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Updated over 7 years ago, 09/08/2017
Rentals in not the best areas?
Hello BP Community,
I am currently looking at properties for my first rental. I see that there are properties that are located in the not so good areas. Does anyone own rental properties in areas that are not necessarily the best? If so, how do you minimize your risk for getting bad tenants? Is it even a good idea to look in these areas?
I would appreciate any input. Thank you!
#2 Multi-Family and Apartment Investing Contributor
- Rental Property Investor
- St. Paul, MN
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#2 Multi-Family and Apartment Investing Contributor
- Rental Property Investor
- St. Paul, MN
I have owned in bad areas and would not suggest it from my experience. House was cheap, so it cash flowed $500+/month until they stopped paying. Then I evicted the tenant and had to spend a month and $5k-$10k renovating the place. Take that times 4 tenants and you get no cash flow. The good thing is I sold it for $25k more than what I paid after all expenses.
Lissette Deleon I'd recommend you search on the forums for how to manage properties in bad areas. Generally, it's a different ballgame than buying in a B- area. I'm 100% sure you can make money doing it, if you want to is a different story. Personally, I don't think it would be my first stop if I was a rookie investor. I'm not exactly a rookie but even at this point it wouldn't be something I'd dive into.
@Todd Dexheimer, @Andrew Johnson, Thank you for your input. this is not the route I want to start this journey on, but was just curious if this was something that investors took part in. If I do decide to take part of this, it will not be any time soon!
We've got a few in not so good neighborhoods. Our smallest house is currently rented to a not-so-young couple; one who works at Wendy's, the other at Taco Bell. It's only an 800 square foot house; however, previously they were living down the street in a 500 square foot house so they are happy to be in a "bigger" place. They are also used to the neighborhood.
I've owned the house for around 8 years; paid less than 20K for it. Needed quite a bit of work when we got it; most of which we did ourselves. Currently rents for $625 a month so it's long paid for itself. Taxes are reasonable on the place.
The downside is the difficulty renting it when it's empty. It's only a block away from a busy street with lots of foot traffic. Every time it's empty and it's up for rent I get lots of calls from "Ashley" or "Melissa" or other young sounding women because, well, the rent is cheap. I know who will feel comfortable living there and it's not them. To save time and energy I always encourage folks to drive by the place first (it's actually a pretty cute little yellow stucco house with a privacy fence) to "view the neighborhood". I rarely hear back from those that do.
Gail
I have been doing this for 41 years now. Back in the 70s I would buy and very very bad neighborhoods and rent only to Hud tenets. It was very very profitable. But even with my size I am 6 foot five and 250 pounds and work out five days a week, I would never go to these places at night. If you were hungry enough you can make money there to jumpstart a portfolio. I have not done Bad neighborhoods since the 1995
You're wise to seek out information. Problem is that many have opinions but no experience in these areas. And if they do have experience, few have been successful.
Long story short, I've worked since 2002 on a neighborhood turnaround. There is nobody, at this point, that would say my efforts haven't been anything less than an overwhelming success. Properties now sell for $30K - $50K over asking price.
With that said, and with countless posts on the topic here on BP, let me suggest the following:
1 - Look at the trash on the ground. The volume and type of trash will tell you a lot about what's going on in the area.
2 - Find out if a neighborhood association or neighborhood watch group is active in the area.
3 - Find the edge of the good and bad neighborhoods. That's the only area you should consider investing in.
4 - Ask yourself, "Do I have a thick skin?" If you aren't able to bounce back after getting your feelings hurt, then invest in a different area.
If you can bounce back, then you can easily amass $1M in restored equity in an emerging market (inner city neighborhood) by working a long term plan.
I'm a wholeseller here in the DFW marketplace and one of our investors loves to buy homes in our rough neighborhoods, Fairpark. He buys for 30k puts 20k into them and the rents them for 900 a month. He's getting great return and as long as you have a property management group that is local to the area you typically don't have many issues. That's not to say there aren't risks involved, there are always risks in rentals.
@Gail K. Thank you for your input. What I am getting is that it is definitely possible to do this, although more difficult. I see that you got success from carefully screening and weeding out the people you are pretty certain will not do well.
@Jeff Small, thank you for your thoughts. Is there any particular reason you stopped investing in these neighborhoods?
@Al Williamson, I will definitely take a deeper look into this neighborhoods and take into account your suggestions. Although this is not the first challenge I want to face right away, it does not hurt to do the research and have some foundations just in case an opportunity presents itself.
