Proper Expectations for Low Income Applicants (Chicago)

7 Replies

My wife and I have purchased our second rental property and this time are working in a lower income area of Chicago (South Shore).  The average household income is around $25k/year and we have our 1-units and studios aggressively priced at $650 / $550 (tenant pays heat) respectively.  

We're currently dealing with a lot of turnover and are trying to better understand how to better qualify Lower Income applicants.  Normally we'd shoot for 600+ credit, 3x rent to income, solid job stability, and no criminal/eviction issues.  I'm starting to wonder if these are reasonable expectations given the demographic of the neighborhood.  In the case they aren't, how do I best set reasonable standards to ensure we're at least targeting the best candidates given the demographic.

Any experienced veterans have some newbie tips on balancing high qualification standards in more challenging economic demographics?  

I don't have first hand working with this but a few of my vendors do in the deep south were your basically working with the same credit income and stability issues.

fico you can throw out the window.. some may have it most wont.

key is job  and get credit app and what they do is make sure they are paying their cell bills and utls on time any late pays on cell and utls is a red flag.. charge offs for medical you just don't even look at.

as tough as this may sound.. this is a very difficult asset to run and manage as your finding out. your not going to retrain you just have to conform.. this is why section 8 is so huge there..

If its not working I would sell and reposition.. it does not get better.. that's my experience with owning a bunch of them.

I have a place in South Shore myself and I have zero section 8 in my building. As Jay said what you end up doing is conforming to them and I manage South Shore very different than I manage Logan Square. What I've found is that showing your face around the building often helps, also opens lines of communication.

Thanks both for the feedback and guidance.  

Josh- interestingly our first duplex rental my wife and I purchased is in Logan Square as well.  We're also learning these are VERY different management experiences.  We've been trying to avoid section 8 and currently have all market rate tenants, however if we're not able to get a decent stable base have been considering whether section 8 is a path that should be considered.  What has led you to stick to market rate?  Do you utilize a property management company or do all the vetting yourself?  

Any tips for how you handle your south shore application vetting, or improve your odds at lower risk tenants?  What can of yearly turnover or vacancy are you experiencing?  I was target 10% vacancy, perhaps I should plan for higher vacancy and more turnovers.    

Jay/Josh- I like the thought around ignoring the credit score itself and perhaps focusing more on specific types of late payments.  Any thoughts on how you vet job security/income?  For example is someone who has been employed for 6 months and makes 2x rent to income a "good candidate" or someone who has been employeed for 2 years with 2.5x rent to income.

I suppose I'll get a feel for things over time, but always value advice and input from those that have already learned such lessons.  Thanks again!

@Sean Taylor Managing low income is an interesting challenge. We own property in much worse areas of Southern Chicago and have found the #1 component is to be present and to keep communication open. I have found it best to look at the situation from the renter's point of view. There are a lot of "slum lords" in these areas who do not put a penny into their buildings and look at their tenants as solely income and not people. Thus, tenants start to get the " me vs the evil landlord" mindset.

I enjoy working with Section 8 for a few reasons...

1.) There is a shortage of participating properties meaning there are more voucher holders than places for them to rent. This shortage leads to higher than market rents as well as strict requirements for tenancy. If the tenant does something to violate the rules of the voucher program, they lose it and do not have a chance of getting that voucher back for quite some time. This leads to tenants being on their best behavior to not lose that "meal ticket." If they are not aware of this fact, make them aware of these facts in your tenant introduction meeting.

2.) Most, if not all, of the rent is direct deposited into your account in the beginning of the month. Enough said.

3.) There are multiple sub programs to help even with the tenant paid portion of the rent such as the Catholic charities, Veteran's programs, etc that give an extra layer of protection that rent will be received while also doing a good thing for underserved individuals. No one wants to see a homeless vet. We work with the VA as our first option when finding tenants.

If you want good tenants who stay for the long haul, you will want to have the best tenants in the best places. We do this in a few ways.

1.) Offer "voucher upgrades," meaning allow 2-bedroom voucher holders to rent your 3-bedroom.

2.) Have the best rental in the neighborhood by having stainless steal, granite, and nice amenities that you would expect of a north side rental property.

3.) For multi-family buildings, actively create a culture that someone one wants to be a part of. Somethings we do are offer grocery gift cards for our tenants when they move in, supply a community garden space where tenants can plant their own vegetables, and ask great tenants if they have any friends or relatives that would be interested in living in the building (traits are often shared among the five people you are closest with).

Closing thoughts: it is always cheaper to have a vacant unit than one that is filled with a bad tenant who is looking for the cheapest rent. Let me know if you are looking for more properties as we also wholesale around 5 properties in southern Chicago per month.

Cheers!

Although the general conscience seem to be that low income earners all have poor credit I disagree. I will agree that those on section 8 probably do since they could careless about anything in life pertaining to personal and social responsibilities and standards. They are generally irresponsible and do not care about or value credit ratings. If they do not have the money they simply choose to not pay. As a landlord you can expect to deal with this when renting to anyone with a low credit score. They simply do not care.

There are however many working class poor that are very aware of their financial responsibilities and those are exactly the ones you want to target when you are only dealing with a small number of units. Yes there are financial blips in their lives but these can easily be read when reviewing credit reports and discounted. A history of late payments and defaults however is a different matter and should be taken seriously.

Set your credit record and score at 650 and the tenant you find will be more responsible and will likely meet your expectations. There may not be many qualified but in my class B rentals there are not many that meet my qualifications either, it's all relative. Nice thing is I only need one and do not often need to evict or replace when I find that one.

The reality is that in mitigating risks a good credit score/history will never be a negative and a bad credit score/history will never be a positive. Ignoring the score means you have given up trying.

@Sean Taylor,

I would start your education by reading the many sub30k (properties bought under $30k) threads. It documents many investors successful in this space.

Then, there are still a LOT of threads about Chicago's Southside. Check the knowledgeable investors and connect with them.

You cans still get good/stable tenants there. You just have to find them and learn how to recognize them.

Also they may come to you when your name and reputation travel in the community...

In this sector, credit score doesnt matter. NO ONE has good credit. My criteria is that the applicant has the income to qualify which often means slightly more than the 1/3 conventional ratio (check census data on African American rental expense ratio).  The determining factor for me is the face to face interview with the applicant and number and ages of occupants. If you catch them lying during the interview cancel them as a prospect. Unless you’re in this sector, please don’t comment on your theoretical assumptions of renting to Chicago’s south side. Those with good credit and income will NOT move into certain areas and they will NOT move into a unit that does not have all the modern updates (stainless steel, hardwood floors etc.). Even Section 8 applicants in Chicago EXPECT the modern upgrades. If you can’t justify or afford these upgrades then you’ll have to negotiate the land mines of unattractive applicants. 

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