Originally posted by Michael Lauther:
John, having said all this I appreciate your observations and would be very interesting in hearing about your failure in this type of market. What are some of the specific lessons you learned investing in small single family properties in low income areas?
Very Low-education/High Crime/Hood areas are very risky because of the systematic risk associated with the area, mainly the inhabitants of the area.
About 20% of my portfolio is low income and they are more work than the 80% of my units in more livable neighborhoods. I wouldn't define those units as a failure as they were my first investment and provide strong cashflow but the maitainance and legwork relative to the return just isn't worth it IMO. I've found the low prices and allure of large profits and improving the area from such low priced property is an illusion and the savy investor should consider areas with better economics before placing high risk bets in these areas.
Here are some bullets on lessons learned:
- If you have debt service and tax payments, you may not have time to wait and find those housebroken tenants as your expenses clip away. There aren't many well qualified renters in low income areas. I use housebroken because tenants who grew up in bad homes with low education likely never learned to respect a house and don't know how to keep an apartment regardless of how nice they are to you before they move-in. For Ex. Tenants complaining about a broken stove when its stopped working because the grease build-up on the burner was not cleaned since the unit was rehabbed.
-You can screen your tenants but not who might and likely will end up in your unit. Ex. Grandma might look like a great tenant but her son who is getting out of prison and coming to live with her in six months is not. Be prepared for overcrowding and long term unwanted guests, this is a fact of life in these areas. Do you want to spend the $$$$ on an evicition, vacancy, lost rent, debt service, and repairs to make a point and risk getting a trashed unit returned to you? Or do you want to let it slide and send the signal that your soft and can be taken advantage of, a very slippery slope. Be prepared for these types of decisions.
-Low education/Low income tenants have a different thought process and will take and take until you can't give anymore, then they will turn on you and take off. Control the situation and never promise or commit to anything until you have thoroughly thought it threw. Think twice before agreeing to improve the unit for the tenant, they may learn they can ask for anything and you will do it. Never befriend your tenants or think they appreciate you. Your tenants should respect you and know you're serious. They will sniff out weakness/inexperience quickly and exploit them.
-The area will not improve just because you buy a building there. Its easy to think that things will get automatically better this simply isn't true. Take a look at all the other properties that have closed over they years and wonder if every buyer though like that. Everything seems easier at a 10,000 ft view.
-Secure your unit during rehab or you'll be sorry. These areas typically have very high unemployment, which mean means a lot of people just looking around all day doing nothing. Be under the impression you are being watched at all times. Locals will know your schedule and when your crew works and when they aren't there. They will see you brining in hot water tanks and copper. Many will not have a qualm ripping off a guy from a nicer part of town wearing a north face jacket and nice jeans.
