Lower income neighborhoods and investment properties
Easton, MD · Member since 2017 · 8 posts · 2 votes
Justin, I'm down in Savannah currently doing the same thing! I'm moving my future wife and myself into a working class neighborhood in a duplex house hack, while also trying to get the seller to owner finance in a rougher neighborhood. People seem to be scared of it but because I've group wn up there I think I'm willing to take the risk. I'd love to hear about your experience and see if we can swap some tips and pointers.
I do have some of them, you can buy them cheap but what about manage them, if you do not feel safe driving on Saturday evening in that area, do not buy it
@Justin Pokrywka You should search the forums for some additional insight on $40K properties, low(er) rent neighborhoods, what goes into managing a property in a dicey area, etc. The financing part of the equation should be the LEAST of your concerns. Now if you started out thinking "This is what I want to do!" then great, have at it, you probably already know what you're in for. If this isn't what you thought of when the idea of REI popped into your mind...well...RUN. A lot of people look at low entry prices, 2%+ properties, that things will be easy with a $14K home because you carry no debt, etc.
At the very, very, VERY least ask yourself why someone hasn't paid $14K for that home yet...
Most investors are looking at more than that for a down payment so there must be more to the story on why it hasn't sold. And that "more to the story" is where the rubber, inevitably, meets the road...
I have a decent house in a bad section of town. i lived there for years without incident but as soon as i started renting it gave me nothing but grief. The only people that wanted to rent from me were the people that wanted to be in the neighborhood, not exactly the best of people really. I spend way more time and effort on this one house with repairs, evictions, no pay, etc than i do with my other two houses combined that are in better neighborhoods, one being very close by but worth nearly triple the price so i get better tenants.
Its not all bad, I have had a few good tenants but they don't stay long. Money wise i just about break even so its not a terrible investment but the added effort is something to consider.
Justin, You need to understand if you feel comfortable with it, then go for it, but if you don't then it'll give you nothing but problems and grief.
There are two times of cheap neighborhoods, the ones that are in the path of progress that will appreciate with time (Gentrify) and those that will just be cash cows and not increase in value.
I currently invest in both, the path of progress are great but you are betting on the actions of others, so while the pay off is potentially huge, it sometimes doesn't work out as planned. I own a beautiful victorian duplex that is on the edge of the ghetto, across the street from the site of the new police station... that was supposed to be completed in April of 2017... so while the property makes money, the appreciation is not there yet, and I have to wait for my little messed up city to come through with the plans it has already laid in place.
The second type of lower income are the cash flow areas. These areas are blue collar type or warzones. I would recommend buying in poor areas that still have a lot of "pride" in their neighborhood. I call these "grandma ghettos" cause grandma still lives there and doesn't tolerate any BS that goes on. Look for mowed lawns, trimmed hedges, and clean - if not a little old- cars. I find that providing a good product, with quick service when a maintenance request comes in and a sense of respect really goes far with these type of people. 20-30% cap rates with low stress are possible in these areas. I would stay away from lots of boarded up buildings, broken down cars everywhere, stray dogs running the streets and trash everywhere if you know the place isn't going to appreciate.
-Curtis
I always wonder what constitutes "low income" and war zones. Everyone's tolerance is so much different. Even our worst parts of town in my area seems like the "grandma ghetto" where you can buy a $45k 2/1 house and get $700/mo.
What kind of rent can you get on those 2/2's for 40k? How much do you need to put into them.
All I think when I hear Maryland is Baltimore and thats scary to someone who lives in an area that might see 2-3 murders a year for a 50k population in the 8-9 small towns in my area.
I wanted to see if anyone had had any experience with rentals in lower income neighborhoods. I've found 2, 2 bedroom, 1 bath duplexes going for 40k each in neighborhoods that would be considered lower income. I also found a 3 bedroom 1 bath for 14k, and there are a few other ones similar.
I know these investments are a whole different beast but as a new investor it could be a good way for I me to potentially pay cash from a HELOC for one or two of them and avoid having to get a mortgage.
Any advice or suggestions are welcome.
If you're trying to go lead free (and you'll want to since Baltimore has some extensive lead paint laws) then be careful of seemingly cheap properties. You can google street view the streets and see how many board ups are there - and if there are more than a couple you may have trouble finding tenants. What zip codes / neighborhoods are you looking in?
