I am a new investor so this may seem like common sense to some but.. I am thinking of buying a multi family in a relatively low income city. I have heard mostly horror stories from a few investors about bad tenants etc. But I have also heard about a couple of really successful investors in the same city. One of the owns about 50 units and couldn't be happier. Why do some run to these areas to invest while others avoid them like the plague? What are the key factors to look for? Is it all about tenant screening and laying a solid foundation of tenant/landlord expectations.
People run to low income because of the high cash flow and run from them because of the high energy drain. You need a great property manager or a lot of personal time. Tenant proof the units, have solid screening, and good luck setting expectations!
@Michele Fischer how does one tenant proof the unit? I'm looking at low income units too
@Jennifer Fernéz There are some other threads here, somewhere, where folks go in to detail on what they do. I purchased a duplex in a low income area last year and I did things like extra coats of poly on the hardwood floors, reinforcing the towel bars, shower curtain rods, and toilet paper holders, replacing destroyed vinyl flooring with real tile, replacing stove surround paneling with tile, etcetera. My goal was to touch these repairs once and keep them from being a problem in the future. We don't furnish with the most expensive fixtures, but we do choose things like metal faucets over plastic with the hope that it will last a long time.
Paul is giving you great advice @Jennifer Fernéz . The Section 8 Bible is a good read. If you will allow pets, don't waste money on carpet. Our main learning was not upgrading things to our standards, because they will not be cared for at our standards. We buy the cheapest option of everything and replace it over and over and over again. Dishwashers, ceiling fans, garbage disposals, and even closet doors are money losers.
If it isn't there, it cant be destroyed. Think "really nice cages"
Expect the unexpected when dealing with and investing in low income city/neighborhoods.. Nothing surprises me anymore... @Michele Fischer is right on when she stated "not upgrading things to our standards, because they will not be cared for at our standards." Go with commercial tile whenever possible, only carpet bedrooms if you have to never carpet high traffic areas, you do not need top of the line anything in these properties because you will end up spending more money replacing them.
If you are not from these areas or if you don't have a great property manager on the ground in these low income areas of investing then you are setting yourself up for failure. These are just my opinions and I may be wrong just going with my 10 plus years of experience in investing, and also growing up/living in these same areas.
Good Luck investing
I'd say that some factors are:
- Tenant Screening
- Realistic projections/expectations of maintenance/expenses (VACANCY/TURNOVER) UP FRONT
- Keeping the units more desirable than the competition (Basically keep them nice)
- Charging the right amounts for rent (slightly under market)
- Keeping solid Reserves for emergencies (Not spreading yourself too thin, keeping a budget, saving cash flow rather than spending it all)
I have properties in a low-income town. And the property prices are low as well. I have good and bad in this town. The ones that are bad - it's largely because I over-paid for them. If I would have bought them for much less, they would cash-flow well.
Also, the good properties are small step up in quality from the bad ones.
Take an extreme example as an illustration. Say for example that you could buy a really crappy property in a bad area in a low-income town for $10. Maybe this piece of crap rents out for $200 per month. With it being so crappy, the vacancy rate is a whopping 50%. But you have a renter standing in front of you ready and willing to sign a long-term lease with you, and he has the first-months rent and security deposit in cash. So, $400 staring you in the face, and you can buy this thing for $10? Go for it. That's an extreme example, but I just use it as an illustration to show that your purchase price is the key.
Low income can be good if you know what you're doing or you can lose a ton of money if you do it wrong. I wouldn't start there.
I do a mix of low income, middle class and a little bit of higher end rentals. Low end ones you REALLY need to be good at screening and that means not just looking at a credit report and background check. You really need to learn how to research your tenants and what to look for. I often have people show up with cash in their hand trying to give it to me rather than filling out the application, these people are generally being evicted from their current place. You can easily end up with thousands and thousands of dollars in damages, huge vacancy losses and a lot of uncollected rent. About half of my properties are in "low income areas" and I do very well with them but it took me years to get it fine tuned. At first I was spending too much time trying to chase down rent, I was accepting tenants that I probably shouldn't have, and I was spending too much on repairs.
I invest in low income areas, but am careful to avoid the part of town that is known for crime. Get to know your target market. Talk to the locals and see where they say the good and bad parts of town are. The goal should be to avoid neighborhoods where your plumbing or furnace is likely to be stolen.
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