First property! Sketchy town vs great cash flow

[Price Steven Burge]

Im looking for advice of really what to even expect with buying property that's inside/ on the edge, of a bad neighborhood. Most of these fall under 20000 and need so minor to medium repairs but with how long some of these have been listed I feel like I can barter with the seller on atleast one of them. I really have a lot of questions on what to expect with class D tenants. If anyone has any advice or tips please let me know I'm nervous over the fact this is my first property at age 19 to handle but I feel like I can do it.

[Michele Fischer]

Do you really mean class D or class C?  Do some research on the difference and your area.  Have you visited your area to get  feel for the area and different blocks?  Talked to the police (most have a community officer who is happy to chat about which areas have which issues).  The lower income areas normally have higher cash flow and lower appreciation.

PRO's of Low Income:

Advantages of low income:

Lower property investment cost. $/square foot and square footage is lower, so purchase price and repair costs are lower. Our motto quickly became “safe and clean”, allowing us to stay focused on using the cheapest products available in rehab.

Higher occupancy rates. Applicants are often living with friends or family, so are often able to move in mid-month, as soon as the unit is ready. More stable tenants tend to need to give notice, and move near the first of the month.

Lower expectations. Low rent tenants are willing to live with more flaws, fewer extras, and won’t be as demanding about discretionary maintenance and improvements.

Fewer evictions. Low income tenants are more willing to move out when the situation gets bad. We have not had to deal with someone living in the unit rent free for months while we work through the eviction process.

CONS of Low Income:

Disadvantages of low income:

More turnover. Low income tenants are not as stable, so they tend to move more often. Even some of our best tenants have become nightmares at move out. Dealing with move out, unit rehab between tenants, and prospective tenants is a huge time, energy, and cost drain.

Higher utilities cost. Water/ sewer/ garbage is about the same cost for a 500 square foot unit as it is for a 3,500 square foot house, so utilities become a bigger percentage of total rent and costs with smaller units.

Collecting rent is time consuming. Very few tenants mail us a check or deposit the funds in our bank account. Some bring the cash to our front door, more have us come get it at their front door, and both involve texts back and forth to coordinate schedules. We often have to initiate the conversation to find out where rent is, and we often have multiple trips to collect partial rent during the first two weeks of the month. We admit part of this is due to our desire to visit the properties more often and our willingness to be flexible for our tenants. It may be possible to set expectations and have low income tenants pay less hands-on, but it is a consideration.

More difficult to screen applicants. Most of our applicants have no bank accounts, have terrible credit, and it is difficult to know where they’ve really been living.

Lower loan amounts. It is more cost effective to mortgage and refinance one property worth $150,000 than two properties worth $75,000. The inspection and appraisal costs are about the same for a $30,000 house as a $300,000 one.

Easy to over improve. It is so easy to get into the trap of wanting to get the property to the standards you would want to live in. Such spending brings risk of being destroyed by tenants or never getting the value out at sale.

Whether you go low income or not, there is no guarantee of getting a rent check each month, of the property being taken care of, or having a smooth turnover experience.