Investing in Bad (D+) Neighborhoods?

Question

I have a deal where the numbers are good (11-12% cash on cash) but it is in a rough neighborhood of Philly. I am confident in my screening abilities, but still concerned about the tenants and neighborhoods of this area. Does anyone have advice for investing in rough areas? Should I stay away?

To add, I have been looking all year for properties in better neighborhoods, but with the rates and prices, the numbers don't work in my area.

Eric Gerakos · Answer

It's usually a terrible idea. High maintenance, high vacancy. Looks good good on paper but the reality is often a great way to lose money.

Monica Williams · Answer

Hi @Brian Caulfield I don't think investing in rougher areas is a bad idea as long as you are aware of the risks and make sure you plan ahead for when problems arise. If you're worried about the tenants and what they could do to the property, maybe consider Section 8. You still get to choose your tenant and having them go through your screening process but since they are apart of Housing Choice Voucher (HVC) they have have to meet certain expectations and responsibilities in order to be and stay in the program and most people don't want to lose their voucher. Plus it's guaranteed rent from the city.

Kevin Sobilo · Answer

@Brian Caulfield, a neighborhood being D+ doesn't mean all properties are D class. In many cases maybe only 20% of the properties are D class but that brings the neighborhood down.

So, if your property is C class or better you will still likely be able to attract a qualified tenant but since you are confident in your tenant screening, I think you will be ok.

My concerns would be how long it will take to get that tenant and how long they will stay (turnover/vacancy) because it isn't a desirable area. So, I would try to add any small amenity I could to give a better value to that tenant to keep them longer. Could be including a washer/dryer or allowing small pets. Anything that additionally sets you apart to reduce that turnover/vacancy.

Steve K. · Answer

Don't forget the 3 Golden Rules of real estate investing: Location, location, location!

We had 8 units in a rough part of Denver for awhile. Cashflow was better on paper, looked much better in the spreadsheet. In reality our properties in better locations have provided much better overall returns, with so much less difficulty. Sold those ones and never again for me!

There's money to be made in these locations for sure, but only by investors with the right resources and skills/desire to deal with the challenges. Everyone has got to start somewhere, but if you can afford to buy in a better location I'd recommend that instead. Even if the analysis doesn't pencil out exactly the way you've set your criteria, I'd wager your projected cashflow is probably optimistic anyway and you'll actually do better in a better location.

I don't even use a spreadsheet to analyze anything anymore, I buy strictly on location (and price compared to surrounding properties). I'd recommend buying the worst house in the best location you can afford, and fixing that property up to the median. This way you'll capture initial equity through the value-add, and being in a better location will set you up better for success over time IMO. Rents will increase faster, appreciation will be greater, and actual cashflow will probably be better also, especially over time. Turnover/churn, expenses and headaches will be less.

Samuel Coronado · Answer

I've found some success here. Here are a couple of my findings:

Vetting is different. Throw credit scores out the window and look at "credit stories" to determine the right candidate. Medical reasons are the number one reason for bankruptcy in the US. Paying attention not just to the what, but the why.

Do shorter terms. I don't go above bi-weekly. Not semi-monthly or monthly. I go only weekly or at most bi-weekly. This helps people budget better and gives me more touchpoints because I collect in person in cash. This lets me identify problems early on in regards to broke down cars, etc. I've also dealt with programs with people who are coming out of great rehabs. Two of the guys wound up staying for years after and they're doing amazing. I am proud of them, but not all of it is a success story for everyone. I keep things week to week with no obligation to them beyond what they are paying ahead for that week.

I offer incentives. Many of these people don't have the best credit for whatever reason. If they want, I put them in a program called Boost that increases their credit score every time they pay rent. This helps the people who struggle to even get prepaid credit cards.

Be aware of other programs, how they work, criteria, etc. Food banks, rental assistance, etc.

Quincy Lockett · Answer

@Brian Caulfield

I have 22 years experience in such areas and you can be successful as long as:

A) You self manage. It’s very hands on

B)You buy on the better blocks in that area

C)You remodel the units to modern standards

D)You select the best Sec 8 tenant in the pool. They will stay longer because of the remodel and your rent payments are guaranteed.

This has worked well for me but I’d only recommend if you CANT afford to invest in better areas.

Monica Williams · Answer

Here is the HCV website, it explains what you need to do to become a HVC landlord, what the tenants needs, the expectations and responsibilities and more.

https://www.pha.phila.gov/housing/housing-choice-voucher/

Caroline Gerardo · Answer

I have a daughter who lives in Philadelphia and not in Rittenhouse Square.

Block by block it varies. Go lookup tranq and Kensington.

You need security and you will be replacing it as it gets stolen. Where are you getting your market rent numbers from? Can be done if you live nearby. What is your personal background? Go there at night and see how you feel.

Tenants: working class, punk musicians, artists, some college areas but these tenants need more personal attention and cash rents. "Screening abilities" would not be on my top ten bullet points needed to be successful.

Leo R. · Answer

@Brian Caulfield personally, I won't invest in anything less than a C+ grade area, regardless of the return (and I'd even be very skeptical of a C+ ...most of my portfolio is comprised of B and A's).

You could offer me the best CoC return ever on a D property, and I'd still pass. Why? My time, energy and skills are way too valuable to waste on the headaches of D grade properties. Moreover, the damage a D grade property would do to my overall business (sucking up time, energy and resources) would completely offset any "excellent" CoC return...and it DEFINITELY wouldn't be worth it for a 10-11% CoC return.

If you're a beginner, read up on all the horror stories on the forums of inexperienced investors chasing "excellent" CoC returns and cashflow in D areas --the story is always the same: they wanted cashflow, they bought in a D area, and within months they have non-paying tenants, a trashed property, an MIA property manager (who understandably will not put in the massive effort required to correctly manage a D property for the minimal money the property produces), and a world of pain.  ...save yourself the headache, and start off house hacking in a B or better area.

Good luck out there!

Eric Greenberg · Answer

If it were me it would matter the specific block in the neighborhood and if I wanted to deal with the potential headache to make the ‘extra’ money.

Investing in Bad (D+) Neighborhoods?

Most Popular Reply