lower end rentals vs higher end rentals

[Geoffrey Murphy]

Hey BP,
I have a question that has been on my mind for sometime now. I was reading a few threads from the archivsection on this but i still needed a little bit of clarification.

I notice that some investors invest in low end rentals (c neighborhoods) vs high end reantals (B to A neighborhoods) U

How do ypu guys make money in the low end rentals. I mean, i was always told to buy property that were locatd in a good area where veryone wants to live, that way the unit is easier to rent or easier to sell in case something came. But i hear investors all the time that the low end stuff givess of more cashflow ect...

Why is that? How do you get that to happen? I thought these tenants were the ones we didnt want?

If someone could explain WHY and HOW? I would greatly appreciate it!

[Curt Davis]

I will try to make this easy for you. Lower price + lower quality areas = higher cash flow and ROI.

Higher priced homes + better areas = slightly lower cash flow.

Over a 5yr period I guarantee the better home with slightly lower ROI and cash flow will provide a higher return then the lower property. You will have more maintenance, turn over and delinquent payments on rent then better areas historically.

Its up to you if you want to roll the dice.

[Ned Carey]

I mostly agree with Curt.

Lower end areas are more risk and more work - hence the higher return.

Higher end areas generally will likely have a better appreciation and be easier to sell when the time comes.

You have to know your market. Right now the market is mis-priced in Baltimore and surrounding areas. Out in the suburbs properties don't cash flow. In the city properties are dirt cheap but the rents are just as high as the suburbs. - So I disagree with Curt that more expensive areas will necessarily do better over time.

[Greg B.]

There is a common misconception that people that rent low end rentals are not desirable renters. Blue collar, honest, working people that don't make top dollar need a clean, safe place to live too. Not all low to mid income people are disreputable. They just don't have the income to afford a nicer rental unit.

I have a great 5+ year track record with my low end rentals.

[Curt Davis]

There will always be the exceptions with lower income properties where someone has been there for 10yrs but I can tell you that working for a company that managed about 1,200 homes,... more times then none the lower income properties are the first to pay late, partial payment, no payment, eviction process started, etc...

Personally, when I look at homes to purchase myself I am looking for C+ to B quality properties that normally have a rental spot between $850 - $995 on average.

[Steve L.]

The question is flawed because what someone considers an A property is completely subjective. For example I rank properties myself and can compare what I think easily.

If you wanted to be an A class landlord in Orange County, your ROI would not be better versus a C class landlord.

There are some landlords who rent under market as a strategy. There are some landlords that fix nothing ever.

Everyone has their own comfort zone and model.

I would suggest you invest in areas you are comfortable dealing with the average occupant in the day or evening and don't grow too quickly at the beginning. From there find a model you like and repeat it as many times as you can.

I personally like buying C+ or better properties in pockets of cities/neighborhoods I know well. With two main criteria: buy with equity today (70% ARV less repairs), have positive cash-flow with expensive financing.

[Al Williamson]

I really like Steve L.'s advice. I now focus on buying low end apts and working with neighbors to improving the neighborhood. I feel good about this process - it works for me.

Every group of properties (A - D) has their own rule set, so find what's comfortable for you.

[Geoffrey Murphy]

Thanks Guys, that was some really great advice! I sppreciate it more than you guys know!

I guess i was always hung up over the fact that the lower income areas were to management intensive, and would eventually turn into a headache if you did not know how to operate them.

Im sure that could be the case with with middle class and higheer end rentals, but i always heard that these rentals were less management intensive and you dealt with a better class of people.

If you guys do not mind, what do you guys look for in a lower income area before you guys actually decide to invest there?

Which one of these areas are great for buy/Hold or rehab and flip? im sure they both are but which one delivers the best return ect

[Nathan Emmert]

Geoff, you just need to be careful what you define as "lower income" areas. There is Section 8/Ghetto/Slum Lords... and then there are more what Greg is talking about. People with jobs making $10 - 15/hr.

To me, I see that group as the safest in some ways. Why? Because their salary is easily replaceable. My lifestyle is built upon my 6 figure job. If I lose that, running down to Walmart and making $8/hr isn't going to put a dent in my bills. If someone loses a $10/hr job, chances are they can find another pretty quickly. Their income stream,
IMO, is more stable and guaranteed.

