Buy&Hold low income area. Your opinion?

Question

I have heard all the horror stories of 'Bad Tenants' who trash / destroy / gut the landlords properties, and read about the how-to's on hedging against it.

The thing I don't know who would fit the criteria of a 'Good Tenant' if you are trying to gain a high-cashflow in a low income area. The other conundrum I am trying to avoid, under the assumption that I get myself a Buy&Hold in a low income area, I may get 20 'Bad Tenants' apply, and no 'Good Tenants'.

Law isn't my strong-suit in the subject of real-estate, but given the above scenario, I do not believe that you can deny all 20 'Bad Tenants' if you don't find even a prospective 'Good Tenant' either.

It is true, you can be too wreckless, but it is also true that you can be too cautious! So I need somebody with more experience than I here:

Am I being too cautious? Or are my reservations a solid "Stop" sign??

Mike Sattem · Answer

@Craig C.,Income and Rental history are the biggest concerns. If people have decent jobs and haven't had issues in the past, they are more likely than not going to be just fine. The issues arise from when landlords either don't actively manage, or they settle for tenants with red flags. I have bought a fair number of properties from landlords that let the little things slip that turned into big issues (i.e. no smoking, turns into smoking on the porch, turns into smoking inside. No adults in the home that aren't on the lease, turns into an out of luck family member needing a place to stay short term, turns into 17 people in a 3 bedroom home)

Craig C. · Answer

I greatly appreciate everyones insight! @Penny Clark @Michele Fischer @Mike Sattem @Jay Hinrichs

Penny Clark · Answer

@Craig C., you can find an "A" class tenant for your "C" class properties, but it takes work and you have to screen very well. These tenant types have had credit issues (defaulted student loans, bankruptcy, foreclosure, short sale, medical collections) that have plummeted their scores below 600 and shut them out of nicer properties. They still need to live somewhere and will choose your rental if it is clean, secure and in good repair. Just a side note here about low credit: seniors who don't charge up cards or have no installment plans, young people fresh out of college, and undocumented workers all have low credit scores but may make great tenants.As others mentioned above, income and rental history is what you put the most weight on. Talk to previous landlords as well as the current one. Ask them specific questions such as, "Were these tenants late with their rent at any time and what were the dates; Did you issue them any notices and what was the reason? If an applicant's home was foreclosed on and does not have a landlord reference, check the tax assessor's office to verify the tenant actually owned the home. BTW, I also use this method to verify the name of an applicant's previous landlord matches their last rental address. Verify income with several month's worth of pay stubs and when checking employment, google the company where they work and go through human resources to speak to their supervisor. If they are on a fixed low income (SSI, Social Security, unemployment, public assistance) ask them to produce their award letter along with several bank statements showing regular bank deposits. If they don't have a bank account but get five stars from previous landlords on rent payments with no issues and had a long-term tenancy, that would make a difference with me. However, if you can verify the income is regular and stable, that is your best bet.I hope this helps!

Michele Fischer · Answer

Craig,Respect Jay to death, but I own a handful of low income properties and am doing well. There was one year where each unit had an average of two turnovers and we were working too hard, but for the most part it's been good and we're giving low income people an alternative to slumlord properties. You may want to listen to my podcast.You can absolutely decide not to rent to any of the applicants and keep looking or take it off the market.If you decide what you want beforehand and don't settle, you won't have to second guess yourself. We use a point system, each application gets scored as heck yes, hell no, or "maybe", but keep looking. We look at how long they have lived at addresses, how long they have had their income source, desire income to not be suspiciously high, we google them and look on Facebook, how "high maintenance" they are, how many prior landlords we can reach, criminal activity, etc.

Mike Sattem · Answer

@Craig C.,Remember that it is your house, so legally you can rent it to whomever you like, as long as you don't discriminate based on race, gender, religion, Etc. Even if someone falls into one of these categories, you still don't have to rent to them if their rental history is terrible, it doesn't matter if they are in a protected class, THEIR RENTAL HISTORY IS TERRIBLE! End of Story. I have seen alot of folks settle for bad tenants because they were unwilling to sacrifice the $300 received for an extra 10 days of received rents, while trying to wait for a better tenant. This is why we plan for vacancy, so we have enough cash reserve to cover our bills while we find a new quality tenant. Bad tenants can destroy you financially, which is why tenant selection is they key to making money in rental real estate.

Craig C. · Answer

Thanks @Jay Hinrichs, I really appreciate your insight!

Jay Hinrichs · Answer

@Craig C. the folks I know that have the stomach for this type of investing have their own custom scoring system I have often enquired how they do it .. since 95% of the tenants will be below 600 ficoWhat they look for is habitual non payment of little things like cell phone and direct TV etc etc.what they over look and don't count is medical and eviction is out.you just need to pick the best you can... and maybe your tenant base is not that bad but in C to D in the mid west this is your tenant base. And they rarely if ever have checking accounts.. ( too many bounced checks) or debt collectors coming after them.but they need a place to live as well or as they say .. a place to stay. this is a niche that can produce over time but its a business and a dog tough one constantly dealing with these folks if you can't scale it.. I can't think of a worse thing to do than own a handful or a few LOW end rentals.. it will drive you NUTS. Plus there is no real money in it. .your time would be much better spent building buying up in asset class were you have some long term viability..that's my opinion for whatever its worth and that may not be much.. but I did own 350 of these low income low value assets .. so I do have some experience at it. and for me its never again.

Craig C. · Answer

@Mike SattemPerhaps I need a lawyers input, but the "Settle for tenants with red flags" would imply that there should be no issue in not renting to the 20 'Bad Tenants' who apply if there is no "Good Tenants'... Is this correct? Again, law isn't my strong-suit in the subject of real-estate. Thanks! @Jassem A. Thanks!

Jassem A. · Answer

You still have to be cautious but I usually don't look too hard at credit in the low income areas. I am mainly focused on verifiable income & rental history.