How BAD is it investing in the ghetto?

29 Replies

So obviously the "hood" is not the ideal place to invest in rental properties but how bad is it really? Can someone brake it down for me? What are the Pros and Cons and do the Cons out way the Pros or does it depend? Does anyone have any horror or success stories about their own experiences?

PS... I live in North Jersey and am sort of referring to the cities known as Passaic and Patterson

Some people say that "Ignorance is Bliss."  However, sometimes, ignorance is just plain ignorance.

I have a duplex in a neighbor that many would call sketchy.  I do my due diligence and screen all tenants.  Background checks, in depth conversations (aka interviews) full reference checks both personal and business, and a favorable debt-to-inome ratio......a salary of three times the rent does no good if there is excessive credit card debt.)  One tenant has been with me for 5 years and the other for two years.  I have a 2% cash flow and hardly any maintenance fees because i rehabbed the house for safety and efficiency.

I manage it myself because I do not give them a need to call me for unreasonable repairs. 

When people are treated with respect and an open communication is developed and maintained, a relationship is built that is based on trust and respect.

The bottom line is that if I don't treat them like crap, they don't treat me or my property like crap.  Sometimes it is not about the neighborhood but simply about the people.

.....just saying

It all depends on the investor.  

I and some other investors have no issues with investing in low-income neighborhoods.  I think it depends on the investor's ability to effectively communicate with the residents of the neighborhood.  If an investor is uncomfortable being in such neighborhoods, my advice is they should avoid investing in those neighborhoods.  If an investor feels comfortable walking the streets and talking to the residents, that's a great starting place.

Be honest with yourself.

The "Hood" is different than the ghetto. It's better.  There's a lot more homeowners.  Crime is lower and lots of times the these hood areas aren't as bad as people think. I would invest in the hood but not the ghetto.  When I think ghetto I think about towers and blocks of government housing with drug dealers on the corners.  It's not always like that in the hood.  

They'll turn because they're closer to the city and lots of times the hood has nice old brick and architecture that just isn't built anymore.  Don't be scared of the hood! It's turning around.  At least that's the way it is in Columbus.

The negative(hoody) is the crime and schools, obviously.  The positive is that the margins are there!  If you're in a city like Columbus that has low unemployment, and a growing population and plenty of jobs, then the housing prices will go up( Cbus is really hot right now). 

Well these good people are being priced out of the nicer areas that have risen in value and they're moving to the " fringe" neighborhoods like Franklinton, which is hoody but not ghetto.  Also the near east side which has built a great new expansive Children's Hospital.  Currently that neighborhood is hoody.  But it's turning. I see it every day and I would invest there.  

There's big gains to be had in these sometimes hoody areas.  Look locally where the government is spending money and what areas the mayor makes a priority to revitalize. Get in while still "transitional" and you should do well.

I went to Ohio State when the Short North was hoody.  There were gangs and it was generally sketchy.  Now the Short North is the trendiest spot in the city and the investors I know who took a chance 12-15 yrs ago are now extremely well off

Hi @Ersi Bice !

Im actually a real estate investor as well and I just so happen to be around the corner form you in Paterson. I dont have any property in the "hood" nor do I live there, but as a resident here all my life I can tell you, there are certain areas in town you just dont want to be at any given time.

 I dont frequent these places either and I dont plan on it. For instance, could you imagine a tenant being late on their rent and you have to go to "the hood" (a place you dont want to be) to ask a tenant for the late rent payment? although a lot of these neighborhoods aren't as bad as the reputation they get.

Not trying to scare you I just want to let you know the experiences I've had with these places. If you know people there or visit there and are comfortable there regularly then go for it. 

If you have any more questions about the neighborhoods here dont be afraid to ask.

Good luck

well said!....if your interested in investing in the ghetto!...my thought is that these neighborhoods eventually do change, i myself are looking in Trenton NJ, the housing market is very cheap down there!...if anyone knows anything about New York, the (Jews) no offense!..bought up a majority of the large properties in the 1970`s and now there all millionaires.

@Ersi Bice sometimes these markets can offer decent returns but extra risk does come along with it. You have to be realistic about what you are getting into, dealing with people in a lower economic state brings their problems too. 

One option may be becoming a section 8 landlord if you decide move forward in those areas. 

