Investing in Low Income Areas

[Greg Gasiorowski]

Hello everyone,

I'm new to the forum and have been doing a lot of research in buying rental properties.

I currently live in the Philadelphia, but would like to invest in lower income areas such as Chester, Marcus Hook, or Trainer (PA). I'm very familiar with these areas since I grew up near them, but wanted an expert's opinion when it came to buying rental properties in low incomes neighborhoods.

I've heard mixed things about investing in low income neighborhoods such as the quality of tenants, the actual profit gained from renting in these areas can be low/minimal, and crime associated with these environments.

However, I see these areas as an opportunity to at least start my real estate venture. 1.) Housing in these areas is extremely cheap so I could easily afford the homes for sale within the area. 2.) The quality of tenants can determined by properly screening potential tenants. 3.) I could establish security measures for these homes such as alarm systems and upgraded windows and doors to minimize burglary and offer tenants more peace of mind.

First, I would like feedback as to what can be expected in investing in low income areas and if it is truly worth the expense.

Secondly, I would like to know how you obtained your property (I'm referring to your first property - ie how you started). I know there are many avenues in order to buy the property and, again, this is a topic where I'm hearing mixed things. I've heard some people say you could got a traditional mortgage to start off, but I've also heard that people are shying away from this method (traditional mortgages are dead?). I've also heard people taking out lines of credit from their own homes to fund their rental property, but I'm not sure if that's a smart move.

Any advice that you could provide would be greatly appreciated....

Thanks!

Greg

[Michele Fischer]

Greg, you will get a lot of naysayers.  This blog post contrasting our best and worst year may be helpful:  https://www.biggerpockets.com/blogs/4445/48554-201...

The fact that you know the area is a big asset, this is huge.  The other thing to look at is what kind of time you have to devote if you plan to self manage; this niche takes more time. We do not have many issues with theft and crime; most issues are related to drama they bring on themselves.

Other thoughts:

Advantages of Low Income:

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:

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.

Whether you go low income or not, there is no guarantee of getting a rent check each month, of the property being taken care of, or having a smooth turnover experience.