Multi-family rentals in lower class areas?

Question

Would anyone mind sharing their thoughts and experiences with investing in multi-family rentals in lower class areas? I've come across a few properties were the numbers work, but I'm hesitant in dealing lower quality tenants. Properties there are cheaper so he numbers work out better, but is it worth it? Any thoughts?

Mike Roy · Answer

@Sunshine Chow - Sunshine from SoCal, love it!  :)  Plenty of people make money in C and D class, but it's a specialized niche that requires thick skin.  I think where people miss on these is that they underestimate their pro forma expenses.  Yes, you might see a nice fat 2% Rule property, but what does that mean if vacancy is 15%; or turnover costs are twice what a B property would be; or if property managers charge 12% instead of 8% because your building is so difficult to manage.  Are you sure the numbers work out better?

And even  if you can generate superior returns, is it worth the headaches of dealing with the drama inherent in a lower quality neighborhood?  What is the opportunity cost of your mental capital?

The big thing, though, is not so much the CURRENT quality of the neighborhood, but it's TRAJECTORY.  If the neighborhood is bad because it's in a sustained decline with no demand drivers in sight, I would stay away.  However, if the neighborhood is bad but improving or in the path of progress, then you have a different story all together, one that might be worth taking on the headaches as the area improves.

Sunshine Chow · Answer

@Mike Roy thanks for your feedback! I'll definitely have to do a little more research with respect to the long term trajectory of a neighborhood. That's a great point!