Buying a home in low income areas

[Brett Stander]

Hello!

My name is Brett Stander, a fourth year finance major graduating from Drexel University in Spring of 2021 (five year program).

While I understand the value of working a 9-5, W-2 job, I also see fear the dry, repetitive lifestyle that comes with it. So instead, I decided to start learning everything I could about real estate, and to look into buying a property this upcoming year.

A little about my financial situation- I am lucky enough to attend Drexel University with full tuition, meaning I am $0 in debt.

Another thing- while I do not have a large amount of financing to my name, I am working with my mom to buy a property in west Philadelphia. She has an LLC in her name that generates positive cash flows (nearly a decade of operation, so all debts are paid off). However, for tax reasons, she continually operates her business in either the negative or breakeven for tax breaks on her, and my fathers, personal tax statements.

All this considered, we are starting to look into our first property in West Philly. Because the area has yet to be touched by the magic of gentrification, the homes are still relatively inexpensive (a fixer upper level home with 3 bed one bath could go for as little as 35k-45k pre auction/foreclosure). 

Personally, I believe that the value in these homes does not lie in the cash flow (although positive NOI is relatively easily accesible given the nature of these homes in distress), rather the appreciation value. Philadelphia is a quickly gentrifying area, and homes that were in low income neighborhoods just ten years ago are now considered (somewhat) prime real estate.

Given this, I will be BRRRing these properties. I have talked to a few agents who have assured me that there are plenty of distressed properties in the area, and my goal is to rehab, and possibly add another bedroom, to cover the hardmoney loan (given a conservative LTV of 75%, but hoping for 80%).

So, I just have a few questions about buying in these neighborhoods. 

- What are the disadvantages to buying in these areas that I may be overlooking?

- Is it more difficult to find tenants?

- Is there a way for me to calculate (atleast roughly) appreciation value of these properties?

- How much will the neighborhood damage an appraisal value of a home? (attempting to BRRR these homes)

- Would section 8 be a good approach in these neighborhoods, or would this be too much of a headache (as the neighborhood is low income as is, I would prefer to stay away from difficult tenants for my first BRRR).

Any advice at all would help, as I would love to hear from the community on this. Thank you so much!

[Marc Winter]

@Brett Stander, thanks for sharing, but that might be a bit TMI regarding yours and your mother's finances in an open forum with over 1 million sets of eyes...  just sayin'.

To respond to your query--lower-income (C- to D-) areas are a crapy crap-shoot.  They look great on spreadsheets, but the reality is that those numbers don't compute in real-world scenarios. It's impossible to factor in the repairs, late or no rents, evictions, and other games the tenants that dwell therein will teach you.

Remember:  you won't get an A tenant in a D neighborhood.  However, if you don't want the boredom of a 9-5, you'll find plenty of action and excitement in managing lower-income properties. 

Some folks love it and make money at it.  I'd rather have a root canal.  (Disclosure--I've managed plenty of 'sub' property, and had my share of serious dental work.  I'd rather the root canal...)

Good luck!