasional big-ticket replacements, you're not going to be left with much, if any, of that $1950 you collect. Check out my blog post about understanding the numbers of an investment property for a deeper look:

http://www.biggerpockets.com/blogs/6815/blog_posts...

@Kellen Bradford - Yes, it can be done and if that's your dream, then, follow it. 

@Swat Khan - mentioned a great way to do this with "guaranteed" rent via section 8. That's if Section 8 pays 100%. At times there are struggles with tenants to pay their minor portion, which can lead to eviction if they don't pay it, but, often times the tenant believes/gambles that the landlord will not pursue that route.

On the other hand one should not paint all people living in a bad neighborhood with a broad brush as being destructive. There are good law abiding people living there too who want to be out of the war zone, but, for a myriad of reasons become trapped in it.

The tenants who mean well will take care of their apartments, furthermore, the section 8 tenants do not want to lose their vouchers, so they will do their best to adequately maintain the apartment.

As the saying goes, there is money everywhere to be made....just go out and find it if that's your urge to provide a solution and simultaneously make money in these neighborhoods.

Keep us posted on your decision either way!

@Kellen Bradford

The process for getting a Section 8 tenant:

1. Post ad on Section 8 website and craigslist.

2. Create a waiting list of tenants and select a resident.

3. Pass your property inspection from Section 8. They will help you get approved by telling you what you need to get fixed.

Also, I would highly recommend that you Google Section 8 in the city that you're from and visit the office and ask all your questions. Also, look for meetings in the area and try to find an investor who has at least 5-10 houses with section 8 and learn and model your business after him. 

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