Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
Hello, I am a new real estate investor from Arkansas. I am considering purchasing a property in a neighborhood that has a history of drugs and some other crimes. Rent, in this neighborhood is in the lower 50% but this property will provide great cash flow. I have never purchased an investment property in a lower income area such as this and would like some insight as to what I should expect for tenants, repairs, and capital. How do you collect rent? With my other property people just pay me online while with these some people may or may not have bank accounts to pay me directly with. What are some things I can do to really add value to the neighborhood and bring in good renters? I don't want to not purchase the property just because it is in a bad neighborhood. I'd like to add value to the neighborhood, while also being prepared for the worst.
Rental Property Investor · Chicago, IL · Member since 2017 · 219 posts · 180 votes
6y
@Matthew Reid if the numbers make sense go for it! I own multi families in low income areas here in STL and I even grew up in a low income area when I was growing up in Chicago. There are a fair amount of good people that will do right by their units, pay on time and take care of the property...the reason why they are in those areas because they dont make enough money to live in other good areas; it does not mean they are bad. There is nothing wrong with renting to section 8 tenants. I have a section 8 tenant whom section 8 pays a portion of her rent but she works a job that she has been at for 10 plus years.....everything comes down to doing proper screening of your tenants that is the biggest thing. Last year i bought a 4 family on a state street in South City STL...now if you ask anybody that is from here they will tell you state streets have a bad rep from a decade ago which right now the area is in a transition but none the less this property was in horrible shape and had all the wrong tenants. I bought it for $85k...moved everybody out.. put about $90k into it and im doing a refi right now and it appraised for $230k... I have two graduate students renting one unit, a nurse renting the other, a dental hygienist in the other and a t-shirt business owner and the other. I have some great tenants in place....because during showings I let people know I am not the landlord they can walk over and inform them of how intense i screen and my deposit is pretty high which filters alot of tenants out. I don't look at credit score only concern with them not having recent evictions within the past 5 years and they don't have utilities in collection agency. I do a search through the court system and a social media search as well...oh boy the things you find on peoples facebook accounts. I also incentivize my tenants... once they are accepted I inform them that if they dont miss a payment and pass the quarterly inspections that if I ask them to renew they become part of my rewards program where I get them a renewal bonus.. for instance one of my tenants just renewed and I gave her a 55 inch smart TV... cost me $299..... I don't have to spend money on turning the unit around and i am going to continue getting the $1000 a month coming in on time and no headaches not to mention I can write the TV off. All in all you can minimize your risk of getting bad tenants by being firm on your screening process and providing really good quality units. trust me it will stand out when you list your place vs all the other run down places.
Real Estate Agent · NJ · Member since 2019 · 237 posts · 169 votes
6y
I always advise against this. While your intentions are noble and your thought process makes sense regarding cash flow there are other costs to consider. Being is rough neighborhood will attract rough tenants who are fine living there. These will be the people you deal with who don't care about legal action being threatened for not paying their rent. You will have to spend more time and money on evicting tenants than the potential for future cash flow may be worth. Not only that, but you can expect higher risk of damages and theft. I worked with someone who rented out units in a similar area and when their last tenant left they took all the copper wiring and piping with them. Your risks will be higher, you will definitely have more headaches, and it will be harder for you to get someone to buy the property if you change your mind down the road.
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
@Shain Ismailovski
I plan on financing my repairs and I'd like to make these two units the nicest on the block. Do you think that along with strict minimum requirements can keep me outta trouble?
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
@Shain Ismailovski
I also think that another out I can have is to purchase the properties put renters in them then turn around and sell them to an investor who is more frequent in these types of areas with an above average cap rate and still make money.
@Shain Ismailovski You are mostly right, but I have 8 duplexes that I section * in lower income area's and have very few problems. @Matthew Reid My goal when buying these properties is to buy them low enough that when I refi I make money from it. I put this extra cash away incase of problems and thats that. I also buy in places where the county is eviction landlord friendly, where eviction takes 30days tops so at most (if you pull the eviction card at first missed paymet) you wont miss to much rent as opposed to places that take months and you lose months of rent. My cap rate is around 12-14% . Just interview your tenents well and even better if you can have someone familiar (who grew up in an area like that) to manage them as they know the lay of the land. Hope this helps!