To add to this, there is money to be made in 'bad parts' of town, but it's crucial you become familiar with those areas before investing and go visit the properties. You typically looking at being all in at $65k - $75k and with section 8 you can get around $1500/mo for a 3/1.
All I think when I hear Maryland is Baltimore and thats scary to someone who lives in an area that might see 2-3 murders a year for a 50k population in the 8-9 small towns in my area.
I have relatives not too far from your location - down in and around Fort Dodge - and you're correct, the ghettos in Baltimore are quite different than those I've seen in IA.
Get familiar with the neighborhood.
If you found those deals with little effort, you can find real deals at half that price.
Their are a lot of homes for sale in those neighborhoods that do not have signs out. It is so hard to sell a home in those neighborhoods that people just do not even put signs out. Or they had a sign out for a year or 2 and just gave up.
There is so little commission on them that most Realtors do not take listings there.
I buy with no expectation of being able to sell the property, so appreciation is not even considered. You can stick $10,000 in improvements and the home's value my go up $500 - 1,000.
How long do I have to keep it rented till I have all my money out? This is the point you can give up without a loss.
If you make it work, there is money to be made.
I would not trust Google street views in these neighborhoods. These neighborhoods can change quickly.
I would not trust Google street views in these neighborhoods. These neighborhoods can change quickly.
True, but there are some places on the same streets with buildings literally falling down with no roof. If the time stamp is from this year and a property is listed for under $5K or $10k, then chances are the street view is more or less accurate.
I would not trust Google street views in these neighborhoods. These neighborhoods can change quickly.
True, but there are some places on the same streets with buildings literally falling down with no roof. If the time stamp is from this year and a property is listed for under $5K or $10k, then chances are the street view is more or less accurate.
I have seen, where the only thing good on a house was the street view.
Starting off with a dirt cheap house, IMO is like jumping on a motorcycle and figuring out how to ride for the first time... if you do great, you'll rock it and everything else will be easy!... if you fail, and a lot of people do because they underestimate it, it will be quick and financially painful.
It all depends on your business plan, and how bad the area is. IMO it's all about the area, is there any growth? Are there stable employers around it? If it's a war zone or D-, I personally wouldn't recommend it because of the lower rents, high competition and overall just bad vibes. If it's in a decent (C+-) area, that you can feel good about renting to a family, I say go for it. I will warn you, (our target houses are under $20K), those houses come with surprises, it's not cheap because it's a wonderful deal, it's cheap because it NEEDS A TON of work, and they know the price has to reflect the amount of work needed. I will say, those houses, you gotta know the streets, the reputation, and decide how nice you will make it to determine what type of tenants you'll get. Again-- all about business plans and strategy!
There's an area here, where I wouldn't touch it with a 10-ft pole, just b/c it's always on the news for crime, and there is an insane amount of rentals available-- b/c guess what-- no one wants to live there! Rentals are dirt cheap-- why would I want a place where I have to rent it dirt cheap to be competitive? It's all about business plan, IMO, and knowing what you're doing.. I personally wouldn't recommend it to start off with, unless you're really up for the challenge and know its' going to be $$$$ to fix up.
@Justin Pokrywka You should search the forums for some additional insight on $40K properties, low(er) rent neighborhoods, what goes into managing a property in a dicey area, etc. The financing part of the equation should be the LEAST of your concerns. Now if you started out thinking "This is what I want to do!" then great, have at it, you probably already know what you're in for. If this isn't what you thought of when the idea of REI popped into your mind...well...RUN. A lot of people look at low entry prices, 2%+ properties, that things will be easy with a $14K home because you carry no debt, etc.
At the very, very, VERY least ask yourself why someone hasn't paid $14K for that home yet...
Most investors are looking at more than that for a down payment so there must be more to the story on why it hasn't sold. And that "more to the story" is where the rubber, inevitably, meets the road...
