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Updated almost 4 years ago on . Most recent reply

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James Elden
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Do lower end / cheaper rentals do better in a downturn?

James Elden
Posted

Question for those who have been around a while, I haven't been able to figure this out myself from research. I'm referring mainly to larger markets, say over 1 million people at least, during a housing crash / downturn where house prices go down and rental vacancy rates go up would houses in the cheapest parts of the city be less affected than the more expensive homes? My assumption was that the people in the lower end neighborhoods would have less mobility so would stay put while people that are moving out of the more expensive areas may be moving away to other cities, etc but maybe I'm completely off base. Would appreciate any input from anyone who has been around a while in real estate.

Most Popular Reply

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Erik W.
  • Real Estate Investor
  • Springfield, MO
2,580
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Erik W.
  • Real Estate Investor
  • Springfield, MO
Replied

Low end has been my bread and butter for 16 years.  It weathered the housing crash and the recent "Rona slump" just fine.  In fact, demand has never been greater, but that's due to a shortage of rental in general.

To be clear, I don't rent in war zones.  I have to feel safe going to the neighborhood at any time, day or night, without carrying a weapon.  That said, my houses I define as "clean, safe, and functional."  They are not updated with the trendiest colors and appliances.  The fact that I PAINT my walls once every 5 years with touch ups in between puts me miles ahead of the competition, most of whom still have stained and/or peeling paint...or maybe gross wallpaper from the 1970s.

My experience is that there will always be good tenants who don't make a lot of money that can always afford my houses.  My job is to find those and screen to avoid the walking disasters.  Section 8 fails to qualify for my properties because they are always too slow.  My houses get rented within a week of coming vacant most times.  Section 8 takes weeks to do their inspections and process their paperwork.  I won't lose money sitting vacant when I have market-rate tenants ready to go quickly.  Also, on those rare occasions I do have to evict someone, Section 8 would not cover damages or late fees, and the cost of going to court plus cleaning plus lost rent more than consumes the deposit.  I do not want to take that kind of risk.

My advice if you want to do low end is find properties that need some work, but are otherwise in decent neighborhoods.  Screen diligently.  You'll get 100 responses, out of that 10-20 will tour, out of that 3-5 will apply, out of that 1 will actually rent.  Set up systems to automated self-guided tours and online pre-screening that quickly weeds out anyone who is obviously unqualified.  It's a numbers game, but can be done profitably.

No one is building more low income housing these days.  It's a niche market and therefore always in high demand.  Your job is to find the good people who simply don't have a lot of money.

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