What makes a neighborhood bad vs good?

Question

I read some topics in the last couple of days talking about buying in lower income neighborhood. I am a little confused. What makes an area a war zone? It is strictly the crime rate in the area or does the average income also determine that?

Before I buy any property, I call the local police department and speak with someone to get more information on the neighborhood. I have decided to not move forward on couple of really appealing deals because the person I spoke with from the police dept told me not to. He said he wouldn't invest in that area if he had money to invest.

Basically, aside from talking to local police department and other investors in the area, what else should I be doing to make sure I am buying in a decent neighborhood. I am also in constant touch with local city Planning and Development Dept (mainly to confirm the zoning for the property). Any ideas will be much appreciated.

Mitch Kronowit · Answer

I check demographics data, such as education and income levels, unemployment and poverty rates, and school performance as well as actual crime statistics. But nothing beats visiting the neighborhood itself and having a look around. 10 minutes of driving will tell me more than 4 hours on the computer and telephone.

Do the homes show pride of ownership? Are there bars over the windows? Cars and/or appliances on the front lawns? Graffiti on every vertical surface? How close to industrial and commercial buildings are they? What about railroad tracks, freeways, drainage ditches, etc.?

Of course, visiting the neighborhood is time and money intensive if far away. That's primarily why I stick to properties within driving distance from home.

Brandon Kamm · Answer

One thing to remember to is neighborhoods change big time from 9am to 9pm.  A property and area can look decent on a Tuesday at 11am.  Saturday night at 2am it may look completely different.  We manage in several areas that look great during the week during the day, no one is out, looks decent. At nights and weekend the area has had gang killings, drugs, etc.  If you came in from out of town and looked at it during the day you would think the area was ok

Sharad M. · Answer

Mitch, thanks for the reply. I haven't been checking any demographics data, but I am going to start doing that. Thanks for the idea.

Another thing I actually do is drive around and talk to anybody I see on the street where I am considering buying a property. I also visit the area in the night just to get the feel.

I haven't seen any bars over the windows, no cars or appliances on the front lawns, no graffiti. I haven't noticed many boarded up houses either. Though every now and then, I will find an occasional empty beer bottle or can outside the property (anything to be real concerned about?.) The area is about 5-10 mins drive to a BP refinery and 15 mins drive to a big casino.

IMO, the area is not a war zone, just a low income neighborhood. The average gross monthly income of my tenants is about $2k. Would you expect similar issues investing in a war zone vs. low income neighborhood?

Scott Karg · Answer

I invest in "bad" neighborhoods in Baltimore. We deal mainly with sx8 and other programs, so it sort of goes hand in hand. These are not war zones, just lower income neighborhoods.

Have you read this yet? I invest and work with her, and we do not consider a purchase a deal unless it cash flows a minimum $300 a month.

http://www.biggerpockets.com/renewsblog/2011/02/04/positive-cash-flow-landlord-example/?utm_source=BiggerPockets+Newsletter&utm_campaign=12a5099961-February_6_2011_Newsletter2_6_2011&utm_medium=email

Nick Henson · Answer

Both "bad neighborhood" and "war zone" are very subjective terms and Deuce hit the nail on the head in regards to the gut feeling. I don't think you would want to buy in either one but neither necessarily apply to low income areas. You can find a lot of home ownership and pride in low income areas and a lot of people who, for whatever reason, still want to live in those areas. Housing in low income areas is challenging and you have to weigh a couple of key factors: Will the person WILLING to buy here qualify for the purchase? Will the renting in this area be more work (turn-over, issues) than you are willing to invest?

Mark Small · Answer

Choosing the right neighborhood is key.   Why?  Real estate derives its value from one major component - cash flow.  Cash flow defines value.  Cash flow gives value.  All cash flow is derived from tenants.  And the best tenants live in the best homes.

That said, my # 1 criteria for choosing a neighborhood is simple - I choose neighborhoods I would be happy living in.  As simple as that is, it correlates nicely with 1)  attracting and retaining the best tenants and 2) protecting my investment from deteriorating.

My criteria runs deeper after that:

Gravity of a neighborhood is a critical component of my decision making.

Availabity of opportunities in that neighborhood with the right returns, of course also factors in.

But if I had to choose between short term yield and the long term stability of a neighborhood I would live in, I'd take the latter all day long.

Mark Andrew Small

Jason Miller · Answer

I invest in low income neighborhoods rent to owner ratio is around 3:2.  I also live in the area.  My perception has changed greatly in my time living here.  Everyone needs a place to live within their means.  Money can be made in all areas if done correctly.

There are pros and cons to good and bad neighborhoods.  It matters on your tolerance to the specific cons and your desire for the specific pros.

Don Hines · Answer

I think Mitch nailed it with his reply. On the other hand, I have increased my farm area by visiting areas that were in my mind previously off limits. Increased farm area has also increased the number of offers I make.
Don

Account Closed · Answer

I agree with Nick.  I look at properties somewhere in between.  I have found that it is rare to find good investment properties in either war zones or high end neighborhoods.  My perspective though is based on the properties ability to cash flow.

Bob Hines · Answer

I live and invest in St. Louis and a big thing that my partner and I use to judge blocks here are the alleys.  Are they littered with trash?  If so, is it one spot or is it the whole alley?  If it's the whole alley, that's a big red flag for us that the people who live around there don't care for their surroundings.  If it's just a spot, maybe the dumpster was overfilled or the cart got knocked over.  Also while checking out the trash in the alleys, you get a chance to take a look at the back of the houses and see if there are cars on blocks, furniture scattered etc.  If the inspectors come out, they are more likely to ding people on the front of the house and not the back so the back may give a different impression of what the block is like.  It also gives you a chance to take a look at the flip side of the block as, at least in South St. Louis anyway, things can be different on a block by block basis and it's good to know what you share an alley with.

We also take a look at the % of multi family properties on the block.  We figure the more multi-families on the block, the more turn over and the unknown of what it is going to be like from year to year.  Not that multi-families are a bad thing, it's just something to keep in mind if you're having a difficult time deciding between 'war zone' and 'low income'.

What makes a neighborhood bad vs good?

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