BRRRR in Low Income Areas?

Question

TLDR: I am a prospective investor looking to BRRRR in a low income area. Does anyone have input recommending or discouraging this? Any stories you could share? Thanks!

Hey all, I'm new here- a prospective real estate investor, ready to start really digging into some properties. I aim to acquire my first property in the coming year. I have a question, and I hope someone here may have the answer.

I live in a small town in south-eastern CT. The area I live is nice enough, but there NOTHING here and the market reflects that. Nobody wants to move this far from their 9-5... personally, I don't mind the drive. But a short way down the road from me, we find ourselves in a more populated area that makes for a closer commute to the city and highway. This area is what I call "low-income", and what my father calls "slums". Having grown up in Willimantic (you'll laugh if you know the area), I wouldn't quite classify it a slum, but definitely not my ideal place to raise a family.

My question is this: I am highly interested in the BRRRR method, and there are several multifamily properties in the "slums" that I am interested in. The underwriting makes sense, but I know there's always a bit more to a property than the numbers. Should I give it a go? The proximity to my home makes it enticing, but I don't want my first deal to be such a nightmare it scares me away from investing... or cripples me financially. I am a fan of Joe Asamoah's concepts about government-assisted housing (which basically state low-income tenants are great if you treat them right), but I wonder if it's a bit of a fantasy (or the playground of real black-belt investors and PMs only).

Has anyone had an experience (positive or negative) with low-income rentals, tenants, PMs, or the like? Do you recommend I pursue the low income area, or run screaming in the other direction?

Really ANY advice would be greatly appreciated. Thank you ahead of time!

Account Closed · Answer

@Steven M Herrick If you run the numbers based on After Repair Value ARV and how much you're buying for, renovation cost and what rents are going for, will it cash flow? I believe any market can be viable if you buy the property at the right price. Low income is not a bad thing IMO as there are state aid programs that could "guarantee" your rent payments, i.e. Section 8 housing in NJ. After doing your research, does it feel right to you? Is your father going to assist as a partner in the investing? That could also determine his comfort level in the area and if you'll want to start there.

Scott M. · Answer

Your theory of "lower income may mean less chance of loan approval" may be correct, all depends on where in the market cycle we are.  But lower income that would fit into a quip of slum is always going to be more risky on the stable side of cashflow unless it is all subsidized housing.

Aaron Caminati · Answer

@Steven M Herrick so I actually own a couple properties in Willimantic so if you have any questions feel free to message me and ask. I didn’t go the BRRRR method, though I’d really like to in the near future, but what I did was rent by the room in the heart of Willimantic. I get much more cash flow when I rent by the room than by the whole house, and when something breaks (normally) it comes out of the security deposit and that helps me fix up the house to make it nicer for the next tenants.

If you do plan on BRRRR-Ing then I suggest when you find a property you like, get the address and drive the area. I used to live in Willimantic and some properties look great, but the area in general can seem a little “slummy” get yourself a real estate agent that knows the area (I can give you mine if needed) so they know what to look for. Anywhere closer to eastern, or even out in Mansfield in between eastern and uconn will be your better bet.

Steven M Herrick · Answer

Thanks for your reply, Timothy.

Yes, we also have the Section 8 housing plan here in CT. I know this could guarantee a portion of the rent, and would make my properties more competitive in the given location, as most prospective tenants here can't afford much. I have to do more research on that. What I worry about is that I can run numbers all day long, but if my tenants aren't paying (again, I'll dig into Section 8 housing), trashing my property, turning over again and again, breaking tenant rules... I worry that the headache and the diminished cash-flow from these events will be more than it's worth to hold the property. Also, I'm sure the market will not be ideal for appreciation.

My father will not be investing with me, the tidbit about his opinion was just a quip that expresses the run-down feeling of the location.

Steven M Herrick · Answer

Thanks for your reply, Scott.

The bits about "slums" were just quips. Again, the area really isn't a slum, it's just a poor town. I believe that makes the rental market hotter though, as most residents can't afford or get approved for houses.

"Higher risk" seems like what I want to avoid right now. Crashing and burning on my first deal would be a real buzzkill. I'm going to continue researching the area and affordable-housing plans before I make any moves or change gears to a different market.

Scott M. · Answer

Conversation escalated fast from lower income to slums.  It can and does work anywhere just know consistent cash flow to pay for the mortgage is harder to get as you go from lower income to slums (not that low income is always walk in the park either).  So yes, all can be done, just higher risk and potentially higher reward.

BRRRR in Low Income Areas?

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