Buy & hold in higher-crime neighborhoods

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Buy & hold in higher-crime neighborhoods

Jordan Grimstad
Minneapolis, MN · Member since 2016 · 51 posts · 19 votes

Does anyone here have experience with buy & hold rental properties in higher-crime neighborhoods with depressed property values? In particular, I'm curious to know if there's a particular set of circumstances or mitigation strategies that could make the increased risks (vacancy, credit, property crime/damage, etc.) worth it. 

Thinking about my local market, the local real estate & job markets are quite strong, crime rates are fairly low, but parts of the city (just like any other city) have higher crime and depressed property values. Assuming that property values in these parts of the city never hit $0 (i.e. it never becomes a Superfund site), what kind of cap rates would one need to see to consider investing in these areas?

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Watson Smith
Investor · Peachtree Corners, GA · Member since 2012 · 131 posts · 83 votes
9y

@Kyle Mccaw has covered it well.

All my properties are in C - D range neighborhoods.  If you're use to high class neighborhoods you won't make it long.  The first house I bought was in a D- neighborhood... It was rough.  I was all in at 38k after a near complete rehab...  its worth about 140k now and houses my best tenants who refer people they know and trust for all my other properties. 

The tenants are more needy.  It's not exactly "mail box" money.  I only take cash (most don't have bank accounts anyway) and I drive and pick it up.  The more they see and talk with you... the better.  You'll gain respect and actually get your rent.

When you rehab these houses don't spend a lot of money... its not needed an it'll look pretty bad in less than a year.   Make sure the plumbing, roof, electrical & HVAC are sound and you should be fine.  These type of renters just need the basics.

I currently have these renters who moved into a property of mine in the middle of a Georgia summer.  It was about 97 everyday... They moved in and the HVAC stopped working 2-3 days later.  I didn't know this till I showed up a few days after just to check on them.  It was 90 in the house and almost unbearable.  I asked why no one called me - They stated they didn't want to bother me.  I tried to put them in a hotel but they refused.  So, I bought them 2 cases of Colt 45 and a bunch of ice-cream for the kids till the A/C guy got there.  I've never seen a family so happy.  They've been with me 4 years now.

Point - They don't expect much - Just a landlord that treats them like a human and not a slum lord. I bring all my renters Honeybaked Ham for Christmas as well.  I've never had to advertise a home for rent... My phone rings almost daily from a referral.  If done right you can make money in low income areas... it's just more work and risk.

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  • Clayton PlankPro Member
    Investor · Jacksonville, FL · Member since 2012 · 122 posts · 46 votes
    9y

    @Jordan Grimstad, I tend to stay away from these areas as they tend to be more work than i have time for as a work a full time job and manage my own rentals. I do know several investors in my area though that have done very well with these areas. They buy them cheap and fix them up and place HUD tenants in them. The rate on return for them seemed to be very strong. Most of these investors use property management and do not self manage though.

    2Reply
  • Thomas Hickey
    Real Estate Investor · Peabody, MA · Member since 2013 · 304 posts · 91 votes
    9y
    My research into these areas shows that you will have a lot of code enforcement problems, lead paint claims against you. These low income tenants in D areas will grasp at anything when going down. Lead paint issues in these areas can cost more than then value of the whole building.
    0Reply
  • Kyle MccawBusiness Member
    Property Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    @Jordan Grimstad I have had great success in high crime neighborhoods. A couple things to keep in mind....be part of the solution not the problem. Too many landlords slum the properties by not taking care of maintenance. Most landlords approve the first applicant with the belief that all people in that neighborhood are bad tenants. That just increase the problem. True we are not as strict on backgrounds as our nicer homes. ALL neighborhoods have good people. Find someone that has lived in there for a long time and want to see the area improve. They can be a great contact. We have a local lady refer tenants to us on a regular basis. She let's the prospects know we care about the property and the tenants. She also knows who the "bad hombres" are. Over the last 3 years we have see our property values rise significantly, vandalism decline, tenants stay longer and the rents have increased. Be careful with your time. For example: don't go running around town to complete and return section 8 paperwork. Require the tenants to do those time monsters. Surprise....they will. If they don't, you don't want them. We also hired a retired police officer to harass drug dealers. They moved because they don't like attention. Don't even think about carpet. We use the glue down vinyl planks that last forever. Hope this helps. I could write forever on this topic.

