How typical are non-paying tenants in lower economic areas?

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How typical are non-paying tenants in lower economic areas?

Christopher Davis
Rental Property Investor · Boulder, CO · Member since 2019 · 144 posts · 72 votes

The more I read and learn about investing, according to the bigger pockets strategies, the more questions I have.

Wouldn’t renting in a low economic area, where homes are selling for under $100k, wouldn’t that also invite less prosperous and less responsible tenants who will more frequently default on rent?

BP never mentions this, but I read it elsewhere. BP also seems to present the idea that owning 40, or even 20, homes is a breeze to manage. Not a big deal. I would think you would need a manager to manage all this? Especially if properties are located in different states?

I just see a lot of problems and headaches in owning numerous low cost homes in poor areas. I have no experience though, so I can’t say.

Can any experienced landlords here comment on this?

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Jim K.
Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
7y

Thanks for the mention, @Jay Hinrichs.

@Christopher Davis I have C/D-class borderline SFR rentals in a major Rust Belt city, several of which cost me $25K or less per unit to acquire.

Point 1: Does running cheap rentals mean that you're going to get tenants who default more often on rent? Not always.  But managing to get the right tenants into C/D units is, I believe, a more involved process than what A/B landlords typically go through.

Point 2: Managing 40 homes is possible in low-income rentals. The way we run our business, we renovate one acquisition at a time, we maintain all our own properties, and and we manage all own properties ourselves. I believe the far upper limit for this sort of business is 25 SFR, at which point running a single renovation as we do as well as managing and maintaining that many rentals will become more than a full-time job for one person with helpers to call on at need and a few key contractors to lean on, namely plumbing, HVAC, electrical,and roofing. I doubt I will get to that point before I start looking to unload my portfolio and transition to a different property class. Or completely change my business model.

Point 3: There are a lot of problems and headaches in owning numerous low-cost houses in poor areas. Well, yes. But if you stick with it, if you hone your craft, if you're willing to become a good handyman, and if you're willing to live where you invest, if you're coming to it from a job where you're not pulling down a lot of income and you're willing to gradually abandon such a job for full-time handyman employment, I believe it's a much less riskier strategy to make some money in real estate and tuck it away for a better retirement than a lot of other ideas I've seen on this website.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    its OK If you understand what you have  @Jim K. might want to elaborate he is quite matter of fact about it.

    don't believe everything you hear on BP  remember its still selling the sizzle.. :)

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    8Reply
  • D.J. M.
    Rental Property Investor · Richmond, VA · Member since 2019 · 19 posts · 17 votes
    7y

    @Christopher Davis it depends. Effectively Screening tenants, following fair housing requirements of course, is THE “key” to prevent problems, as is proactive management and direct communication.

    4Reply
  • Daniella Sanchez
    Real Estate Broker · Melrose Park · Member since 2015 · 68 posts · 44 votes
    7y

    First remember that every city is different and so are the people that live in them. Generally speaking, tenants can't be umbrella'd into a category because of their economic status. There are many other considerations. 

    @D.J. M. also mentioned this and its worth repeating; effectively screening tenants is your best defense. When my mom and I weren't doing so well financially we had to rent in a lower income neighborhood. This didn't change the fact that we were responsible, trustworthy, considerate tenants. People like my mom and I and many other considerate tenants can be found. Do your best to screen for them.

    9Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y

    Thanks for the mention, @Jay Hinrichs.

    @Christopher Davis I have C/D-class borderline SFR rentals in a major Rust Belt city, several of which cost me $25K or less per unit to acquire.

    Point 1: Does running cheap rentals mean that you're going to get tenants who default more often on rent? Not always.  But managing to get the right tenants into C/D units is, I believe, a more involved process than what A/B landlords typically go through.

    Point 2: Managing 40 homes is possible in low-income rentals. The way we run our business, we renovate one acquisition at a time, we maintain all our own properties, and and we manage all own properties ourselves. I believe the far upper limit for this sort of business is 25 SFR, at which point running a single renovation as we do as well as managing and maintaining that many rentals will become more than a full-time job for one person with helpers to call on at need and a few key contractors to lean on, namely plumbing, HVAC, electrical,and roofing. I doubt I will get to that point before I start looking to unload my portfolio and transition to a different property class. Or completely change my business model.

