4 Reasons Low-Income Investments Don’t Deserve Their Bad Reputation

by | BiggerPockets.com

A square is a rectangle, but not all rectangles are squares.

Bad neighborhoods are filled with low-income housing, but not all low-income housing is in a bad neighborhood. Some low-income tenants are bad, but a lot of low-income tenants are good.

There’s a lot of glamour in mansions, flipped houses, and tiny homes, as evidenced by HGTV shows, but when it comes to low-income housing, there’s an undeserved stigma.

Many investors assume that with low-income tenants come late rent payments, vandalism, and all sorts of problems. All of those are real threats, but they’re real threats with tenants of all incomes.

Countering the Drawbacks of Investing in Low-Income Areas

As mentioned above, there’s a huge difference between low-income housing and bad neighborhoods. There ARE some neighborhoods you want to avoid.

For example, I once owned a property that had its windows broken in almost weekly. I ended up remedying the situation by replacing the glass with plexiglass. A better solution would have been to recognize that this low-income neighborhood was a bad neighborhood.

Look out for signs of growth, like new businesses or developments, before you invest. If companies are leaving or if a lot of units are available for rent in the building, it may not be the best to invest in. When construction is making a lot of noise, it brings down property values. That’s the perfect time to buy. Once the construction is done, the new store or amenity will improve your property value.

Look up crime statistics in the area. Specifically, avoid areas with lots of break-ins, vandalism, or violent crimes. Those are difficult to rent or maintain.

Call references for potential tenants. If past landlords liked them, you’re golden. If a past landlord didn’t like them, take the hint and move on. There are plenty of reliable, low-income tenants for you to rent to.

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

4 Benefits of Investing in Low-Income Areas

1. Many low-income tenants receive government assistance.

Government assistance means guaranteed on-time, monthly rent payments for the landlord. Unless your check is coming from the government, there are no guarantees in monthly rental payments. Even tenants with the highest of incomes can give you issues.

There are penalties if these tenants are evicted. They could potentially lose their vouchers, which means losing their ability to pay for housing. Most tenants using government assistance will not want to risk that.

It’s naive to say that housing tenants on government assistance is stress-free. However, those tenants are properly motivated to follow the rules set by your contract in ways that other tenants are not.

2. There isn’t a lot of competition in the field.

Look at the quality of low-income housing in some areas. You’ll notice right away that there isn’t a lot of competition in this sector of the real estate market. It’s a landlord’s market in most areas.

I say that with confidence because if there was more competition, landlords would need to add more amenities and upgrades to these units to compete for tenants.

Most tenants don’t have a lot of options to choose from within their price range and requirements. They often settle for units that meet their bedroom requirements but aren’t as conveniently located or as spacious as they’d hoped.

From the landlords perspective, that means that there is a great amount of opportunity in the low-income housing field. When you invest in the low-income market, inexpensive upgrades to your unit can keep your unit from experiencing vacancies.

existing-tenants

Related: How Investors Get Burned Following the 2% Rule in Low-Income Neighborhoods

3. Low-income tenants can offer a great amount of stability.

Tenants with low incomes don’t have the money to be taking off from work to move. Therefore, once you’ve found a tenant for your low-income property, they will likely stay with you for a considerable amount of time. That means you don’t lose revenue from having your unit vacant.

4. Low-income properties are more affordable.

Middle-income properties are often a lot more expensive than low-income properties. Nonetheless, the difference in rent isn’t as extreme. You may be able to buy multiple low-income units for the same price as a moderate income property—and end up making up more money.

You end up earning a greater cash flow for a smaller investment. When you buy two or three units for the price of one, the opportunity cost of a vacant unit has less of an effect than when you have purchased a pricier single unit.

Would you consider low-income investments? Why or why not?

Comment below!

About Author

Martin Orefice

Martin Orefice has over 12 years of experience in the real estate industry, specializing in rent to own deals and flipping houses. He created Rent to Own Labs as a hub of information about all things rent to own.

6 Comments

  1. Ali Hashemi

    A disciplined investor won’t be bias against particular income levels.

    The income level should only matter in-so-much as it relates to the ROI. If you’re honest with yourself about the quality of tenant and quality of neighborhood, the numbers will tell the story.

    Once you have honest calculations it’s up to the investor to determine a) if the investment meets their risk tolerance and b) if the return accurately reflects the risk

    As Mr. Wonderful on Shark Tank always says, “I only care about how quickly my money comes back to me”

    • Martin Orefice

      You’re absolutely right! People with different income levels rent differently priced properties because they go after what they can afford. Having a low income should not price you out of a place to live.

      Mr. Wonderful is right too. I usually get my money back a lot quicker with low-income investments than with high-income investments.

  2. Bernie Neyer

    Lower income properties can actually return more dollars per square foot than higher income properties.

    While every state and city differs, I’ve had properties return $1 per square foot, while a higher income property, in an upper middle income neighborhood only returned 75¢ per square foot.

    The difference between the two is associated costs and/or inconvenience. With lower income properties, you will get tenants that have an assortment of personal issues. My experience is that lower income tenants tend to complain more, violate the rules more and then obfuscate their culpability. You have to learn to deal with these issues.

    I’m not one for Section 8 supplemented rent. Every place is different, and certainly high rent areas will have working poor, that need help, but in our area the Section 8 recipients tend to be drug users who can’t hold a job. They also tend to be personally lazy, and fail to keep their places clean even to the point of not taking the garbage out. They complain a lot like they’re actually paying the rent themselves. These, in my opinion, are the result of the drug use.

    We have 5 simple rules to follow, now there are a lot of explanations beneath them, there are only 5.

    1) Pay your rent on time.
    If you can’t, let us know before the first and when you’ll be able to pay in full.

    2) Don’t bother the neighbors.
    We have a zero tolerance for the police being called to the property because of your actions.

    3) Don’t tear the place up.

    4) Keep the place clean.

    5) Leave it clean when you leave.
    We want to take the key from you and give it to the new tenants.

    • Martin Orefice

      Hey Bernie,

      Those are good rules to follow. The neighbor one is HUGE, it is so important to keep your neighbors happy, it tends to pay off over time.

      I’ve never had an experience in which I can take the key from one tenant and give it to another, but aside from a few horror stories, my tenants have left the properties relatively clean. I always have professionals come in to clean before my new tenants move in because I would hope to be given the same courtesy.

  3. Charles Morgan

    I have found my low income tenants to be relatively hassle free, and willing to help take care of the place in order to have a large place with lots of space for the money.
    My Section 8 tenants have been great, over 2 years, the only major problem has been the roof (not their fault). They didn’t replace the fire alarm batteries, I should make sure I do that every year. The property just passed the housing inspection with nothing more than the batteries and a window screen in two years.
    My second low income tenant has been great (not section 8), hard worker, has only made two late payments in over 3 years, rarely calls for anything, I have not raised her rent in three years because she has been so trouble free. She has paid for the property in that time, at this point my only costs are taxes, insurance, and occasional repairs.
    I’m helping a third low income tenant apply for section 8, I expect they will be around for a few years, I do need to add some more electrical outlets to that home, minimal cost to keep good tenants.

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