Beyond that, they aren't as picky. They are more self reliant. They want clean, they want safe, but they aren't looking of expecting pristine. They won't call about ever loose knob or squeak, heck they might even pull out a pliers and tighten it themselves. They don't need to be coddled and babied the way higher end tenants do.
I

[Chuck Mak]

Hey Ned,

Please call me if you have dirt cheap rental properties in the better areas of Baltimore?

I have properties in Mt Vernon. I must have missed all the dirt cheap deals in this or better neighborhoods.

Don't you think property values are lower in Baltimore City than say Howard County because properties taxes are more than double in the city?

[Ned Carey]

Chuck,

Go to the website in my signature and you can sign up for my buyers list by clicking the button in the upper right side.

Your fortunate to have rentals in Mount Vernon. I would love to own there but the returns are not good enough for me. I would consider Mt Vernon a B+ to an A rental area in Baltimore. Sure there are areas that are nicer like Roland Park but I wouldn't consider Roland Park a rental area. So Mount Vernon wasn't one of the areas I was referring to.

There are decent rental areas like the better parts of Belair Edison where with patience and good negotiating you can be all in for $40-50K and rent for $1300-$1500.

That is certainly part of it. Prices have dropped more in Baltimore City than outlying areas. At the same time Rents have gone UP in the city. The ratio of rents to price in the City is better than anytime in the last 8 years I have been investing.

[Chris Clothier]

The other part of the question is looking at what is being made available to you by the market. Every real estate market is a macro-economic area so each will be affected by the economy, jobs, government, etc... in a different way.

Right now, many investors, myself included, are buying properties in what are considered nicer neighborhoods with higher values, higher rent rates and presumably fewer problems. In the recent past these properties were not available and those that were available were not priced well for investors. So we are simply taking advantage of an opportunity while it is here and will make adjustments in the future when these properties are not available.

If you pay attention to basic investing fundamentals, then whether you are buying higher or lower end properties, you should be able to achieve your objectives.

[James Martin]

Nathan made a great point. Mostly all of my rentals are classified as C- or C+. Many of my tenants work were their income are easily replaceable with another Memphis warehouse job (Fed Ex, Nike, UPS).
We also manage higher end propeties and what I notice is that the middle class during the month of July, Black Friday, and Christmas or New Years shop or vacation before they pay their rent. I am not saying all are like that, this is from my experience. Now with the lower end properties I work twice as hard all year because with many of my tenants they pay twice a month and I have to go get my money. If I had to choose, with the many years of success with low income, I would buy in a better area.

[Geoffrey Murphy]

Thanks alot guys for the great advice...

I guess you can look at it from both spectrums. I see that some Investor do good with one side of the coin and others dont. I guess as a new Investor starting off i wanted to way my options on what to get involved with as a "newbie" but as long as i am following my plan of attack i should do fine.

Great point made by Chris, James and Nathan! I alao believe that it depends where your at in you real estate career.

[Ryan B.]

I purchase both. I buy my low income rentals knowing they are not going to go up much in value, but they have great cashflow. I then use the excess cashflow to purchase nicer rentals in suburbs that are growing and I plan on keeping for retirement.

When I get to retirement my nice rentals will be paid off and I will sell my low income rentals to the next generation of landlords. For now I keep my eyes open for deals in both areas.

[Account Closed]

I'm hoping to do what Ryan is doing. Just closed on my first one, and am trying to keep the rehab basic, but sturdy. And I plan to set up a regiment of preventive maintenance to help minimize some of the issues. Hopefully, in a few years, I will be able post that its working.

[Account Closed]

I buy what the market gives me and it seems to break down like this:
High density units = lower end neighborhoods
Single family = average or better
We focus on cultivating our residents to move up to our better stuff. It works like a training camp. If they cut it in the minor leagues they get called up!
The stigma with lower end neighborhoods presents an awesome opportunity to buy entire blocks of homes and then become a stand out when you bring that inventory to the rental market in great condition.

[Geoffrey Murphy]

Great Points guys!! that makes alot of sense Ryan & Shawn!

I agree with buying the lower end stuff for cash flow and then buying the higher end things for retirement and appreciation!

So what advice would you have for me in order to be successful with these lower end and higher end rentals? what things should i look out for?