@Reyes Velasco, This was the reason I looked into these neighborhoods, the prices are pretty good for multi-families. Do you have experience working with tenants with section 8? How does it differ with a tenant that pays market rent? Thanks for your input!
@Robert Westbrook, There is risk in anything you do, you cannot avoid it. I am trying to figure out if the risk is worth it. I have had this conversation before, whether or not these neighborhoods make a good investment, and all I hear is that they are war zones and to stay away.
I would stay away from "bad areas" until you get some experience and you have your full team in place.
Consider College areas, yes I know they are not perfect tenants but when it comes paying rent on time I have no complains. Typically you have parents as their cosigners..
I own a property in a "not so good" area....to be honest one person referred to it as one of the worst streets in the city. Its not that bad. People are people whether rich, poor, middle class etc. Just thoroughly vet your tenants. My only suggestion is I would not invest in an area that I felt uncomfortable visiting. It's really all about what you are willing to deal with. In my short lived experience if you provide quality service, treat them like people, and act assertively they will respect your property.
@Lissette Deleon I completely understand, I will say my investors that are willing to invest in the lower parts of town wherever they may be typically have a model of investing on the fringes of gentrifying neighborhoods. That way they can look forward to appreciation on their property while still making a revenue on their rental. Here in Dallas they invest in the Fair Park area, Trinity River, and lower South Dallas. I would suggest that you build a network of property managers and figure out which ones are having the most success in the areas you wish to purchase before even purchasing. You're property manager or whatever method you use to manage these properties will be your success or demise.
@Lissette Deleon The section 8 tenant i have is great, they automatically put the money in my account on the 3rd no problems. But you have to make sure the house is up to code.
I have learned that my best cash on cash return is where I can buy the cheapest properties, often that's in a scarier area - but I do avoid anything I am scared to walk alone at night. That's my safety line.
I prefer not to, but rather than say it is better or worse, here are the pros and cons from my POV:
Pros:
- Initial cash flow is higher
- Purchase price is lower
- More distressed properties/sellers so that it may be easier to find a steeper discount below market price (on a percentage basis)
- Easier to diversify in the sense that you can buy more doors, since they are less $/unit
Cons:
- More management intensive
- Generally lower quality tenant base
- Cash flow is less steady/more volatile
- Higher CapEx and vacancy rates
- Typically less market appreciation over the long term in both prices and rents. Could even have negative inflation adjusted appreciation
- Under $50k is typically much more difficult to find financing on
- You likely will need to scale up to a large portfolio before you really start to make significant profits (in terms of $s rather than %s)
- Less liquidity, meaning it will take longer and be harder to rent, refinance, or sell if you ever need or choose to.
So, depending on how you weigh the pros and cons will depend on if it is good strategy for you personally.
Easy question to answer.
Ask yourself, would you yourself want to live there and feel reasonably comfortable and safe with that location?
If not, then I don't buy unless the deal is just that good, and the area is still "ok". It is a simple rule I follow.
Some people call them ghettos, many call it home.
Originally posted by @Chris Grenier:
Some people call them ghettos, many call it home.
Well said Chris
Originally posted by @Lissette Deleon:
Hello BP Community,
I am currently looking at properties for my first rental. I see that there are properties that are located in the not so good areas. Does anyone own rental properties in areas that are not necessarily the best? If so, how do you minimize your risk for getting bad tenants? Is it even a good idea to look in these areas?
I would appreciate any input. Thank you!
I think that managing in Class C or worse neighborhoods is a game for those who are incredibly skilled and incredibly experienced. It is imo the last place someone should begin their real estate investing career.
As an example on one of the Chicago threads, another poster talked about having the following things happen to him:
1) HE had dry wallers who were held up at gunpoint.
2) had sod stolen...after it had been laid. Yes, he had his grass stolen.
3) He had someone break into a staged house and invited others over for Thanksgiving. Then they stole/damaged the furniture.
4) Stolen plumbing (fairly common).
There were a few others, I forget them all, but you get the point.
Having said that, I think there are people making big money in those same neighborhoods. I just think its a game for the experienced who knows neighborhoods block by block.
I think as a new investor you are better served to buy a little better property in a B neighborhood, learn how to manage it and then worry about things like rehab, value add, higher return neighborhoods etc.
Best of luck to you!!!
Originally posted by @Chris Grenier:
Some people call them ghettos, many call it home.
