Rental Property Investor · San Diego, CA · Member since 2022 · 40 posts · 26 votes
Hi Folks,
I've heard investing in the inner city and low income/high crime areas is horrible, but I'm here to ask either how you've made it work to be successful, or exactly what kind of nightmare you've had?
I've been considering trying to BRRRR in the inner city in several cities in the Midwest (KCM, STL, MKE, CLE) and I live out of state. I've spoken to many local very experienced and saavy agents/PMs who caution against it due to to the amount of headache involved with low income areas and the crime, dangers and risk that come along with it. Specifically that good PMs will refuse to manage rentals in the inner city, and contractors will refuse to bid your job.
While this is excellent and sound advice, can anyone share if this has happened to you or you've found a way around it, and offer any additional reasons/showstoppers that make this a bad strategy - or offer how investing in low income areas have been a home run for you?
If I were willing to give it a shot anyways and learn from experience, I'm wondering what other huge negatives there may be that I haven't discovered thus far and how likely I'd be to recover from my mistakes. Clearly I'm pretty risk tolerant and hoping I can make it pay off - posting here to gain your collective wisdom!
Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
4y
Hey, James. I've split my 4 unit portfolio between 2 low-income long-term rentals in Detroit and 2 high-en STRs in Vermont.
All in all, I have been happy with my 2x long-terms in Detroit, but the headaches are real and definitely eat into your cashflow. The key thing to consider is that your projected returns in your pro forma are always going to be too high for low-income, so while it seems like you're getting great returns for low cost to acquire, they never net out so well because of high repairs and maintenance and lost rent.
In one property, I bought it vacant and put brand new builder-grade everything in it. This place was by no means fancy, but was on the nicer-end of what most tenants are used to in the area. I was able to get a Section 8 tenant in there who has never missed her portion of the rent, but once a month, my PM has to go in there to repair something for at least $85. Things are always breaking there because she and her family are just harder on the house than a B-Class tenant would be. I put a brand new range/oven in there right before she moved in, and I walked the property 10 months into her lease. The oven door was split down the middle like she peeled the outer door away from the inner door. How does that even happen? I had to replace it because it's a safety hazard, and she agreed to pay for it incrementally over time, but it's going to take me 3 years to recoup that cost. A fugitive ran through her backyard and while nothing happened, she asked for a flood light to be installed; a reasonable request, which I did at ~$300. The rent at the time of both of these was $850, so all in, those two things were well over 1 month's rent.
My other Detroit property, my tenant just stopped paying and stopped returning calls and messages from the PM. We took her to court and she didnt show up. The case got postponed by the judge for 3 months. Then one day, she just up-and-left in the dead of night without a word. The ironic part was that she would have qualified for Section 8 and we would have done all the paperwork for her, but nope, she'd rather just not pay anything and not get the State to cover it for her. I lost 8 months of rent before she left. Now I am renovating for 7 weeks. I will have ultimately lost about 10 months of rent with little recourse.
Net-net, these properties have appreciated a ton and when my new tenant is in, I will be grossing $2250/month total for the two, but dang. Not a day goes by I dont wonder if I'd prefer half the net income for friendly nice tenants that pay on time, and dont rip the oven door like a tin of sardines...
Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
4y
Hey, James. I've split my 4 unit portfolio between 2 low-income long-term rentals in Detroit and 2 high-en STRs in Vermont.
All in all, I have been happy with my 2x long-terms in Detroit, but the headaches are real and definitely eat into your cashflow. The key thing to consider is that your projected returns in your pro forma are always going to be too high for low-income, so while it seems like you're getting great returns for low cost to acquire, they never net out so well because of high repairs and maintenance and lost rent.
In one property, I bought it vacant and put brand new builder-grade everything in it. This place was by no means fancy, but was on the nicer-end of what most tenants are used to in the area. I was able to get a Section 8 tenant in there who has never missed her portion of the rent, but once a month, my PM has to go in there to repair something for at least $85. Things are always breaking there because she and her family are just harder on the house than a B-Class tenant would be. I put a brand new range/oven in there right before she moved in, and I walked the property 10 months into her lease. The oven door was split down the middle like she peeled the outer door away from the inner door. How does that even happen? I had to replace it because it's a safety hazard, and she agreed to pay for it incrementally over time, but it's going to take me 3 years to recoup that cost. A fugitive ran through her backyard and while nothing happened, she asked for a flood light to be installed; a reasonable request, which I did at ~$300. The rent at the time of both of these was $850, so all in, those two things were well over 1 month's rent.