[Al Williamson]

Geoffrey,
I put a lot of thought into what you're asking. Since I'm not able to give you a direct link, just Google "Inner City Property Investments - 5 Wealth Building Strategies" for an article I published. It summarizes my lessons learned.

[Mike H.]

This was a great thread for seeing the list of pros and cons for the
investing in the diff area types.
I will say I was a bit envious seeing the one post that
was getting houses for 40-50k "all in" that were renting for
1300-1500.

Thats crazy cash flow there. Based on my math, your payments are about $250 to $300 and I'm guessing taxes and insurance might be another $300 or $400 (assuming the assessments are still pegged to boom prices as most counties here are still at).

That still leaves cash flow at $600 to 800 per month assuming no money down.

For that kind of cash flow, I would pick up the rent every month from my tenants as well. Wow! I'm not sure that even qualifies as investing anymore at those numbers. I would consider that somewhere along the lines of winning the lottery.

[Geoffrey Murphy]

Al, thanks for the site, it had lots of great insight that i was looking for!

Mike, I feel the exact same way! If they are grabing MF that cash flow like that they are really making some serious cash flow!!!

[Albert Hasson]

Geoffrey, another consideration is how much time you have to manage your properties. I work full time in another industry so I don't have time to collect rent,track down late payments, listen to excuses why rent will be late, etc. I therefore only invest in solid middle to upper middle class neighborhoods. My tenants are realtors, small business owners, teachers, etc. With very few exceptions the rent comes in consistently by the 5th of the month. Without exception, my tenants are former homeowners that lost their homes to short sale or foreclosure. They have a homeowner mentality and treat my homes with great care. You will not find that in low end rental tenants. Good luck.

[Jeff S.]

One problem with higher end rentals is that the renters tend to be temporary. Maybe they are building a house or are there on temporary assignment. This isn't always a bad thing but getting that really long-term tenant is less likely.

Many foreclosed upon would/will buy again and a good lease option could work well for both you and them.

People I know that want to invest capital, as opposed to wanting to generate income, are more likely to invest in trophy properties. It is hard to make a living investing in trophy properties unless you are involved in the construction or rebuild.

In my area cap rates are typically +/-5%. Investors buy because of low vacancy, a lack of building, and expectations of rental increases going forward. This is expected to drive up values.

[James H.]

simply put, you can buy lower income rentals at a lower purchase price to monthly rent fee ratio. The reason for this is because they are not desirable for the average person to live in who can afford to buy a house and has good credit. At the same time, everybody needs a place to live. Thus renters.

On this forum I hear more folks talking about the ease of renting upper class and the woes of renting low income. But the handful of investors that I know and interact with personally tell me that their 1000/month rentals have head ache tenants whereas their 400 to 500/month rentals don't have finicky spoiled tenants complaining about every little thing. To boot, they say they have an easier time collecting rent - and its in cash.

I have a low income property - my first one that I bought last year. It was not a question of whether or not I wanted to do high or low income rentals. It was a matter of me wanting to invest NOW and that is what I could afford to do RIGHT NOW (after saving for a couple years). It rents for 550/month and the tenants have complained about two things: Draft from the doors, which I fixed right away and a crack that developed in the kitchen ceiling sheet rock from the foundation shifting, which I fixed right away.

The man works in landscaping and his wife works at McDonald's. They have paid rent early every time. They pay in cash. They keep the house clean. Cleaner than my house.

I had plenty of opportunities to have tenants that would trash the place and screw me for rent, but since the house was cheap, I could afford to let it sit for a while to give me time to screen for the best possible tenants. It still rented out the first week after the completed rehab, but we were taking applications during the three month rehab process.

You may see higher appreciation in a higher end unit if you're lucky and pick a neighborhood that is not in decline or soon to be in decline. In a low income neighborhood, it can go down, too. But chances are it will increase with inflation if not more. Unless you are investing in VERY solid neighborhoods with generally very low cash flow potential, its a crap shoot whether or not you're going to see better or worse appreciation, or even depreciation in some cases - current economic cycle not withstanding.

[Geoffrey Murphy]

Great post guys! I think it's about a 50/50 split when it comes to this. Great Posts!

[Geoffrey Murphy]

We all know that there are different kinds of low end areas and higher end areas.

Lower end, which area would you choose to invest in? or what do you want to see in a lower end area/Higher end area?

ex: lower end, war zone?, Section 8? ect

Higher end, newer properties? certian income?