What does it mean to buy the higher end of the low end?

Question

Over the past 20 years, I have developed a strategic approach to investing in the higher end of low-income neighborhoods. This approach aims to maximize value while minimizing the risks involved. To achieve this, I focus on several key strategies, such as selecting areas with lower foot traffic, avoiding streets dominated by multi-unit properties, and targeting neighborhoods with well-maintained yards. Additionally, I steer clear of mixed industrial or commercial zones and look for signs of neighborhood improvement, like remodeled houses. These tips have helped me find properties with the potential for appreciation in value and stable tenancy.

Can you tell me more about your experiences?

V.G Jason · Answer

Hmm, just from the first view I'd the opposite. I'd buy the lowest house in the best neighborhood, and fix that thing up. You have lots more room to develop and are attracting a higher tenant pool.

Not the best in the worst neighborhood. You're likely capped and attracting a lower tenant pool.

Anything pre-rona and discussing appreciation of your property really does not apply to 2023. You got in great, don't think that'll mirror going forward.

Marcus Auerbach · Answer

You can make anything work, but that would not be my first choice. Here is why: real estate is about people. For many people moving up in neighborhoods is a goal. As soon as they can afford it, they will buy or rent in a nicer neighborhood. They want to be safer, send their kids to better schools, go to better grocery stores and have better neighhbors. It's human nature. It puzzles me how many of our tenants drive a high end German SUV - but it is a reflection of this desire.

We surveyd property managers in Milwaukee and asked what portfolios did the best over long periods. Without hesitation everyone said class B neighborhoods. It takes capital to build a class B portfolio. Per definition that is the segment just above median price, which is now 248k in Milwaukee. The higher end of the low income areas would still be under 150k and that comes with a lot of issues, a lot of deferred capex (nobody spent money on these 100 year old houses since forever) but a roof or windows cost just as much as in a calss B area.

Marcus Auerbach · Answer

It's about people as much as it is about math! A house without a tenant is not an asset, it's a liability. And while individuals are sometimes unpredictable, people (plural) are very predictable.

The demographic segement you work with also makes a difference.

At lower price points you are dealing more with needs driven tenants. They need a place that sleeps a family of 4. Above median lifestyle factors start to come into play, it's about what they want and preferences. If you can meet these preferences you get higher rents and people who are generally very easy on the property. Note that we are not talking about luxury, this is just above median. Luxury is tricky,  because the expectations are very high and the segement quite volatile depending on the state of the economy.

Jorge Vazquez · Answer

I totally get your concerns about market risks, but let me share a bit from my own experience, especially considering long-term investments. When you're looking at this from a long-term perspective, the focus often shifts more towards the rental potential rather than the immediate equity of the property. In many scenarios, the equity part isn't the main player. The real game-changer is whether the property can endure the ups and downs over a long period.

Let me give you a personal example. Over the past 10 years, I've bought about 25 properties following this strategy. Most of these were in the range of $50,000 to $75,000. By focusing on these types of investments, I've managed to build up around $5 million in equity. It's all about picking properties that might not seem like much at first but have the potential to generate a steady stream of rental income.

Also, there's something to be said about buying the best property in a less desirable neighborhood. By doing this, you're entering the market at a lower investment point, which can minimize the financial risk. This approach can pay off significantly, especially as these neighborhoods start to pick up in value.

So, it's not just about the price you pay today, but also about the long-term potential of the property. While there might be some fluctuations in market value in the short term, the consistent rental income and potential for future appreciation can make these investments quite valuable in the long haul.

Hope this example helps illustrate the point a bit better!

Joe Villeneuve · Answer

How does this Minimize risk?  If the rest of the market validates the lower prices for the same property, how does the property bought at a higher cost than the rest hold its value?  That would be the first property to lose its value.

What does it mean to buy the higher end of the low end?

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