My other Detroit property, my tenant just stopped paying and stopped returning calls and messages from the PM. We took her to court and she didnt show up. The case got postponed by the judge for 3 months. Then one day, she just up-and-left in the dead of night without a word. The ironic part was that she would have qualified for Section 8 and we would have done all the paperwork for her, but nope, she'd rather just not pay anything and not get the State to cover it for her. I lost 8 months of rent before she left. Now I am renovating for 7 weeks. I will have ultimately lost about 10 months of rent with little recourse.
Net-net, these properties have appreciated a ton and when my new tenant is in, I will be grossing $2250/month total for the two, but dang. Not a day goes by I dont wonder if I'd prefer half the net income for friendly nice tenants that pay on time, and dont rip the oven door like a tin of sardines...
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
4y
I just sold my rentals in Akron's second poorest neighborhood. I had good tenants in that building that paid their rent (though not always on time); three of the tenants ended up with masters degrees before they moved. I made money every month that I owned those rentals but I worked for it. If you don't want to churn your units, you will need to extend credit to people who have NO other access to credit. You will need to be able to figure out who will pay you back and who won't pay you back and avoid renting to people who won't pay you back-- it's easier said than successfully done. CLE has the same type of 100 year old money pits that Akron has-- I like gravity furnaces, they are inefficient af but they don't have hardly any parts to break, galvanized plumbing supply lines are a nightmare, cast iron stacks will be at the end of their useful life. Find a good plumbing company-- your going to need them. FYI: Some counties have programs to pay for lead paint remediation. When tenants complain, appreciate it and listen very carefully to what they say-- multiple tenants complaining about excess traffic means you have a drug dealer and you'll need to get them out asap before you have a shooting in your building. (we had good luck just asking drug dealers to move and offering to return their security for leaving the place clean.) Litter and dumping. is. a. constant. problem in the 'hood. Make sure all your tenants know where their breaker box is in the basement because if they run a vacuum and microwave at the same time they will earn themselves a trip to the basement to flip the breaker. Find a reasonable pest control company and put them on speed dial. You'll have to remediate if someone gets bedbugs; your tenants wont be able to afford it no matter what your lease says. It's always a trip and kind of sad marketing these units because you hear so many sad, sad stories. I had one bank robber apply; Now everytime I get a bad tenant I say, I should have rented to the bank robber. I wouldn't do it again (because I can now afford to buy easier properties) and I *really* wouldn't do it if I had to rely on a property manager. Would not recommend for long distance investing. (I had no evictions in the almost 6 years that I owned the buidlings and when I sold I forgave a total of $170 in debts owed by four of eight tenants.)
Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
4y
So much of our urban core has really redeveloped that it’s hard to call it inner city. But let’s say, we are discussing C class and worse. There are less Pm companies willing and perhaps less who are skilled in such areas.
One other risk might be that people willing to live in that area could be settling in a sense. More likely to have transition / turnover. That of course depends on other factors.
i will say, I’m bullish on areas of urban re-development as I’ve personally witnessed the power of appreciation in my own investing and that of my colleagues and clients. It has the potential to run laps around more suburban type appreciation (admittedly that’s more historical, and recently in this market that’s skewed). There is power in redefining an area and the potential for anchor developments to literally redefine that area. Something that you don’t see as much in suburban or rural settings. It’s my own version of what David Green talks about lately with appreciation not just cash flow.
We think the Midwest is a GREAT place for OOS investors to consider!
YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/...
Your biggest question shouldn't be WHERE to invest, but HOW you will invest!
Many OOS investors set themselves up for failure because they don't truly take the time to understand:
1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.
2) The Class of the PROPERTY they are buying - which is relative to the overall area.
3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.
4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.
5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.
6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.
7) That OOS property Class rankings are often different than the Class ranking of the local market they live.
8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.
9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.
10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.
11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
My first thought is: there has to be an easier way to make money. The only thing that would drive most investors to the inner city is the fact that you can buy more properties for less $$. So if that is your motive, then go for it, but be careful with your screening. Otherwise, move up a couple levels and make the easy money (well, easier anyway)
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
And bear in mind that to get a good Contractor to go work on your properties, you will have to pay a premium. I used to upcharge about 20% to work in dangerous areas.....every time you go out to the trucks, you have to lock and unlock everything...every time. Extra jobsite security like fencing and locks. PITA.