    Point 3: There are a lot of problems and headaches in owning numerous low-cost houses in poor areas. Well, yes. But if you stick with it, if you hone your craft, if you're willing to become a good handyman, and if you're willing to live where you invest, if you're coming to it from a job where you're not pulling down a lot of income and you're willing to gradually abandon such a job for full-time handyman employment, I believe it's a much less riskier strategy to make some money in real estate and tuck it away for a better retirement than a lot of other ideas I've seen on this website.

    13Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    @Christopher Davis Investing in lower C/D areas out of state isn't a good idea in my opinion. Why? Generally, good property managers stay far away from managing in these types of areas and when you are out of state the success/failure of your investment is more in the hands of you PM day to day than you are. So you can get in a situation where you have a below average house, being lived in by below average tenants, managed by a below average PM. Not exactly a recipe for success.

    With all of that said, investing in these areas can work if you are an experienced landlord who is local, and very hands on in the day to day management of the properties. Does not sound like your particular situation though. 

    3Reply
  • Tim Davids
    Real Estate Broker · NW Indiana · Member since 2014 · 99 posts · 30 votes
    7y

    I'd boil it down further. You need to intimately know the area. Even low priced, low income areas will still have a situation where one street or area is better then the rest but is still the same price. 

    4Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    7y

    It's a tough market. The standard income qualifier of 3x rent goes out the window in these kind of places. A lot of tenants like to pay all cash as well because they don't even have a bank account. 

    [email protected]732-289-3823
    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    7y

    from our limited 25+ years of residential rental experience B/C-class we averaged 20% late (I always thought the statistic was 30%), but they always paid the late fee followed with an array of excuses. One we just inherited was consistently late so we raised the rent by $100/month & hoped she would leave, but she paid the extra & then was on time. But a year later we evicted her when it was time to rehab the unit.

    Now on those we hold CFD, NNN or just a note its about 15% but again late fees are a bonus. One commercial client (48 months) has always been late but always pays the hefty late fee on the 15th like clockwork???? We have 2 more years with him so we hope he renews :))

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Pat L.:

    from our limited 25+ years of residential rental experience B/C-class we averaged 20% late (I always thought the statistic was 30%), but they always paid the late fee followed with an array of excuses. One we just inherited was consistently late so we raised the rent by $100/month & hoped she would leave, but she paid the extra & then was on time. But a year later we evicted her when it was time to rehab the unit.

    Now on those we hold CFD, NNN or just a note its about 15% but again late fees are a bonus. One commercial client (48 months) has always been late but always pays the hefty late fee on the 15th like clockwork???? We have 2 more years with him so we hope he renews :))

    Pat just move his / her payment date to the 15th  that way everyone is happy  :)

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    1Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    You buy D-class properties, you'll get D-class tenants.  Yes, more rent collection issues, more skips, more intentional or careless damages, more trashed properties.

    That is not to say that an A, B, or C tenant won't mess up.  But in my experience, it happens far less often than a D.

    Don't be fooled by the higher cap rates on the lower class properties.  Very often that 'paper profit' gets burned up in other expenses:  rehab, evictions, collections, etc.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Yes it is very common, and some of on here such as myself and @Jay Hinrichs are always talking about the risks associated with lower class rentals.

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  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    7y

    Hi Christopher,

    1. You need to know your "Demographic" (aka. know your customer).

    2. Your Property Manager needs to know your "Demographic" (aka. know your customer).

    Everything you think is true, is probably true. You just need to weed through more weeds to find grass (while keeping 1 and 2 above in mind at all times).

    Some areas are almost all weeds and considered very tough to make a profit in (High Crime, etc..).

    They are cheaper for a reason (it's risk/reward as set by the free market).

    Know your Customer--Why did the Resident buy a 200,000 mile car at a "Buy here pay here" that sits on your parking lot leaking oil and not running? (Should you have it towed off), etc...Know your Demographic...

    Good Luck!

    0Reply
  • Rob B.
    Chicago, IL · Member since 2018 · 546 posts · 227 votes
    7y

    Make sure you know the area where you're buying, in-and-out. Great example; the Woodlawn neighborhood here in Chicago is based on the south side. Crime definitely exists in and near the neighborhood, but one of the world's most prestigious universities (the University of Chicago) is also right there (in Hyde Park and Woodlawn). Many students end up renting in the surrounding areas with [more often than not] guaranteed funding from their programs — this also covers housing costs/expenses. A great market to rent to, and a great place to own a rental property. But, if you were just looking at Woodlawn's numbers/crime statistics, by most standards, the area definitely is one where you know certain parts are lower-income. 