    McCaw Property Management4.4900 Reviews
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  • Clayton PlankPro Member
    Investor · Jacksonville, FL · Member since 2012 · 122 posts · 46 votes
    9y

    @Jordan Grimstad, I have seen some great success with the advice @Kyle Mccaw stated. Maybe find another investor interested in the same area and go in and take control of the area. This may take some time and work but once you control a street you can began to change the area and start increasing not only your house values but also your rents, 

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  • Jordan Grimstad
    OP
    Minneapolis, MN · Member since 2016 · 51 posts · 19 votes
    9y

    Thanks Clayton & Kyle!

    @Kyle Mccaw 100% noted & agreed on the "be part of the solution not the problem" - my hope/idea was to help stabilize neighborhoods that might be seeing waves of foreclosures and maintain homes that people will love - and feel safe - living in.

    Three questions on this:

    1) What kind of bargaining power might one have with a bank that is holding on to dozens of foreclosed homes in these neighborhoods? Doing some research, it looks like some of these homes have been in foreclosure/are unoccupied for months or years, and the homes that are on the market aren't moving.

    2) How might operating expenses on these properties differ compared to similar properties in B-class neighborhoods? I'm assuming maintenance budget could go as high as 30-40% of gross rents - reasonable?

    3) What kind of cap rates do investors typically hope for to offset the additional risks/volatility?

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  • Kyle MccawBusiness Member
    Property Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    1) I can't help you with this

    2) Fully expect the maintenance to be higher. Inspect the properties to make sure they are changing air filter and there are not water leaks. Remember these tenants live a very different lifestyle than you. Don't be surprised if they have food on the ceiling. Or motor oil on the living room floor. Don't be quick to kick someone out if they ruin the carpet. Just ride it out because you will need to repaint regardless of if the move out tomorrow or 10 years from now. 10yr is better. Turns can cost more in C than B properties. But remember their standards are lower, so be careful not to spend money on items that a B class would require. And your next tenant maybe just as bad. 30-40% expense would be on the high end. For me my section 8 tenants tend to stay longer in my properties than non-section 8.

    3) We look more at rent rate to purchase price rate. I want more the 1.5% of the purchase price in rent each month. Example: $50,000 value should rent for more than $750/month. But every market is different.

    McCaw Property Management4.4900 Reviews
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  • Jeff Schechter
    Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
    9y

    I would agree in staying away from D properties. Although the numbers will look great initially, there are too many unknowns that can come back and bite you in the ***. We're doing great in C neighborhoods, but use a mgmt company that has 20 years experience in that market. Not unusual to see 12-20% ROI.

    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Kyle Mccaw

    I enjoy reading your posts.... Very funny...

    Question on your one comment of "30 -40 % expense".... It is my observation that these units have much much higher expense... and below are the numbers:

    Rent - $600

    Utility (landlord pay) - $200, or 33%

    Insurance & Tax - 10%

    Vacancy - 10%

    Repair - 5%

    Cap - 10%

    Total - 70% ish.... No?

    0Reply
  • Sid Leibowitz
    Contractor · Glen Cove, NY · Member since 2016 · 209 posts · 89 votes
    9y

    In my opinion. No, no, no. and NO!. Unless you like losing money. 

    0Reply
  • Watson Smith
    Investor · Peachtree Corners, GA · Member since 2012 · 131 posts · 83 votes
    9y

    @Kyle Mccaw has covered it well.

