Low Demographic Area > Low Demographic Tenant > Low Chances of Success

If you’re a buy and hold investor thinking of buying in Class C or below neighborhoods, you’re going to experience more tenant dramas than in Class A or B areas. This might seem obvious, but many new investors (especially in the Metro Detroit area, where we operate), seem to miss this point - or even worse, are scammed into buying a Class C property they think is Class B.

The fact is, the best cash flowing rental returns are usually found in C areas, not in A or B neighborhoods where rent-to-price ratios are lower. Especially for rental investors who are buying property for the first time, these areas seem to be where they want to be: they can buy a property cheaply here, and are attracted by the high returns. The flipside of this is that you’ll also have to regularly deal with tenant issues (damages, unpaid rents, evictions, etc.) that are much rarer in higher-income neighborhoods, and that’s something a lot of new landlords aren’t prepared to deal with.

So, as long as you’re aware that you’ll be assuming more risk and responsibility when it comes to managing these issues, Class C areas can be the buy and hold investor’s bread and butter. Just make sure you prepare yourself for the realities of operating in these markets.

Tenant Screening

No matter what type of area you invest in, tenant screening is the most important part of rental management, but it’s really crucial when renting properties in Class C (and below), to go above and beyond with your screening procedures. You can check out what we recommend screening for in lower-income neighborhoods (based on our 20+ years of experience in the Metro Detroit market) in this article.

You’ll also have to consider whether or not you want to accept Section 8 tenants, as these will make up a significant percentage of applicants in lower-income areas.

Air-Tight Lease Clauses

A generic lease won’t cut it if you’re investing in lower-income areas. Be extremely specific with deadlines for things like reporting damages and triggering late fees, include penalties to increase accountability for violations and late payments, and have unambiguous wording when it comes to the tenant’s responsibilities for maintaining the property. Requiring renter’s insurance is also a good idea.

Comprehensive Landlords’ Insurance

In some lower class-C neighborhoods, things like squatters, theft, and vandalism could become a problem that costs you thousands of dollars in repairs. They’re also not covered by many basic landlord insurance policies, so make sure you opt for extra coverage to protect yourself against these expenses.

Experienced Support Team

Evictions, tenant damages, and unpaid rents will happen when you’re dealing with lower demographic tenants. To deal with these issues when they arise, it’s essential to hire a great legal team and fast, efficient contractors who can help you handle the things you can’t do yourself. If you’re a new investor who’s a bit wary of operating in a lower-income area, or who doesn’t want to deal with the tenant headaches that come hand-in-hand with these types of properties, then consider also hiring a rockstar property management company who’s well-versed in dealing with them - just make sure you screen the PMC thoroughly first to ensure you’re getting a high quality of service.

Regular Property Inspections

Your lease might stipulate a physical inspection of the property every six months, but it’s good to check in on your properties even more regularly than this. Even just doing a drive-by inspection is better than allowing issues to continue for months before they come to your attention, and it will give you the chance to check up on the condition of your rental without giving your tenant time to clean up (and move their unauthorized pet out for the day) just to pass inspection. You won’t be able to see the inside of the property, but just a look at the exterior can tell you a lot about how well it’s being maintained.

Attractive Property

A reliable and responsible tenant is probably someone who has pretty high standards, and doesn’t want to live in a run-down home, even though it might not be in a first-class area. By presenting your rentals as clean, attractive places to live, you’ll be targeting a better pool of potential tenants than if your property is rougher around the edges. So don’t be afraid to spend a little extra on refurbing properties in Class C neighborhoods.

Investing in lower-income neighborhoods is not for the faint of heart, and it’s important to match your expectations to reality to avoid getting disappointed.

We’ve seen many new rental investors get scared off by one bad experience early on in their investment journey, but it doesn’t have to be that way, as long as you’re prepared. Just don’t buy in a low-price neighborhood and assume you’ll end up with 100% perfect tenants, because that’s a fantasy.

Any other tips you have for new investors in Cass C areas? Share them below!

Images Courtesy of Mali Maeder