    Be hands on. And as others have mentioned, low priced, low-income areas still have a situation where one street or area is better than the rest. I know a lot of landlords who would immediately think, "Southside of Chicago? No thanks" but there are many landlords in the area making bank on rentals. @Christopher Davis

    5Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    7y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Pat L.:

    from our limited 25+ years of residential rental experience B/C-class we averaged 20% late (I always thought the statistic was 30%), but they always paid the late fee followed with an array of excuses. One we just inherited was consistently late so we raised the rent by $100/month & hoped she would leave, but she paid the extra & then was on time. But a year later we evicted her when it was time to rehab the unit.

    Now on those we hold CFD, NNN or just a note its about 15% but again late fees are a bonus. One commercial client (48 months) has always been late but always pays the hefty late fee on the 15th like clockwork???? We have 2 more years with him so we hope he renews :))

    Pat just move his / her payment date to the 15th  that way everyone is happy  :)

     are you kidding & miss out on the late fee!!!

    plus he direct deposits so it's arm length 

    1Reply
  • TIm Harstead
    Property Manager · Chicago, IL · Member since 2016 · 69 posts · 43 votes
    7y

    A few things it really depends on you and the property,  First off as many have already said screening is crucial if they can't afford the apartment paying for it will be difficult, second point to this is what kind of upgrades you do it is very easy to over upgrade in these neighborhoods and than want to squeeze every penny out of the rent, which will make it hard to find tenants that fit the 3x rent rule. Keep the upgrades modest and prices low enough to get the top tenants in the neighborhoods and you will be ok.  Raise rent to high and you will often get people who could not get approved for lower rent priced places, and who can't truly afford the apartment

    2Reply
  • Blake Garcia
    Rental Property Investor · Big Sandy, TN · Member since 2013 · 147 posts · 91 votes
    7y

    Its definitely higher, but by doing credit checks and application systems it can help you screen. I definitely suggest online payment options

    0Reply
  • Vincent Dych
    Philadelphia · Member since 2018 · 18 posts · 3 votes
    7y

    @Pat L. What is Amp?

    0Reply
  • Christopher Davis
    OP
    Rental Property Investor · Boulder, CO · Member since 2019 · 144 posts · 72 votes
    7y

    Thank you all so much for the replies, very helpful. I love the active and lively nature of this community! Sounds like screening tenants is the key, which I have head already so this makes sense to hear it confirmed.@Jim K.

    @Jay Hinrichs I am hyper aware that BP sells the sizzle, so I'm trying to learn from different resources. And once you get past the sizzle, it's always more complicated and not quite so easy.
    @Jim K., Thank you for your comments. What is an "SFR"? (Single Family Rental?) For your Point 2, it just seems like pulling in $2-300/ mo cash flow from one property is not much. So you gradually add to that, at which point it becomes a full time job and maybe you change your strategy. I don't really want to be a full time handyman. But, I tend to get ahead and overthink things, so right now I'm just looking for one property to run smoothly as a proof of concept.

    @Michael Noto This strategy seems pretty much what BP is promoting, especially for BRRRR. Would you recommend another strategy for getting started instead? Basically, I want to learn by experience. But I do not envision myself as a handyman/PM singlehandedly managing 5, 10+ properties in a distressed area. I am moving to Nashville, and I am ready to invest. But I may have to look in other nearby cities to find a truly low cost property. Chattanooga for example is two hours from Nashville, so not sure how I would manage that day to day.

    @Peter Tverdov Thanks, that sounds like reality. Your comments are what I am starting to realize, I will keep this in mind.

    @Pat L. What is CFD? NNN? Thank you for the comments.

    @Marc Winter Thanks Marc. I can imagine what you are describing, I am afraid of the drain on cash flow by maintenance and operational management like you describe. What would be a better strategy than investing in a D neighborhood? I guess it all depends if the rent vs. mortgage calculations makes sense, invest in any better neighborhood.

    2Reply
  • Alvin Sylvain
    Los Angeles · Member since 2018 · 464 posts · 471 votes
    7y
    D class rental? Forget the credit check, other than confirming they are who they claim to be. Most D class renters, and many C class, will have no credit or bad credit. Like somebody above said, some have to pay cash, and that's sometimes because banks won't touch 'em.

    We've self-managed and rented to folks with bad credit, but they had solid jobs, no evictions, no criminal record, and ... my wife liked them.

