“Low Income” vs. “Bad” Neighborhoods: Yes, There IS a Difference. Here’s What Separates Them.

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You hear the advice all the time: Don’t look for investment property in bad neighborhoods. Or sometimes, you hear the same advice about low income neighborhoods — in fact, mostly the terms “bad” and “low income” are used interchangeably. That’s a crime — because there are definitely low income neighborhoods that are good neighborhoods to invest in. Let’s look at what separates the two.

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Rule Zero: Don’t Trust Your Eyes

It’s easy and intuitive to look at a property and if you don’t like the first impression you get of it, walk away. Unfortunately, real estate investing isn’t that kind of party: If you want to win this game, you have to play strictly by the numbers. This means looking at statistics, prices, and environmental factors, not at the faded siding, broken windows, and missing shingles. Each of the points that follows is a guide about which factors mean “low income” but don’t mean “bad” when it comes to investing in a home in that neighborhood.

“High Crime” Can Mean “Bad” — Or Just “Low Income”

Every neighborhood has a few different crime rates — for the purposes of investing, you want to pay primary attention to property crimes, as they’re going to affect the security of your investment. But far more important are the “quality of life” crimes, like vandalism, littering, and public urination. Why? Because those crimes indicate that a neighborhood isn’t just desperate, it’s also “self-loathing” — the people who live there aren’t just committing crimes to get by, but they’re doing it because they simply don’t care about the neighborhood. (It can be hard to get stats on those kinds of crime specifics; your best bet is to call the local police department and ask them.)

Related: 8 Myths About Section 8, Corrected: Here’s the Profitable Truth

A neighborhood that has prostitution, drug dealing, and other money-making crimes but doesn’t have the “quality of life” crimes isn’t necessarily bad — it’s just low income, and low income-but-good means there’s a potential for a value investment. Genuine “war zones” where the police don’t even visit if you call in a vandalism report because the bangers break every window in the neighborhood every Friday just on principle? Yeah, don’t buy there.

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Growth Potential Can Make the Difference Between “Bad” and Just “Low Income”

One of the most important ways of separating a low income-but-good-investment neighborhood from a just-plain-bad neighborhood is by looking at what is going to happen in that neighborhood over the next few years. For example, buying a home in a neighborhood where there is currently a large lot being cleared for the addition of a Costco is significantly better than buying one where the local Wal-Mart just moved out, and nothing is moving in to replace it — even if, at the moment, the Costco neighborhood house looks like the worse investment.

Alternatively, if you can find a neighborhood with a clear downside with a clear expiration date, you could be looking at a winner. For example, imagine a place where it sucks to live because there’s a stanky breeze from a mushroom farm that blows over the whole city — but the mushroom farm just declared that they’ve purchased a new facility and they’re moving a town over in six months. That window, after the declaration has been made but before the move occurs, is your window. Property values are depressed because only desperate people are willing to live there right now, but that will change once the smell goes away, so buy before they shoot upward.

[Bonus: One more subtle way to pick up on a just-starting-to-grow neighborhood is to look at the days-on-market of the homes that are selling in the neighborhood. If the average DoM six months ago was 90+, but today it’s down to 45 or less without a rise in property prices (and the rest of the numbers look good), buy! A downward-trending DoM is almost always a sign of soon-to-rise property values.]

Low Geographic Mobility

Let’s be frank: Moving costs money, which means that people in low income neighborhoods tend to move less often. Look up the net migration numbers in your chosen neighborhood — if they’re very low (below 9%), you may be able to take advantage. Warning: This can be a genuine downside if you land a problem tenant who simply won’t move until the police show up and physically drag him away — that’s a lot of lost rent and probably a lot of vengeance damage you’ll have to repair.

But! If your tenant screening techniques are on par and you maintain yourself as an available, easy-to-talk-to landlord that is willing to deal with an occasional legitimate disaster empathetically, you can keep a hardworking low income tenant paying mostly on time for year after year. Statistically speaking, the best low-income tenants have a reliable if low source of income — often, they’re retired or disabled and collecting stable monthly benefits. Other than the occasional late payment due to something like an unexpected car repair, these tenants can handily turn “low income” into a benefit.

Your Investment Goals Can Change What “Bad” Is

Some investors are looking to buy a property that they can maintain using the rent and have their wealth build up as the property appreciates over time. Others are looking for a property that they intend to hold for as long as they can continue to pull a solid monthly cash flow out of it. Investors looking for that appreciating property are honestly probably not going to find it in a low income neighborhood (unless you can find one on the verge of a major improvement, as above).

Related: What’s More Costly: Rental Vacancies or Filling Rentals With Subpar Tenants?

But investors looking for high cash-flow can definitely find a killer investment in a low income neighborhood — because rents tend to move less than property values do. So it’s relatively easy to buy a home that costs 50% of the identical home one neighborhood over, and charge only 15% less in rent. The end result is that you can set up a high cash flow investment with relatively little initial investment — at which point, yes, you might have slightly more difficulty with tenant screening and maintenance requests than you would one neighborhood over, but your capitalization rate will be well worth it.

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Bonus: The Difference Between Rented and Unrented Properties in Very Low Income Areas

There’s one catch to all of this that novice low-income investors can easily miss: if the home you’re buying is in a critically low income area and there’s not currently a renter, you absolutely must inspect it (or pay someone to inspect it) before you buy it. The reason why is simple: In many very low income areas, an empty house is almost immediately stripped of everything inside that can be sold, including plumbing, HVAC, water heater, appliances, and basically anything made of metal or worth a dime on the street corner.

