Investing in low income cities

[Lucas Procopio]

This is very broad so I just looking for some past experiences one may have had, I'm 25 years old and currently hold a solid union job in western PA about an hour north of Pittsburgh. The city I'm in is a depressed area of about 30,000 people with very little in the way of jobs paying over $8.00 an hour, avg household income here is $25,000. The average 3 bedroom home goes for about 60,000 but many more closer to the 50,000 mark, very little in the way of rentals, maybe 3 small apartment buildings a few single families and a few multi families all renting for about 500-700 a month. The 2 nice areas of town have going rates from 120,000-200,000. There are some potential rehabs. Does anyone have experience in this type of area and any tips on RE in a depressed city or should I possibly consider avoiding and look elsewhere, just looking for other opinions.

[Ron Vien]

Lucas,

I've been investing in New Castle PA since 2011 and have a wealth of info to share with you.  This was my first foray into real estate investing and learned a ton.  I have 7 properties, 8 units.  There are pros and cons to every market and there is money to be made at both ends of the spectrum. New Castle is on the lower end of the spectrum.  I'm an out of State investor and make a trip or two to the area every year.  That's mostly driven by my hands on nature and desire to establish relationships with my tenants and city officials.   I've stayed in some of my properties and have always felt safe.  I grew up in a similar town so I'm familiar with the demographic.  Here are some of my takeaways.

The tenant pool is tough but I do all my own property management and will keep a home vacant rather than risk a bad tenant.  I charge a property management fee similar to the going rate so my property expenses account for a management fee.  Using a strict screening process has worked out great as I have several tenants who have stayed in the property for 4+ years.  I keep my rents competitive and if I have a good tenant I don't raise the rent for several years.   Since 2011 I've only had one eviction.  

Yes these are older homes and do require upkeep.  I've been bitten with roofs, sewer lines, vent stacks, and a furnace.  Part of this is my fault because when it comes to roofs I want it done right and would rather replace the entire roof and be done with it, rather than patch it every year.  I target the higher end clientele of the New Castle market and renovate my properties to meet their expectations.  

I have gone great distances to establish good working relationships with all the Code Inspectors and have had no problems with them.  This took time but if you say what you'll do and do what you say they're reasonable people.  Unlike Massachusetts where you need a permit for everything New Castle is much easier.  Labor rates for work are also considerably less than my State of Massachusetts.  

I'm no expert but I see little opportunity for capital appreciation.  This is a cash flow position. On a positive note the city has been on a tear down spree.  There is too much outdated housing stock so they are tearing down vacant properties which will certainly improve the town.  The downtown area has maintained a steady business portfolio and just outside of town in Union Township is a new Holiday Inn hotel, Sheet's Gas Station, and McDonald's.  Some positive signs of big companies making investments in the area.

My recommendation is to stay away from multi-families in this area.  I know of several investors who went this route and have lost their shirt.  The tenant pool is tough so one bad tenant forces the others to move.  Secondly, buy existing houses that are occupied.  I spent the most money on a "cheap" vacant property after all the rehab.  If someone is living in the home there's a good chance you have good electric, plumbing, sewer, and heat.  Vacant homes are money pits and with the price of a decent occupied property being so cheap just avoid the headaches and have a property ready to rent or better yet already occupied. 

If you want more info I'd be happy to talk with you.