I agree with Mr. Johnson on this matter up until suggesting you to ask yourself why someone hasn't paid 14k for that home yet. I think the hint is that it is a bad investment. One of the main reasons I have come across on why people aren't buying cheap properties in my area is that they don't have 14k and the money to rehab the property; they would rather put down 5k or 10k on home in a 100k neighborhood and make poor returns until their 30 year mortgage is up. Outside of a portfolio lender it is difficult to get financing on a property that needs some work with a low price point; now, after the work is completed, you can finance it by all means. Hopefully this 14k property you mention has a county appraisal of 40k-50k. People run from inner city neighborhoods because they don't understand them. Ghandi taught us to be the change we want to see in the world. Money put in an inner city property goes so much further. I'll call it like it is, there are some racial fears that come into play too. This goes both ways too which favors the investor, many people in these inner city neighborhoods don't want to move to the suburbs, they want to be around their family and friends, people that are like them. These neighborhoods have a history. I am not suggesting to buy a home around several vacant houses unless you are going to buy the whole block and change the neighborhood, but buy on the fringe (corner lot maybe or by a major street or highway). I bought a home for 18k in a low class area this year and it's been a cash cow, I did go with Section 8 and I would suggest doing that (In my area I get above market rent even because there is such demand for affordable housing). I would never buy in an A or a B neighborhood because I am looking for cash flow. I hope people keep looking over these 14k properties because I'll buy them one by one. Salmon swim upstream.
@Jonathan R. I'm with you for the most part. My thesis is that if you have a $14K property that's sat on the market then there's a reason. I'd imagine that in every market that there are investors like you, people that pick up these properties, rehab them, and turn them into little cash-cows. Even in a rural (non-metro) area you can throw a rock and hit a few people with $14K to spare. And with a cash-deal it's not like you worry about DTI, credit scores, etc. In all reality you could just buy the thing with a credit card. Consequently, if experienced investors (with a playbook around these low-dollar properties) pass on these deals I would never want to jump into them. If all of those salmon swimming upstream haven't taken that $14K bait, I'd keep swimming!
And, you’re right that there is bias. My bias for new investors is to start with a C+/B- area if at all possible. Learn what it’s like to manage a property, get a sense of the maintenance cadence, dealing with tenants, marketing a vacancy, etc. before jumping into a $14K warzone (or warzone adjacent) property.
@Justin Pokrywka my advice, from my experience in this demographic, is that it is a LOT of work. Don't underestimate that one bit.
Imagine that you are starting a business and it's head office will be at this property. You won't be there quite that often, but it might feel like it some months. Thinking this way will also engender some honesty about how you feel about the neighborhood and your comfort level there. "Am I willing to go to 'my office' at any hour of the day - or night - to work on my business?"
You will manage your physical plant (the property itself) and also the Human Resources (the tenants). Could you manage a department at a company whose workers were of this demographic? They'll throw a lot at you: excuses for non-payment, snitching on "#4" (yes, my tenants only referred to each other by apartment number, never by name), why they need this or that. I'm not part of the sect of BP that seems to believe tenants are subhumans who exist to poop out money for the landlord or else crawl off to rot and die elsewhere, but you will have to set rules and stick to them steadfastly. You're the manager; you get to set the rules.
I enjoyed managing our low-income, working-class apartments. We made a lot of money. We left a lot of money on the table in unpaid rent, but made out just fine. We evicted people. We pulled evictions when people shaped up. We called the cops on unwanted guests when the tenant was too intimidated to, and then stuck around so the creep would know there were people who had "her back." We learned who to turn away, even when we were desperate for tenants in the beginning. We supported the local homeless shelter and sought out as tenants people who had been through the shelter's "get on your feet"-type program. We helped people with their addictions to the small extent we could, because to some of them, we were the only human constant in their life.
It was an enormous investment of time and energy, and we sold when I simply couldn't make the time for it among the many other things in our lives. I personally found it to be humbling and rewarding, but there are many ways to achieve that in life that don't require managing such a property.
Love this @Dan Schwartz. I expect to write a similar bio in 5-10 years.
I'm a new investor as well, but there are people cash flowing over 50k a month with lower cost rentals. In Baltimore there is a lot of the low cost housing stock. It is a niche that you have to feel comfortable playing in, but can be profitable if done right.
I'd recommend reaching out to some PM companies around you and see if they manage there. If no one manages there, then you shouldn't either.