I have 100+ SEC 8 tenants between my own and those I manage. While HUD calls it the "Housing Choice Voucher Program", because it is intended to allow low income people to find alternatives to pockets of poverty and provide better opportunities, the reality is that when someone is working an $12 job, is the only income in the house, and has 3 kids to feed, cloth, and care for, there literally isn't enough money to cover all the expenses. That's the whole purpose of the subsidy. If the kids are too young to stay home alone though, this puts daycare on the list of items to be paid for, and daycare is far too expensive for a low income person to afford. Thus, SEC 8 voucher holders tend to want to live in the same neighborhood as their extended family members who will take care of their kids while they work. It's not that they really choose to live there. It's that living in the low income neighborhood they grew option is usually really their only option.
- Patti Robertson
- 7574722547
@Lissette Deleon - (Not sure why tagging isn't working for me.) I wrote a blog that may give you some insight. Here's the link.
https://www.biggerpockets.com/blogs/9232/55313-intro-to-section-8---your-perceptions-vs-my-realities
- Patti Robertson
- 7574722547
#2 Mobile Home Park Investing Contributor
- San Antonio, TX
@Lissette Deleon I've done it in the past and it made the situation worse. Couldn't pass up on the deal. Only looked at the numbers. Soon found it was hard to "convince" the type of renters I worked with in the past to live in this neighborhood. At that point, I already had a portfolio and contacted my existing tenants to see if they had any friends and/or family members interested. They came to look and asked if I had anything else.
Through experience, I've learned you can change the house but not the neighborhood. Each area will attract a certain type of clientele. As an investor, it's important to know that and work in areas where you feel comfortable with the type of people it attracts.
Due to the area clientele, I decided not to fill the property and ended up selling to another investor.
Just my experience. Hope that helps!
You have to know the area, that you invest in. Some of these "bad areas" or whatever aren't so bad. You have to maneuver through and understand the difference between the potential bad tenant and the hard working dad and mom who trying to make ends meet too take care of their family. There are good people who do not have the qualifications to get a higher paying job and sometimes it will compromise your current living situation. There can be a terrible complex with "bad tenants" but around the corner in the same neighborhood their can be pretty good units with great people who is striving to do the best they can to survive.
Originally posted by @Al Williamson:
You're wise to seek out information. Problem is that many have opinions but no experience in these areas. And if they do have experience, few have been successful.
Long story short, I've worked since 2002 on a neighborhood turnaround. There is nobody, at this point, that would say my efforts haven't been anything less than an overwhelming success. Properties now sell for $30K - $50K over asking price.
With that said, and with countless posts on the topic here on BP, let me suggest the following:
1 - Look at the trash on the ground. The volume and type of trash will tell you a lot about what's going on in the area.
2 - Find out if a neighborhood association or neighborhood watch group is active in the area.
3 - Find the edge of the good and bad neighborhoods. That's the only area you should consider investing in.
4 - Ask yourself, "Do I have a thick skin?" If you aren't able to bounce back after getting your feelings hurt, then invest in a different area.
If you can bounce back, then you can easily amass $1M in restored equity in an emerging market (inner city neighborhood) by working a long term plan.
This is one of the most useful post ever, for me. Could you help me elaborating on the trash and neighborhood watch parts? Are you looking for needles? If there is a watch group, is that supposed to be a good sign or a bad sign? If the area requires a watch group, then it is bad enough for the neighborhood to form that watch group. On the other hand, if they are forming a group, then I guess it's safer than the next block down the street.
You're wise to seek out information. Problem is that many have opinions but no experience in these areas. And if they do have experience, few have been successful.
Long story short, I've worked since 2002 on a neighborhood turnaround. There is nobody, at this point, that would say my efforts haven't been anything less than an overwhelming success. Properties now sell for $30K - $50K over asking price.
With that said, and with countless posts on the topic here on BP, let me suggest the following:
1 - Look at the trash on the ground. The volume and type of trash will tell you a lot about what's going on in the area.
2 - Find out if a neighborhood association or neighborhood watch group is active in the area.
3 - Find the edge of the good and bad neighborhoods. That's the only area you should consider investing in.
4 - Ask yourself, "Do I have a thick skin?" If you aren't able to bounce back after getting your feelings hurt, then invest in a different area.
If you can bounce back, then you can easily amass $1M in restored equity in an emerging market (inner city neighborhood) by working a long term plan.
Check out my book, Building Wealth with Inner City Rentals to get more details and save yourself years of trial and error.
Hope that helps.