Seeking to understand why high crime markets are recommended for multi-family

[Erik Aybar]

I recently heard on BiggerPockets podcast about Cleveland and St. Louis areas being recommended for multi-family real estate investment. I don't recall the episode but I think it was the economist from Zillow. 

As I browsed around looking into these markets the prices are appealing, but it jumps out quickly that they have high crime rates. I've seen a lot of conflicting advice that cautions to avoid areas with high crime rates due to complications and extra costs from the tenant base and property crime.

I understand that both cities have shown crime rate improvements, but their overall rates are still way above average.

What makes these cities attractive for investment despite this? Would you caution new investors away from these types of markets? How do you factor in crime rates when researching markets?

[James Wise]

Quote from @Erik Aybar:

I recently heard on BiggerPockets podcast about Cleveland and St. Louis areas being recommended for multi-family real estate investment. I don't recall the episode but I think it was the economist from Zillow. 

As I browsed around looking into these markets the prices are appealing, but it jumps out quickly that they have high crime rates. I've seen a lot of conflicting advice that cautions to avoid areas with high crime rates due to complications and extra costs from the tenant base and property crime.

I understand that both cities have shown crime rate improvements, but their overall rates are still way above average.

What makes these cities attractive for investment despite this? Would you caution new investors away from these types of markets? How do you factor in crime rates when researching markets?

 Price is low. Barrier to entry is low. Price to rent ratio is high.

[Greg Scott]

I would generally agree that places with high crime are not desirable areas to invest. On the other hand, it is often impossible to compare crime rates from location to location.

We have a property in one community that has a strong focus on law & order.  They have a much higher ratio of police to residents, and as a result, they have more arrests than the neighboring communities.  We had investors questioning whether or not it was smart to invest in an area with such high crime.  Ironically, it is a much safer neighborhood than the one next door with a "lower crime rate".

[Ryan Arth]

You never know what someone is actually referring to. If that Zillow economist is referring to the affordability of the market in general, and you are looking at crime stats for the inner city, you may come to the wrong conclusion. 

MF cap rates in this market may rank higher than other markets, in general, or they could have been referring to just within the city limits. That makes a big difference when you are trying to make a decision. 

Just read the threads on here and listen to people talk past each other. One person is extrapolating out the depths of the inner city to the entire market as far as long term viability for investment, when the other person is actually considering A/B neighborhood buy and hold. 

[Erik Aybar]

I appreciate the responses and different perspectives here. Some takeaways for me:

1. There are some valid pros with lower barrier to entry pricing and price to rent ratios. Could make for good investments if you know the area.

2. Crimes reported doesn't necessarily translate to safety or bad investment. It's just one data point to consider.

3. Important to not take one statistic and make conclusions about the entire market.

I would have to get to know these areas a lot better to understand the trade offs and dynamics. I'm in the early learning and exploration stage and definitely learning a lot just searching through the BP threads and reading.This gives me more to digest and continue learning. Thanks!

[Alecia Loveless]

@Erik Aybar Even for a better price I won’t buy a property I wouldn’t feel safe living in. But perhaps that’s just me.

There’s subtle nuances in every market and unless you become super familiar you won’t know them.

[Scott Mac]

St George Utah,,,,Cleveland--we aren't in Kansas anymore.

@James Wise has a youtube chanel devoted to learning about the realities of inner city investing. Take a look, and it's no St George.

Good Luck!

[Ryan Arth]

Quote from @Scott Mac:

St George Utah,,,,Cleveland--we aren't in Kansas anymore.

@James Wise has a youtube chanel devoted to learning about the realities of inner city investing. Take a look, and it's no St George.

Good Luck!

 To my point, that is a very specific type of investing, and obviously the worst of it is being shown for entertainment. It is not indicative of what the majority of investors, in this market or elsewhere, may experience. 

Even the generalization that out of state investors want the cheapest properties with the highest yields isn't entirely true. I have an out of state client here who doesn't own a property that leases for less than $3,000/door.