It is not bad if you are there intentionally, have the right management and your business model model is based around serving that market. If you are just buying off the MLS in the hood because it is all you can afford and self managing, it probably won't be a great experience.

@Ersi Bice

I think @Missy H. has the right idea. Deal honestly with humans in an area you know, and you can always provide value for both parties (income for yourself, a safe place to live for the tenant). 

If we read between the lines, the main issue is out-of-state investors playing the numbers game. I live in New York City, so all my investments are out-of-state. However, I have never invested without team members who were on the ground and local to the area. The main reason is knowledge and connection with community. @Joshua Dorkin is quick to mention his bad experiences with St. Louis in this regard (Podcast), and I think it's a good lesson.

If you have no team in 'The Hood' willing to work with you and the tenants, then that's a bad sign. If you have the right people, it can be a great win-win investment for everyone. 

Also @Steve Faucette

I have invested in Trenton. I love the look of the buildings there, and do think that the location will be critical to future success down there. 

That being said, my team is on the ground, working Trenton everyday. There is no way I would attempt to do that remotely, even from NYC.

@Ersi Bice

  you need to make the distinction between and investment and a business.

if your going into the  ghetto and or hood you need to be in the business of running rentals. if you think your going to make an investment in these properties and sit back and collect rent well then you probably not going to have happy day and chances are you will lose most if not all of your investment..

If you choose to go into the business of running low end rentals then put a business plan together the team together and go big.. you need to have 100's of doors to so you can spread your loss's over the entire portfolio.. because you will take loss's.. the Ghetto and hood populations are extremely transient by nature.. ( you can get the long term tenant) but that's not the norm... so your dealing with a lot of turn over.

The other issue is security of your properties.. if you don't have near police state type security your properties will get stripped of anything of value within a very short time.

Look up DAWGS systems in Chicago you will see how the rehabbers there need to secure the properties. if you not prepared for this you will get wiped out end of story.

Missy H I couldn't have said it better. Shortly I will be getting into hood investments and I'm looking forward to it. It's an area my family has been in since the 1940's. I'm seeking section 8 tenants and will perform my due dilligence. Relationships are paramount!

If I had the choice between owning a dumpy property in a suspect area and buying stocks I would buy the stock.

Works for me 24/7 and no tenant headache. Having said that I know very little about stocks. 

Everybody has to start somewhere. If someone has limited cash they look at these areas for cheaper properties. What people want to do if going this route is instead of buying what appears to be cheap properties in a ( Hood ) is to find properties close by on the outskirts where values are much higher.

Take that 30k property, put 15k in, and have a 75k property in a better area. The war zone areas will be the last to turn around but the fringes have a fighting chance. Now it's much harder to find those properties of course. You want to buy the lowest property you can find in the best area for your price point you can afford.  

I don't mess with residential. My take on it is not everyone is cut out to be a residential landlord especially the rougher areas. If you grinded out for instance for 20 years in the rough area and built up to 1 million net worth is it worth it?? Not to me. The 1 million is likely worth 550k in future dollars. Someone just took off a ton of time from their lives to deal with constant drama from a tenant mix that has lot's of issues due to lack of education and life circumstances.

I can see some young people with limited cash making plays on these and then owning a few years and spring boarding to better things. I would think personally though if you can buy a dump for 30k with 20% down that is 6k.

Why not buy in a better area going FHA and live in one unit and rent out the other three?? With 3.5% down you could afford if DTI works about a 170,000 property.

I just want people to stop looking at purchase price as the only metric that excites them. I would rather get a 200,000 property in a 300,000 area then a 26,000 property in a 30,000 area etc. 

@Joel Owens

I always advise new insestors to buy a four plex with a FHA loan as their first investment and move in it.... teach's them landlording buy 4 doors.. buy in an area much nicer than one would typically buy a rental etc etc.. I think that is great advice

Joel Owens has good advice:  

"I just want people to stop looking at purchase price as the only metric that excites them."

I made that mistake 24 years ago, and am now getting ready to sell that dog  of a property that caused me way too many headaches. I bought it because it was cheap. Wrong. Pick your neighborhood first, then your property within that neighborhood. Buy the cheapest house in that neighborhood if that's all you can afford, but  buying in the  right neighborhood is crucial to long term success.