It’s terribly easy to buy a home that looks like a legitimate structure, only to find out that you need to invest four or five times what you paid just to make it legally livable again. All of which you can avoid by purchasing a home that currently has a renter (and thus a certificate of habitability or whatever your city’s equivalent is). Even a seller that offers written evidence of an inspection on Monday can end up with a home stripped by Wednesday morning — unless someone is physically living there, and you buy the lease along with the property.

In short, you don’t need to be scared of investing in low income areas — you just have to be aware of when “low income” and “bad” don’t match up, and prepare to take advantage of how the two don’t overlap. Good luck!

Investors: What’s your take? What’s the difference between a “low income” and a “bad” neighborhood? Do you invest in lower income areas? Why or why not?

Let me know with a comment!

About Author

Drew Sygit

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

31 Comments

  1. Marco Santarelli

    Good article Drew.

    Once more point to add: “low income” neighborhoods are not for every investor. There is more to consider than just income and crime, of course.

    Classifying a neighborhood by “type”, or what many investors refer to as a “grade”, is typically nothing more than a subjective description. Although most people will have a general idea of what is being referred to, in my experience it is usually nothing more than a qualitative rather than quantitative description.

    I covered the topic of “Choosing the Right Neighborhood” in episodes 007 of my Passive Real Estate Investing podcast.

    Continued success!

    • Drew Sygit

      @MARCO: you are 100% correct, so thanks for adding:) in our experience these areas take up a lot more time to manage and the tenants seem to have a lot more “drama” they try to suck a landlord into.

  2. Charles Morgan

    I also look at graffiti in the area. If it’s on public areas (IE: bridges) or abandoned buildings it’s a better neighborhood than one that has graffiti on occupied homes and fences. Of course no graffiti is best but that is rare in low income areas where I live.

  3. Jamal Wilson

    Great article Drew, I have been recently struggling with this dilemma. I live in gang-ridden and low-income Compton Ca and was looking to invest. This cleared up a lot of things and things to look out for. Do you have any recommendations for an investor looking to house-hack in one of these neighborhoods?

    • Drew Sygit

      @JAMAL: kudos to you for moving forward! While a lot of advice doesn’t always transfer well from one area of the country to another, the actual city of Detroit is a great”teaching” ground. Stripping of homes is a huge problem as they take furnaces, hotwater heaters, copper, cabinets, toilets and even sinks. Squatters are another big issue. Figure out how to address problems like these common in your area ahead of time to make your investing more successful.

  4. pedro florentino

    Good article Drew; this is exactly what I always say about my investment strategy. I consider low income neighborhoods a gold mine. These low cost of entry neighborhoods are a blessing especially for newbies who have limited funds, patience, and willing to work hard. I started my investment in a low income neighborhood within 3 miles of a major US city. Fear mongers found it dangerous because of word of mouth BS and profiling of low income Latinos. What the fear mongers didn’t know was that the majority of the population are hard working blue collar worker who just want a better life and don’t want violence in their neighborhood. Today this neighborhood is going through gentrification; Starbucks, restaurants, major government offices, and big mix used projects have popped up and in the works.

  5. Deanna Opgenort

    My property is in rural CA, one of the poorest counties in the state. My best tenants have been young families with “something going for them” – ie going to college for RN degree making 4.0 grades. I may not get to have them for more than a year or two as they move to bigger towns for better jobs, but they are good tenants while I have them. I do NOT penalize anyone for a past foreclosure — IMHO anyone who has owned a house in the past seems more apt to pay attention to maintenance than a “lifetime renter”. I’ve found this applies to the younger tenants those whose PARENTS own their own home vs growing up in a rental – they seem to be more careful and diligent about the house. For the former homeowners the sound of water running when it shouldn’t be triggers a response, an investigation, and a call to me . vs the “always renters” who ignore a cracked and dripping toilet tank because they seem to be afraid that any repairs will raise their rent).

    • Drew Sygit

      @DEANNA: a lot of truths in your statements. Lifetime renters, especially those with low demographics, often don’t care about the homes they live in. They have a “throw-it-away” mentality about homes just like many do on electronics now.

      • Erin S.

        It is sad how people don’t take care of other people’s property. As a kid, my parents rented and we were always told that we were living in someone else’s home but to treat it like it was ours. My parents didn’t even let us put a push pin in the wall to hang up a poster because they didn’t want any holes in the walls. They kept that house in great condition, and stayed there for 10 years until saving enough to buy their first home.
        ~E

        • Drew Sygit

          @JOSE/ERIN S: Your parents’ type of ethics seems to have gone out the window with successive generations:( Tenants are often tenants for a reason!

  6. Paul metzler

    We are having success with buy and hold rentals in our town which has a long time reputation as a bad neighborhood. A few years ago the citizens voted in a bond measure for a tough new jail. Consequently petty offenders do serious time. Quality of life is up, more young families are moving in and the downtown has become more vibrant. The price of properties is however more reasonable than adjoining towns, hence better return on investment. Reputation not equal to reality = opportunity.

  7. Trey Williams

    Great article detailing the pitfalls of a “bad” neighborhood. I am definitely going to broaden my search in to low income areas. Less completion great returns, just budget in a “good” PM company and have reserves.

  8. Drew Sygit

    @TREY: don’t be surprised if a good PM charges more for managing properties in these areas. We know from experience that it takes more time to successfully manage in these areas — and time is what you are really “buying” from a management company. So, more time means more cost:) Of course, you could try to go the cheap route, but then the PM will not invest the needed time and your investment will most likely suffer.

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