Approach to investing in lower income areas

[Tyler Smiarowski]

Just wanted to get opinions on how people approach investing in low income areas. I've heard people who have done very well investing in these areas and others who tell you say don't even consider it. My current properties I would consider to be all class B properties.

Some questions I have are:

What are cash on cash returns you would expect? cap rate? Do you put them on short notes and pay them down fast?

[Dawn Anastasi]

I generally buy properties really cheap, fix them up and rent them out. I would call this in "lower income" because no one I rent to makes more than about $40,000 per year.

However once I get done with them they are no longer "low quality" properties. I try to make everything something that I personally would live in. It might not be my preferences but at least I would live there. (I personally think a "slumlord" is someone who doesn't maintain their properties and wouldn't live in one of their own places.)

I also screen really well in order to get good tenants. Screening is critical. For people that don't make much money, usually a credit score is not something they ever learned about or know about. So I look more at other factors:

- Criminal history - especially nothing to do with drugs

- Eviction history - don't want it but I have taken people with one eviction in the past

- Rental history -- are they hopping from place to place every year? What do their prior landlords say about them? (Note that is plural.)

- Income -- do they have sufficient income to rent the place? Are there outstanding judgements against them? How long have they been at their job?

I have yet to know anyone that has a crystal ball to know if their tenant is going to stay at or lose their job in the future or if they're going to have medical issues, etc.

In my area, the two most commonly cited reasons about why people are moving:

- Landlords do not fix things.

- Landlord is going to foreclosure and they need to move.

So in my rentals, I combat that by:

- When things break, fix them in a decent amount of time. Be responsive. My tenants really like to text, so when they need something, they text me. I text them back.

- I let them know up front when they go to rent that I hear that all the time and that I'm growing and expanding and getting new properties. I'm not going anywhere.

I live in the same zip code and within about 3 miles of where my properties are. People know that I'm not off in some fancy suburb somewhere, I'm right there.