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
@Douglas Gratz
I dont think my county is 30 day eviction friendly, so that definitely adds some risk. When renting to these types of areas do you have minimum requirements such as credit score, income, or criminal history?
Real Estate Agent · NJ · Member since 2019 · 237 posts · 169 votes
6y
Keep in mind that in areas like this repairs may not necessarily add the value you want or expect. Prices tend to appreciate lower and at a slower pace. Even if you make the units beautiful you still would be attracting the same base of people who would feel comfortable living in a rough neighborhood. I’d also be careful in updating too much because then you will find yourself in a hole that may not necessarily even add much value to your pocket in the short term. To your second part if you have access to an investor pool that may be plausible also assuming you can get rent prices to an attractive level which again may be tough. If you do end up going for it anyway ensure strict background checks and minimum requirements are in place. Some people ask for a minimum credit score of 675 or higher. Call all references and ask to see all identification. Screen everyone the same way every time no exceptions. There are many sites you can use to set up automatic payments some of them allow tenants to pay by credit card. If they don’t have a bank account i’d accept a money order only. Cash can be messy and leaves a less detailed record if you need to have one for legal reasons.
@Matthew Reid Nothing specific that you havent already heard. I just stay extremely strict and have mostly good tenants. My section 8 tenants have never been responsible for paying more than $300 towards their rent which is relativly low and makes it "easier" to afford. Since the housing authority sends me a direct deposit, I do not look much into their histories other than past rent check with an old landlord if I can. I already know most of them have low credit and bad histories or they would not be getting subsidized housing. Just lay the law down !
@Matthew Reid I dont want to talk out of my *** (so I will try to speak of what I know), as I do not know much about loans other than my personal experience which is ....i purchase a house with cash for say 40k then I use my own cash 60K more (rehab) totaling 100k out of my pocket at first. Then I go to the bank and refinance it. They come out, appraise it for 175k, give me 122k and now I have a mortgage. I make 2500 a month, 1,000 mortgage/insure. I cash flow about 400-600 and I am plus 22k on the deal.
You are saying you are going to finance the rehab costs so I do not know what position that puts you in after all is done, but if you can pull your 70k out with an equity line or refi, then it sounds good. Your cash-flowing and paid nothing for it however; Personally, if its a low income area, I think 130K is a little much. I like a lot of cushion so I do my best to be all in way under its APR. (Again I no nothing of your area, so take what i say with a grain of salt)
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
6y
@Matthew Reid From my experience, properties like this cash flow great on paper. But in reality, the repairs and bad tenants make you need to practically triple your savings for those categories. These tenants probably won't have any credit or bad credit, so there is no point in requring a certain score. You just basically look to find the person who pays most of their bills. They will all have bad credit or they wouldn't live there.
You must be strict and firm (but fair) with these kinds of rentals. You warn them the day that they sign the lease that the very minute rent is late, you are filing for rent court. So they don't even need to bother with the stories, excuses, and guilt trips. If they decided to mail you the rent and it arrives late, that is their own problem. You can't prove they actually mailed it, so treat it as nonpayment if you didn't receive it on time.
Some tenants will sound great and then try to show up to lease signing with only some of the money. Never let them sign the lease if they are short on the money!
Finally, these neighborhoods don't tend to appreciate in value. They're not really ones you can flip or improve or accurately expect any ARV on. They're just kinda stagnant strong rental neighborhoods. These can be the kind that make you great money each month when things go right, but they can also wear you down with the constant attention and babysitting they tend to require.