    All my properties are in C - D range neighborhoods.  If you're use to high class neighborhoods you won't make it long.  The first house I bought was in a D- neighborhood... It was rough.  I was all in at 38k after a near complete rehab...  its worth about 140k now and houses my best tenants who refer people they know and trust for all my other properties. 

    The tenants are more needy.  It's not exactly "mail box" money.  I only take cash (most don't have bank accounts anyway) and I drive and pick it up.  The more they see and talk with you... the better.  You'll gain respect and actually get your rent.

    When you rehab these houses don't spend a lot of money... its not needed an it'll look pretty bad in less than a year.   Make sure the plumbing, roof, electrical & HVAC are sound and you should be fine.  These type of renters just need the basics.

    I currently have these renters who moved into a property of mine in the middle of a Georgia summer.  It was about 97 everyday... They moved in and the HVAC stopped working 2-3 days later.  I didn't know this till I showed up a few days after just to check on them.  It was 90 in the house and almost unbearable.  I asked why no one called me - They stated they didn't want to bother me.  I tried to put them in a hotel but they refused.  So, I bought them 2 cases of Colt 45 and a bunch of ice-cream for the kids till the A/C guy got there.  I've never seen a family so happy.  They've been with me 4 years now.

    Point - They don't expect much - Just a landlord that treats them like a human and not a slum lord. I bring all my renters Honeybaked Ham for Christmas as well.  I've never had to advertise a home for rent... My phone rings almost daily from a referral.  If done right you can make money in low income areas... it's just more work and risk.

    3Reply
  • Kyle MccawBusiness Member
    Property Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    @Diane G. Where I mention the 30-40% expense being on the high end, that was referencing @Jordan Grimstad 's estimate. I don't have expenses that high. Keep it cheap, safe and secure. And I don't pay utilities. Anyways make the tenant pay those or they will take advantage of you.

    McCaw Property Management4.4900 Reviews
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  • Thomas Hickey
    Real Estate Investor · Peabody, MA · Member since 2013 · 304 posts · 91 votes
    9y
    Kyle Mccaw Unfortunately in larger buildings it's usually not feasible to separate utilities. I've seen people from tropical climates trying to recreate that climate of 90 in a Massachusetts winter. Not great when you're paying for it.
    0Reply
  • Kyle MccawBusiness Member
    Property Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    Paying for utilities sucks. I encourage you to look into billing that out as a separate fee. Some areas are regulated on how you account for the expense. Check out this link. 

    http://www.accurateutility.com/rubs.html

    We manage several multifamily properties, none that are separately metered. But we have our tenants pay that expense. 

    McCaw Property Management4.4900 Reviews
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  • Linda S.
    Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes
    9y

    @Jordan Grimstad,

    The thing about higher-crime areas, that i think the majority of investors don't get, is it requires significantly more common sense than regular investments.  It's not easy, and  poverty scares the crap out of super wealthy investors!    It's not just a quick/easy buy/hold, and requires more work than others.. but the returns will be higher too!   

    Everyone has their limit with crime/poverty,etc.... You have to know the area, and specifics of the crime--where is the drug dealer,  where are there always shootings, ... if you don't want to go there, chances are -- people won't want to live there, or if they do.. rent will need to be very cheap and not worth your time IMO.    Again, common sense needs to be higher for this type of investing.. people who just throw money get easily disappointed when they buy the place next to the crackhouse, and wonder why it's not renting?

      Talking with local  (especially elderly, as they often own their houses and have seen it all in the neighborhood, and have good stories!)  residents, and ask them where/why/who?  The other thing I look for is stability of the area-- are the jobs nearby, bus lines, etc?    We bought a duplex, and our realtor told us we'd get  around $400 per side... nope.. we fixed it up and now  get $675 per side... the quality of your rental will reflect the quality of your tenants.  

    Don't be afraid, but just know what you're getting yourself into.  Good luck!

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