You can make money buying  in the "hood."  Everyone needs a place to live, right?   But not all people are the same.  "Hood" tenants frequently come with what Joel describes as "constant drama from a tenant mix that has lot's of issues due to lack of education and life circumstances."

Absolutely correct.  I prefer not to deal with those types of tenants. Way, way, too much aggravation.

Originally posted by @Ersi Bice :
  • The Pros- The Short Term Return on Investment can be very high;  Con- The short term risks can be high.  This means you must have risk mitigation plans.  I don't know anything about Passaic or Patterson, but in Chi-town we'll avoid specific blocks; we'll invest in security systems that we don't use in the suburbs;  ensure our reserves are higher; invest in the neighborhood block association,......We've even gone as far as purchasing multiple properties on a block to protect our investment. 
  • The Pros- The Long Term ROI can be very high if the area you're investing in is a gentrification target. Yesterday's ghetto is today's trendy area. Are there signs/signals around Passaic or Patterson that a change is coming? Maybe you invest right next to an area that has already changed anticipating that the change will eventually arrive where you've invested. CON- It's a gamble & if your timeline for returns is short then it may not be worth the risk.

BP Podcast 008 specifically discusses ethical landlording with Al Williamson.  He offers unique yet effective approaches for transforming multi-unit communities.

Give it a listen please. There may be a few ideas to consider if you choose to go forward with your idea

Agree with the previous comments about choosing a neighborhood.  Really look at the neighbors.  We have two properties where the neighbors are slobs, so it's harder to influence our tenants and the block.

Here's an excerpt from my e-book:

Advantages of low income:

Lower property investment cost. $/square foot and square footage is lower, so purchase price and repair costs are lower. Our motto quickly became “safe and clean”, allowing us to stay focused on using the cheapest products available in rehab.

Higher occupancy rates. Applicants are often living with friends or family, so are often able to move in mid-month, as soon as the unit is ready. More stable tenants tend to need to give notice, and move near the first of the month.

Lower expectations. Low rent tenants are willing to live with more flaws, fewer extras, and won’t be as demanding about discretionary maintenance and improvements.

Fewer evictions. Low income tenants are more willing to move out when the situation gets bad. We have not had to deal with someone living in the unit rent free for months while we work through the eviction process.

Disadvantages of low income:

More turnover. Low income tenants are not as stable, so they tend to move more often. Even some of our best tenants have become nightmares at move out. Dealing with move out, unit rehab between tenants, and prospective tenants is a huge time, energy, and cost drain.

Higher utilities cost. Water/ sewer/ garbage is about the same cost for a 500 square foot unit as it is for a 3,500 square foot house, so utilities become a bigger percentage of total rent and costs with smaller units.

Collecting rent is time consuming. Very few tenants mail us a check or deposit the funds in our bank account. Some bring the cash to our front door, more have us come get it at their front door, and both involve texts back and forth to coordinate schedules. We often have to initiate the conversation to find out where rent is, and we often have multiple trips to collect partial rent during the first two weeks of the month. We admit part of this is due to our desire to visit the properties more often and our willingness to be flexible for our tenants. It may be possible to set expectations and have low income tenants pay less hands-on, but it is a consideration.

More difficult to screen applicants. Most of our applicants have no bank accounts, have terrible credit, and it is difficult to know where they’ve really been living.

Lower loan amounts. It is more cost effective to mortgage and refinance one property worth $150,000 than two properties worth $75,000. The inspection and appraisal costs are about the same for a $30,000 house as a $300,000 one.

Easy to over improve. It is so easy to get into the trap of wanting to get the property to the standards you would want to live in. Such spending brings risk of being destroyed by tenants or never getting the value out at sale.

I think there is a very smart team here in Trenton - the ghetto? well for someone from La Jolla I live in a ghetto - for someone in NYC I live in a nice area - that depends.

but basically Mr Mack is giving you good advice - you might invest anywhere but you need to calculate the cost of doing business - one reason why food in the supermarket costs much more in the "hood" than uptown. If you can buy low enough to make the figures work - go for it, but you will have a higher vacancy rate, delinquency rate etc - than in other parts of town, because whatever the ethic background, as soon as people can leave the ghetto they do - so you have got leftovers. that said - there is a lot of money to be made supplying section 8 - a lot of rules but the payer never goes broke and never gets high.