Rental Property Investor · Chicago, IL · Member since 2017 · 219 posts · 180 votes
6y
@Matthew Reid if the numbers make sense go for it! I own multi families in low income areas here in STL and I even grew up in a low income area when I was growing up in Chicago. There are a fair amount of good people that will do right by their units, pay on time and take care of the property...the reason why they are in those areas because they dont make enough money to live in other good areas; it does not mean they are bad. There is nothing wrong with renting to section 8 tenants. I have a section 8 tenant whom section 8 pays a portion of her rent but she works a job that she has been at for 10 plus years.....everything comes down to doing proper screening of your tenants that is the biggest thing. Last year i bought a 4 family on a state street in South City STL...now if you ask anybody that is from here they will tell you state streets have a bad rep from a decade ago which right now the area is in a transition but none the less this property was in horrible shape and had all the wrong tenants. I bought it for $85k...moved everybody out.. put about $90k into it and im doing a refi right now and it appraised for $230k... I have two graduate students renting one unit, a nurse renting the other, a dental hygienist in the other and a t-shirt business owner and the other. I have some great tenants in place....because during showings I let people know I am not the landlord they can walk over and inform them of how intense i screen and my deposit is pretty high which filters alot of tenants out. I don't look at credit score only concern with them not having recent evictions within the past 5 years and they don't have utilities in collection agency. I do a search through the court system and a social media search as well...oh boy the things you find on peoples facebook accounts. I also incentivize my tenants... once they are accepted I inform them that if they dont miss a payment and pass the quarterly inspections that if I ask them to renew they become part of my rewards program where I get them a renewal bonus.. for instance one of my tenants just renewed and I gave her a 55 inch smart TV... cost me $299..... I don't have to spend money on turning the unit around and i am going to continue getting the $1000 a month coming in on time and no headaches not to mention I can write the TV off. All in all you can minimize your risk of getting bad tenants by being firm on your screening process and providing really good quality units. trust me it will stand out when you list your place vs all the other run down places.
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
@Andre Taylor Thank you for the advice. I really appreciate hearing about the positive sides of renting to lower income families. It sounds like I really need to focus on getting the right tenants in there and screening properly. I also feel like this neighborhood is moving in the right direction. There have been several new businesses open up nearby that have been bringing more traffic from other parts of town to the area.
I would advise against. The ROI is appealing, but comes with a cost. My first duplex I put 20% down and had a COC return of 45%. Money was great for awhile, but repairs added up with lower income tenants and collecting rent became an issue. I suppose if you screened your tenants extremely well and were ok with having a higher vacancy rate due to being more selective then you might be ok. I noticed most tenants did not care about the property and that led to more phone calls of things "broke" or not maintained. Ended up selling after 2 years. Looking for SFH or possibly another multi family in better neighborhood with a little lower ROI and less stress.
I fixed what was found on inspection. I did not remodel anything major. My thoughts are if you dump money into a remodel in a bad neighborhood you will not get your money back out. Tenants can still trash it and your next buyer will still consider the property in a bad location, even if the property is updated.
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
@Nicole A
Since you have had bad experiences with Tenants in the past what have you started doing to insure you get top notch tenants every time. I feel like if I get a bad tenant I cannot blame the tenant for not being late or destroying my property because I did not do my due diligence on the front end.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6y
You want to add value to the neighborhood even though it’s The ghetto lol good luck turning around the community . Maybe free malt liquor and Newport’s will add that value to the locals . If your not experienced in this kind of asset class they are going to steam roll right over you ! Wait till your picking up beer bottles dime bags and used condoms in the front yard then remember all the “ value” your adding
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
6y
@Matthew Reid When I got my best tenants in that particular rental, they never stayed long. They either stayed a full year but would not renew or they simply broke the lease.
You can only get as good of tenants as the neighborhood attracts.
You make it sound very easy and simple. I have plenty of experience as a landlord, so your last comment comes across a bit condescending. Let us know your thoughts when you get experience in this class neighborhood.
Rental Property Investor · Jonesboro, AR · Member since 2019 · 105 posts · 59 votes
6y
Definitely not trying to sound condescending, I apologize if I did. I try to see the good in people and in neighborhoods but like you said the "good" tenants move past these areas quickly. It is also my job to do the best I can to ensure I can sort out the people that will take advantage of me.
I plan on financing my repairs and I'd like to make these two units the nicest on the block. Do you think that along with strict minimum requirements can keep me outta trouble?
When your houses are the nicest on the block, then they become the local WalMart for the neighborhood. Whenever anyone wants something they break into the nicest house on the block to get a new TV or whatever. In a rough neighborhood you want to blend in, not stand out.
Realtor · Hollywood, FL · Member since 2014 · 91 posts · 26 votes
6y
@Matthew Reid Have you talked to a local property management company? Try and get some straight forward answers from them about the area. If enough local property managers don't want to take it on that's probably a good sign to steer clear. Wanting to improve a neighborhood is admirable, but improving 1 house in a bad area is not enough to turn the tide. If you're in the path of progress than that's a better situation.