Rentals in rough neighborhood

13 Replies

I am new to the REI industry but I have educated myself with as much as I can possibly to at least get me to my first deal. Me and my partner have a few properties that we are in the negotiation phase with. We don't feel as though these properties would work for fix and flip investors mainly because of the area but we are thinking of negotiating seller finance and putting about 3k into repairs and using them as rentals. Our monthly cash flow looks to be about $275 for the first 6 years or less time and then we are looking at $475/monthly cash flow. Any ideas or suggestions

What happens at 6 years that boosts your cash flow  $200/month?

Maybe I don’t understand ..What is your question specifically about ?

After 2 years the loan will be paid and I will own the home free and clear.

Not so much a question as me wanting any past experiences with rentals in a rough area.

Turnover rates are higher, chasing money can be the norm, units are usually turned back in rougher condition, vandalism, etc, etc. Get very familiar with the eviction process in your market and follow things to the letter and quickly.

Make sure to vet tenants thoroughly and pick wisely (and even then it is a gamble). 

But these properties can be profitable and if you keep the properties up you will be able to secure better and better tenants over time.

In a sentence

As an investor You have to be as savage as the people who live in these areas

@Arreanna Cromartie ,

First you have to determine if it's a "rough" neighborhood or a working class neighborhood. Is it a place where people are making very little money and have none left over, or is it a place where there are open air drug deals during the day and cars broken into every night?  There is a difference.

Next, if you decide to buy and manage there, SCREENING is your highest priority.  Do not be in a rush to sign a tenant.  Make sure the tenant you end up signing is as good as you can possibly get.  Screen properly, and you will have very few problems with the tenant.  Screen poorly, and you can have many problems.

In C/D areas you must treat your tenants like children...bad children.

By the 2 year mark if your property is paid off your cash flow will be reduced to almost zero due to the rent being eaten by paying for the opportunity value of your equity. Your highest cash flow is today and it will only be reduced as your equity grows. ROI diminishes with time.

If you value cash you would never allow it to sit as dead equity.

@Thomas S. is completely correct for some landlords. Some landlords do not have the skill set necessary to succeed in C neighborhoods. Fortunately, REI is an expansive and varied playing field and there are many ways for many different types of investors to be successful.

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War zones and working class neighborhoods are not always synonymous. I'm moving into a lower income neighborhood where there are corner stores in between houses and folks sitting on their stoop during working hours, and the crime is lower there than the city I live in with 500K homes and horse farms. There are good tenants and nightmare tenants in all neighborhood classes. Screening is key. Stay away from drug and gang infested communities, and wait patiently for the right tenant.

@Thomas S. Definitely some higher level thinking there, but equating cash flow and opportunity value of equity would have to be at the discretion of the investor. We all have different goals and aspirations. Maybe to get as much cash flow as possible to pay for our daily living expenses is what this person wants. Return on Equity is always a great barometer to watch and to see if that equity could get better returns leveraged somewhere else, if that person is willing to accept the risk associated with it. Thanks for sharing!

Originally posted by @Thomas S. :

In C/D areas you must treat your tenants like children...bad children.

By the 2 year mark if your property is paid off your cash flow will be reduced to almost zero due to the rent being eaten by paying for the opportunity value of your equity. Your highest cash flow is today and it will only be reduced as your equity grows. ROI diminishes with time.

If you value cash you would never allow it to sit as dead equity.

Thomas, I am also new here and was wondering if you could expand a bit on your comment above. I am not really grasping how your cash flow will be going down as the equity goes up (if I am interpreting that correctly?). Also, what do you mean by "dead equity." Thank you, any help is much appreciated.

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