Sheboygan, WI · Member since 2012 · 10 posts · 11 votes
4y
I live about an hour north of Milwaukee, I would pass on that city. The shootings are at a record high this year along with stolen cars/car jackings. Milwaukee sadly is turning into a mini Chicago. :(
Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
4y
@James Brewer we insure thousands of units throughout the country for OOS investors. When it comes to inner city properties, you have to have a strong team on the ground to make it work. If they are slow to act, that eats up all of your cashflow. If they are REALLY slow to act, your most likely losing $.
We also insure a lot of higher end properties, and from what I can see, you can have subpar management and still have a successful investment.
Rental Property Investor · San Diego, CA · Member since 2022 · 40 posts · 26 votes
4y
@Brian Kantor Thanks for sharing your story! I'm glad to hear your properties in Detroit have done relatively well and I appreciate you mentioning I should pad the numbers to account for more lost rent, more repairs, etc. Thanks for sharing your stories!!
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
4y
@James Brewer do you own any rentals already? Trying for an out of state BRRRR comes with many different risks... and as you basically stated, buying in a tough area is just going to make a hard process even harder.
Have you listened to Spencer Cornelia's BP podcasts? Great case study of how things can go.
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
4y
It can be really bad. D class can be bought 50, put in 40, and then sold 12 Months later for 35. Happens all the time. C class is the lowest I’d say for non locals.
The main issue D class areas only attract D class renters. Nurses and doctors don’t move into these neighborhoods regardless of how HGTV it looks. (As Clayton use to say) Really hard to manage and really hard to move in someone who will pay their rent on time and respect the property. Crime and rough tenants are no joke. They don’t give a rip about your spreadsheet.
@James Brewer do you own any rentals already? Trying for an out of state BRRRR comes with many different risks... and as you basically stated, buying in a tough area is just going to make a hard process even harder.
Have you listened to Spencer Cornelia's BP podcasts? Great case study of how things can go.
Thanks @Nicholas L. I'll take a look at that podcast!!
How exactly do you distinguish between a C and D class neighborhood, especially when looking online? Higher crime seems to be the entire inner city, so perhaps it's just the locals who can classify it best? Opinions can vary so that's tough to judge.
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
You want to talk to @James Wise here. This guy can tell you some serious horror stories about the Cleveland area. There's a lot of money to be made in C class and below housing, but as @Jill F. said you are going to work for it.
I grew up in one of these areas and I can't imagine what it would have been like to own the properties. In the apartment building I lived in, the super lived in the basement so the owner at least had someone on-site to deal with the constant issues. I remember two fire-escape break-ins in our apartment (we lived on the 4th floor), roach and rat infestations, and lots of the general chaos that goes on between neighbors of low socioeconomic strata. And I was in a better building; mine was luxury apartments when it was built in the late 19th century (I lived on Park Avenue!) with a massive lobby, inlaid tile, turned staircase, etc. We were just 8 apartments, 2 on each floor, 4 floors. The buildings behind mine were federal projects that were 7 or 8 floors and maybe 4 times the number of tenants in each building. Those kept the cops busy.
To answer your question on how do you determine the housing class and expected tenants? It's nuanced at that point and you really need experienced local people on the ground to steer you right. You generally don't go into anything less than C without a gun or posse of people around you. Talk to the local police precinct people in the areas you want to invest and you'll find out pretty fast where they won't go without backup (or at all).
How exactly do you distinguish between a C and D class neighborhood, especially when looking online? Higher crime seems to be the entire inner city, so perhaps it's just the locals who can classify it best? Opinions can vary so that's tough to judge.
Hi James,
C areas are showing their wear--the working poor and Section 8, some crime, drugs, breaking and entering, DUI, robbery, etc...
D areas may be nice all the way to really run down, some working poor, some section 8, some (heavier) crime/drugs, murder, rapes, car jackings, etc...
It's the Danger that makes a D.
If you are "concerned/worried about driving the area-- just call that area a D.
It's a judgement call.
A fish knows his own pond best (who and where to avoid on a micro scale) and some people are loads tougher than others, making a D a good fit for them.
But for the more mild mannered ones, even a C might be to much.
