Are your rentals typically in "bad" areas?

Question

Looking at the SoCal prices, it seems most areas are very far from being able to offer rent / price ratios that would satisfy the 2% and 50% rules. In my complex (Newport Beach), a $700K townhouse typically rents for $2700-$2900 and you have $350 in HOA. You would have to the house for less than I paid in '99 to have positive cash flow. In Palm Springs, Palm Desert, it looks like you could possibly come closer to the 2% and 50%, but still not quite. However, in "less desirable" neighborhoods (I'm looking at Desert Hot Springs and Indio), it seems you can come much closer. Prices are lower (some rehab typically needed), but rents aren't that much lower.

Do you find that low income neighborhoods make for better rental investments?

Thanks!

Do you find that low income neighborhoods make for better rental investments?

Thanks!

Harrison Painter · Answer

Our philosophy is to only buy and sell single family homes in areas that we would feel safe to live in ourselves.

I am a little spoiled in our home market of Indianapolis, as there are plenty of good cash flow investments located in safe blue collar demographics.

In Atlanta, my partner for that market actually lives in the neighborhoods that we buy and sell in. The crime rate is higher, but we are seeing so much pride and improvement in these areas! It is a great opportunity!

The Tampa/St Pete and Orlando markets have been flat for us. I am seeing desperate investors driving the rental rates down to unprofitable levels in all the demographics. Properties are based in more suburban markets here, and they have been purchased correctly. I feel really good about our long term position, but it is going to be a longer and more difficult ride than we anticipated.

Cape San Blas/Port St. Joe, FL has been dismal for the short term. For those of you unfamiliar with this area, it is an upscale vacation rental market in the panhandle. The economy is really taking its toll here, as tourism is down. You can get a phenomenal deal on a Gulf Front home right now, but you will need to be able to have enough reserves to hold a very negative cash flow position. It is paradise, and a great long term hold if you can afford it.

Timothy W. · Answer

I wouldn't buy a rental in any place I wasn't willing to live in.  Then again, I was the guy the insurance company sent to investigate vacant, vandalized houses in Chicago's ghetto so I've been desensitized to the fear of "bad" areas.  Plus I carry 24/7 as a habit.
            
            I buy in the "good" parts of "bad" areas.  I get the price point I want and the truth is that the "bad" areas are filled with decent, honest, low-income people who are waiting for the chance to move to a nicer part of the bad area.  The gov. assistance check too is nice.

Mark N.A · Answer

The rentals I have in 'bad areas' typically cash flow much better.  Of course, the additional hassles (collecting rent, evictions, turnover, etc.) are higher.

Interestingly, they seem to rent quicker from just a yard sign.

Selling them may be a different matter.  I've had one two-family apartment on the market for several months without one single showing.

Luckily for me, the tenants are great and their government assistance check comes in like clockwork.

Brandon Schlichter · Answer

Not typicaly, as others have said, the worse the area, the better the potential cashflow.

I have a rental in a "Better" Area than one I currently live in, so some areas can be good for cashflow.

There's a subdivision outside of my town that is becoming retiree heaven, and TONS of investors own properties there, due to the fact at one time they were built as low income housing.

Robert Granara · Answer

in eastern mass the only areas that will cash flow are in the tougher cities with higher crime...i find that cities have nicer parts and thats where i focus bc tenants will seek out those better streets/areas...
in these tough cities my strategy is to rent soley to section 8 tenants in these areas bc the section 8 rents are more than market rents and these tenants tend to stay much much longer...i have never missed  section 8 rent in 5 years, even during evictions!

Michael Rossi · Answer

The American dream is to own a house, not rent one.  There is a definite pecking order in the world.  Rich people live in mansions and usually own multiple homes.  The upper middle class live in Mcmansions.  The middle class owns a home.  The lower middle class rent a house.  The lower class rent an apartment.  The lowest class lives in government housing projects.

Therefore, almost by definition, the lower middle class and lower class live in areas that are not "nice" areas, because these areas are filled with other lower income people.  Let's be politically incorrect and tell the truth.  People are lower income because they consistently make bad decisions.

My wife certainly would not live in most of my rentals and she wouldn't even walk into a lot of them.  That's not because the buildings are in bad condition, but because many of the tenants choose to live like animals.  They are dirty; they have clothes and uneaten food strewn about; they attract roaches and mice - THEY'RE PIGS!

I buy rentals in rental areas.  I don't have any rentals in "war zones", which I would define as areas where bullets fly on a regular basis.

I do buy in troubled areas and then endeavor to fix those areas.  I have purchased multiple properties on streets that were drug infested areas and then turned those entire streets around.  That allows me to buy dirt cheap and increase the value of the property by improving the neighborhood.

To answer your question directly, yes, I buy in lower income areas.  In Ohio, there are very few renters in upper income areas.

Mike

Mark Yuschak · Answer

The happy medium between buying at the price which will cash flow, yet still realizing some apprecition over time could be said for any market.

For that reason, I like to look for deals not in the inner city.  I've found prices on homes in the suburbs of a bigger area will appreciate better over time, yet still cash flow well if bought for the right price.  I've never purchased anything in a "higher end" neighborhood simply because it won't cash flow.  The rental market can only bear so much per month.

N/A N/A · Answer

In my area (west texas) you have to look in the less desirable areas to find a house that will cash flow. The rents are way on the low end but so are the values of property. No one in this area could afford 2700 dollar rents, most can't afford 650. I was wondering about all the foreclosures in Cal. that there may be some steals when the banks get tired of holding them?

Henrik Frank · Answer

With regards to the deals, others can probably give a better answer, but I have a hard time finding them. It seems everyone is watching the REO sales and when the prices drop to the level of the most recent sales (or just below), they get picked up quickly (at least in the areas I've been looking in). 
A lot of places are bargains compared to what they sold for 2 years ago (some selling at 25%-50%), but are they bargains compared to what they will sell for tomorrow? I guess that's the million dollar question...

Are your rentals typically in "bad" areas?

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