Renting in a bad neighborhood

8 Replies

The market in our city, Reading, PA, is great to buy a 'great deal'.   There is an abundant properties available for cheap, and the rent is high.   The school district isn't so great and neither is the neighborhood.   Some streets are better than others.   Does anyone have experience renting in a not so good neighborhood and have any tips or advice?

I do.  I had a couple rentals in South Phoenix near the airport - which isn't exactly known as being a great area.  Terrible schools.

There are, of course, pros and cons to this. 

PROS:

- Decent rent to purchase price ratio

- While I definitely took care of my properties, the tenants were less picky about little appearance things (i.e. - one house was painted pink by the previous owner, paint was good, I never redid it.  Or counters were laminate, a couple floor tiles had chips, one house had no dishwasher).

- Usually the neighbors were nice and would look out for the house while vacant, they just wanted decent people to move in next to them and would often refer friends as potential renters (this can also be a negative).

- At least in my market, easy to sell if you decide you want out.  The buyer pool for a nicer, lower-income level home is big and the homes sell quickly if priced fair.

CONS:

- Usually hard to find a qualified tenant.  Everyone has a sob story, you have to have thick skin and realize it's a business for you, even if it means evicting someone you really believe is on hard times.

- I often had to get creative with structuring move in as I rarely had an applicant that could afford deposit AND first months rent all at once.

- Potential vandalism is higher, especially when vacant.

- Higher turnover.  I found when I did get good tenants, they usually liked the house, but didn't want to stay in the neighborhood.  It was a definite stepping stone.

- Tenants are less sophisticated - don't expect that they will ever remember anything from their lease, including where to send payment.  Most paid by money order as they don't have checking accounts and could not pay online.

- Tenants will often NOT tell you if something breaks, for fear they will be charged or what not and will either let it be or try to fix it themselves.  Doing inspections is important!

I am sure I overlooked lots of things, this is what came to mind right away.

End of story - I sold mine in the lower income areas.  I did my own property management, and with other things in my life I didn't have the time to dedicate to filling vacancies or telling tenants every month what the payment address was.  I was able to sell for decent appreciation, so it was a reasonable exit strategy for me at the time vs hiring an outside PM.

I have lived in some tough neighborhoods in my day.  As far as the school district often people will use the money they save in taxes/rent to pay for the kids to go to a private school.  Not sure if your situation allows that.

Also check out spotcrime.com?  Shows you recent crimes on a map so you can get an idea of where the "hot" areas are.  The difference between a "safe" and "unsafe" area can be as little as a single block so this can help you pinpoint whats going on in your exact location.

Lastly I would encourage you to give the local police precinct a call and ask them about the neighborhood.  Understand they won't likely be able to answer a question like "is this a good neighborhood" (although they may answer it anyway) but they will be able to give you an idea of whats going on locally.

And second lastly I would say don't make the mistake of trading safety for a good deal.  I was living with my sister at one point in a tough neighbor hood and while I was fine walking on the street day to day she did not feel comfortable and in the end she left because she just couldn't take it anymore.  Peace of mind is worth a lot more to some people than saving.  

Good luck! 

We have 2 SFRs in what I would consider a bad neighborhood by my standards - as in, I wouldn't live there but haven't been afraid to go there over the last 8 years...in daylight ;)

As @Deborah Smith  has pointed out, the cons in these kinds of rentals can be a real test. We had the copper pipes stolen during a vacancy, and when these kinds of tenants run into financial trouble, they almost never have the resources to ride it out; hence, be prepared for evictions despite the sob stories. It can take quite a while to find a qualified tenant.

As Deborah said, they will often try to fix things themselves, or not tell us until it becomes a bigger problem. When they leave, by choice or by eviction, the houses usually need a few thousand dollars in rehab, even though the tenants may not have deliberately destroyed the property. They are simply harder on these homes. We have accepted that this will occur, and stopped frequent inspections, knowing we will need to spend money to renovate when they leave anyway. It's not worth aggravating ourselves or the tenants. As long as they pay the rent and the water/sewer bill, and call us when there's a real problem, we leave them be. We never raise the rent while a tenant is in residence. A turnover is far more costly than lower-than-market rent.

We stopped investing in this area after our first 2 rental properties, and have focused on solid middle-class areas.

Aly NA Sounds like we had similar experiences - stopped at 2 and invested elsewhere!

I probably would have kept my rentals there as the cash flow was good, but I had lots of significant life changes at the time I had a vacancy, and was having issues with another tenant.  I did attempt outsourcing the filling of the vacancy and to say I was disappointed would be a huge understatement.

To sum up my thoughts, I think the areas that aren't great but aren't scary (war zone) are a good place to start and build some experience/cash and then explore elsewhere if it isn't your cup of tea.  And if it is, then good on you :)

Exactly! The monthly cash flow is good, but we take a hit when a tenant moves out. The empty property is a target and that causes a lot of anxiety; simply not worth the cash flow as far as further investing. Property values are slowly recovering, much more slowly than our other rentals out of state, so we hope the tenancies stay stable long enough to eventually sell and not lose money.

I would consider outsourcing the vacancies too, but haven't heard anything good about that either! I'm sure you're sleeping better at night now ;)

I have a simple rule , if I wouldnt live in the neighborhood , I wont buy it .   Why ?  Part of my back up plan , if things go really bad is I could move into one of my paid for rentals.  I also buy in areas that will appreciate ,  I pay more , but it works for me .  The low income areas dont do anything for me

I rent in "tough" neighborhoods. To some of you they might be tough but for me who grew up in similar neighborhoods I understand how to screen the tenants, and have a certain amount of street smarts.  The cash on cash are very good and usually there isn't as much competition.

Its a niche like anything else, and like any niche you better know your product. Either you or your management need to have a good feel for it. Its more of a job so you are essential trading more time for better returns {potentially} 

I intentionally invest in a low income neighborhood.  I recommend you find and read the book Section 8 Bible.  Don't do anything above the bare minimum.  Don't replace closet doors.  Avoid carpet or avoid pets; they don't mix.  If a tenant paints a room a funky color, leave it that way and market it that way; low income folks love funky.  Focus on cash flow, you won't see appreciation.  Buy on the better streets, look for streets with a higher portion of owner occupied vs rentals.  Be prepared to have a lot of entertaining stories to share at parties.

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