As someone who has properties B to D-/warzone, let me just warn you-- stereotypes exist because of some(most) of the time they are true. Only locals know what's really going on.
Buying/fixing a property in a "D" area is literately opening pandoras box. It's going to start with the renovation, slumlords don't do anything correctly, they do shady patches. I've seen A FREAKING UMBRELLA ON A ROOF BEFORE! This will likely be your first shock when your renovation budget gets thrown out the window completely. Forget the tenants-- the renovation is the part most people don't talk about. The houses you will buy are the ones everyone has likely trashed, contractors have broken in and stolen stuff, maybe copper pipes missing, maybe electrical stuff, definitely HVAC will be stolen, local gangs will break in and grafiti the wall There is a one vacant house, we swear is the John motel, where people just normally break in, use it for an hour and leave.. you might be buying that house? Neighbors watch, and if they see all brand new stuff being put in-- guess what, they see your contractors leave and if they can quickly steal it, they will.. it's just people being "opportunistic" in their eyes..... Different culture, you can't be naive. Your $2K in appliances may quickly jump to $4K if someone steals them and need to be replaced. If stuff works at first, when it breaks or there are issues-- you should expect the contractor to recommend a huge pair to be done, not because they are just trying to maximize $$, but because it was likely done wrong in the first place.
If you fix up a place, make it a nice, decent place-- section 8 or some type of a program will be your best bet. There are a lot of people retiring that are on a fixed income that may be okay with a rougher area. Can you be successful? Absolutely, and neighborhoods can turn around for the better. You can find good, hardworking people who are willing to live in D areas if the place is decent and rent is cheap, you won't get a premium though unless it's section 8. Everyone needs a home!
I say 90-95% of my tenants are great, .. I have wonderful, hardworking tenants, early paying, take great care of my homes, easy to work with, I am so appreciative of them.. (yes, they live in the inner city!). most of them, the problem and stress come from the cheapest/D- areas, it just does.. it makes no logical sense, but it is what it is---just did an eviction for a house (d--/roughest street IMO, just a shooting there 2 weeks ago) I got for $10K that we were renting for $525.. guess what we got-- busted window, stolen oven, nasty, $500 trash removal, he was on SSI.. thought he would be there forever and appreciate a cheap house.. nope. I'm salty, but that's what investing in bad areas makes you!
It's not going to be a smooth ride, and you will be unpleasantly surprised by how expensive that "cheap" house can turn into. You don't just need thick skin, you need leather-like skin to handle it. Only you know what you can and can't handle, but I hope you pursue it! The people that can handle it, make a LOT of money! Definitely not for everyone!!
Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
4y
Long distance investing in D-F in my opinion not a good idea, possibly a better idea if you live in the same city and can have more of a hands on approach. I actually have an investor friend who lives and invests in the same neighborhood and he does amazingly well because he is known and respected in the community and knows exactly how it handle any issues himself. For me it's a definite no at this point, however I would passively invest with my friend as I believe in him and trust what he's doing.
Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes
4y
I've been showing houses in worst of the worst areas of Cleveland for coming up on 2 years and I've only ever heard gunshots once. There are no areas that I don't feel safe driving through. However, just cause I've shown houses, or taken pictures for an investor in D area doesn't mean I am going to recommend it. It is absolutely not for everyone. The tenants are going to be worse, turnover costs will be higher, evictions will be more time consuming and more common, the list goes on. But there are very few areas of America now that you can spend 40k and get much more than a grass plot. For 40k in neighborhoods of Cleveland, you can get a house that brings in $1000+ in rent. I highly advise that if you plan on investing in hard areas that you always expect worse than the worst case scenario, only buy GREAT deals not okay ones, and have an exceptional team to run the operation. Best of luck to you!
South Holland, IL · Member since 2017 · 374 posts · 432 votes
4y
@James Brewer
I’ve owned such properties for 21 years now. And I would not recommend them for out of state investors. It takes a nuanced 6th sense or flat out experience to pick and choose the best of the worst in tenant pools. Lower end properties are in my opinion where investors earn their stripes. If you can successfully manage these tenants, EVERY other property class is a breeze. But it takes a toll on you mentally unless you’re a glutton for punishment. The returns are great and lately also appreciation which is my cue to exit stage left. A younger more patient investor can buy my properties and start “Basic Training” all over again. I’m moving on to greener pastures - B Class.