    But it's definitely a B-C area, with C-D nearby. Can't expect people to have a 700 credit score in these parts.
    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Scott Mac:

    Hi Christopher,

    1. You need to know your "Demographic" (aka. know your customer).

    2. Your Property Manager needs to know your "Demographic" (aka. know your customer).

    Everything you think is true, is probably true. You just need to weed through more weeds to find grass (while keeping 1 and 2 above in mind at all times).

    Some areas are almost all weeds and considered very tough to make a profit in (High Crime, etc..).

    They are cheaper for a reason (it's risk/reward as set by the free market).

    Know your Customer--Why did the Resident buy a 200,000 mile car at a "Buy here pay here" that sits on your parking lot leaking oil and not running? (Should you have it towed off), etc...Know your Demographic...

    Good Luck!

    yOu mean parked on your law  driveway would be too logical

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    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    I have noticed a high incidence of mental health issues with c and d class tenants . Things that are logical and make good horse sense don’t seem to apply to their world . They also have no sense of urgency or sworn duty to honor their commitments or good name . They usually live in a very small world that rotates around themselves . It’s all about self preservation. I would not go as far as to say they don’t pay ,they just often pay late and usually with a litany of excuses to explain it . Most have no real savings or emergency funds so when a car fails or a bill comes in high they will pay that before the landlord especially if they sense weakness or kindness . Generally i will find a way to get my money but I work for it . In these asset classes there is no such thing as passive investing . Every other week it’s a crisis situation or drama your wrapped up in . Not for the weak or timid

    8Reply
  • Raju V.
    Investor · Severna Park, MD · Member since 2016 · 32 posts · 39 votes
    7y
    Originally posted by @Daniella Sanchez:

    People like my mom and I and many other considerate tenants can be found.

    There are hardworking decent tenants that can be found in D areas, but you may have to burn through 2 or 3 really bad tenants to find them. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Raju V.:
    Originally posted by @Daniella Sanchez:

    People like my mom and I and many other considerate tenants can be found.

    There are hardworking decent tenants that can be found in D areas, but you may have to burn through 2 or 3 really bad tenants to find them. 

    by then your down 5 to 15 in lost revenue and turn over cost when they trash the units. 

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    0Reply
  • Jermell Shavers
    Member since 2019 · 295 posts · 159 votes
    7y

    @Christopher Davis I only buy houses under 30k in my market you can find decent SFH and sometimes a duplex that needs work. I plan to buy and hold all my investment homes. Tenants that are less than gainfully employed they are my best performers.

    These houses are never vacant and if they are they will fight for the house not literally but figuratively and they rarely if ever leave and they always pay their rent. I never worry about someone paying 800$ a month. But the people paying 1200$ a month I worry about sometimes.

    0Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    7y

    You can have a "D" tenant in an "A+" neighborhood and you can have an A+ tenant in a "D" neighborhood; I have several. My husband and I self-manage 33 units in Akron. We own 8 units in the neighborhood that roadsnacks.net just dubbed the 2nd worst 'hood in Akron (I think they're wrong about that, but it's at best a "C-" neighborhood).

    In those units, 7 of my 8 tenants have been there at least 23 months. Right now, I have only one tenant that is currently behind (by one month) but on a payment plan-- after an uninsured drunk driver hit her car which was legally parked in front of the building and she is working to catch back up after having to get another car. I think she'll pay off her back rent and I think she'll rent from me for a while.

    I'm going to bet that many of my low income tenants work as hard or harder than you and me. High income tenants have access to credit and a credit score to protect-- they don't have to pay late. This does not apply in most low-income areas so you need different incentives and different expectations. To be successful (and enjoy) working in this space, you have to HAVE A HEART.  I'd rather risk that $425 on a tenant that has been paying me for over two years than take a certain loss to pay an eviction lawyer to make her leave.

    We strive to have the nicest units in any price-point where we compete. We strive to do A+ maintenance on all our properties . We strictly require a minimum of 2.5* rent in net income even in our least expensive units so our tenants aren't struggling UNLESS something out of the ordinary happens. Our low-income tenants want the same thing everybody else wants: good value for their hard earned money. We have found our low-income tenants to be honest and very reasonable in their expectations. In the last 3 years we've done one eviction and it was not in a low-income property.

    This is not directed at OP, but I need to say it: It's ok to grade
    neighborhoods, it's ok to grade properties, it's NOT ok to grade
    *groups* of people. Fine, judge away if you are talking about an
    individual but when talking about groups, please, stop.

    5Reply
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