Inner City - How Bad Could It Be?

[James Brewer]

Hi Folks,

I've heard investing in the inner city and low income/high crime areas is horrible, but I'm here to ask either how you've made it work to be successful, or exactly what kind of nightmare you've had?

I've been considering trying to BRRRR in the inner city in several cities in the Midwest (KCM, STL, MKE, CLE) and I live out of state. I've spoken to many local very experienced and saavy agents/PMs who caution against it due to to the amount of headache involved with low income areas and the crime, dangers and risk that come along with it. Specifically that good PMs will refuse to manage rentals in the inner city, and contractors will refuse to bid your job.

While this is excellent and sound advice, can anyone share if this has happened to you or you've found a way around it, and offer any additional reasons/showstoppers that make this a bad strategy - or offer how investing in low income areas have been a home run for you?

 If I were willing to give it a shot anyways and learn from experience, I'm wondering what other huge negatives there may be that I haven't discovered thus far and how likely I'd be to recover from my mistakes. Clearly I'm pretty risk tolerant and hoping I can make it pay off - posting here to gain your collective wisdom!

Thanks!

[Brian Kantor]

Hey, James. I've split my 4 unit portfolio between 2 low-income long-term rentals in Detroit and 2 high-en STRs in Vermont.

All in all, I have been happy with my 2x long-terms in Detroit, but the headaches are real and definitely eat into your cashflow. The key thing to consider is that your projected returns in your pro forma are always going to be too high for low-income, so while it seems like you're getting great returns for low cost to acquire, they never net out so well because of high repairs and maintenance and lost rent.

In one property, I bought it vacant and put brand new builder-grade everything in it. This place was by no means fancy, but was on the nicer-end of what most tenants are used to in the area. I was able to get a Section 8 tenant in there who has never missed her portion of the rent, but once a month, my PM has to go in there to repair something for at least $85. Things are always breaking there because she and her family are just harder on the house than a B-Class tenant would be. I put a brand new range/oven in there right before she moved in, and I walked the property 10 months into her lease. The oven door was split down the middle like she peeled the outer door away from the inner door. How does that even happen? I had to replace it because it's a safety hazard, and she agreed to pay for it incrementally over time, but it's going to take me 3 years to recoup that cost. A fugitive ran through her backyard and while nothing happened, she asked for a flood light to be installed; a reasonable request, which I did at ~$300. The rent at the time of both of these was $850, so all in, those two things were well over 1 month's rent.

My other Detroit property, my tenant just stopped paying and stopped returning calls and messages from the PM. We took her to court and she didnt show up. The case got postponed by the judge for 3 months. Then one day, she just up-and-left in the dead of night without a word. The ironic part was that she would have qualified for Section 8 and we would have done all the paperwork for her, but nope, she'd rather just not pay anything and not get the State to cover it for her. I lost 8 months of rent before she left. Now I am renovating for 7 weeks. I will have ultimately lost about 10 months of rent with little recourse.

Net-net, these properties have appreciated a ton and when my new tenant is in, I will be grossing $2250/month total for the two, but dang. Not a day goes by I dont wonder if I'd prefer half the net income for friendly nice tenants that pay on time, and dont rip the oven door like a tin of sardines...