Buying Real Estate Investment Houses In Bad Neighborhoods:
Yes or No?
Typically one of the first requests buyers make when looking for a home is a house in a "nice" neighborhood. It makes sense to want a neighborhood that is safe and enjoyable, but there may be some benefits to buying real estate in the rough part of town or on the wrong side of the tracks.
-There is less worry of your neighborhood going downhill because it is already downhill. Good neighborhoods can get bad and bad neighborhoods can get better. Since the price usually reflects the current condition, buying in a neighborhood that has room for improvement might be a good idea.
- If you are buying a rental, you usually get better cash flow in rough neighborhoods. If you are renting your property, there are more renters and they are more long term. It's difficult to rent in good neighborhoods because fewer people are looking to rent and those who do are generally there short term while they look for a house to buy.
- You can look better in comparison to other landlords. Landlords in rough areas frequently don't maintain their properties as well as people in nice areas. Therefore, if you maintain your properties, you can blow away your competition, and charge more for it.
- If you are in a rough neighborhood, you can propose that your property change will improve the neighborhood and you have a better chance of getting a different zoning. Conversely, if you are in a good neighborhood, it's hard to make the same argument.
- You can buy more property. If you want to spend 500k, you can either buy one house in an upscale neighborhood or six or seven houses in a rougher neighborhood.
- They're more recession proof. When the economy goes south, real estate in rough neighborhoods is less affected.
If you do buy in a bad neighborhood its a good idea to wander over the tracks and look around a bit.
Look for Signs of Imminent Investment
Property values tend to happen in response to actualities, not plans — which means that there’s often a period of time between when a planned neighborhood investment is announced and when house prices start to increase. Study your investment range for neighborhoods that have Federal, state, or municipal projects gearing up to improve the place — or for areas that have new business-centered construction in progress. (The latter is great because construction tends to depress land values while it’s underway, but when that pile of bulldozers and 2x4s turns into a new Walgreens, that impact swings hard in the other direction.)
Look for Neighborhood-Level Deal Breakers First
The deal-breakers that should keep an investor from buying any home in a given neighborhood are pretty simple. If property crime is ridiculously high compared to neighboring towns, don’t do it. If the entire neighborhood is in a flood zone, don’t do it. If there’s anything happening neighborhood-wide that you could reasonably expect to either destroy the structure within the decade or make your tenants run screaming away within a few years, don’t do it.
Look for the Jewel in the Rough
Low-income people and families have the same basic priorities as everyone else: a home that is pleasing to the eye, convenient to relevant amenities, and structurally solid. This means investigating the history of each potential home and learning basics: when was the last major renovation? How old is the plumbing? Wiring? Insulation? The roof?
If they’re too old, you’re going to have to redo them, and that’s money. Find a place that looks like rubbish but has a solid undercarriage and is in a decent place, and you can update the visual appeal for far less money than it takes to get a fixer-upper fixed up. Finally, if you can get a place next to a school, shopping center, or highway, you can charge meaningfully higher rent than if it’s in the middle of a suburban food desert.
Make the Largest Possible Down Payment
In short, the larger the down payment you can make, the faster you can turn a profit on a house. The larger the percentage of the final price you can put down, the truer this becomes. So when you look for a house in an inexpensive neighborhood, maximize your cash flow by minimizing your monthly costs (which means paying off as much of your mortgage as you can up front).
Upgrade Security Measures First
As much as you’re going to want to do the upgrades that maximize your rent, it’s also important that you maximize the safety of your property — doubly so in a low-income area. Installing items such as outside lights on sensors and a security door will go a long way towards deterring crime in your properties.
Perfect Your Tenant Screening Skills
The problem with a low-income neighborhood is that you’ll end up attracting low-income people. In general, low-income people aren’t much more problematic than middle-income people — BUT only if you screen them properly. This means taking your time to get credit checks, criminal background checks, employment verification, income verification (yes, separately from employment verification!), and — the one landlords love to skip — Call ALL of their references, including any former landlords they have listed. Talk to all of them for a minute or two, and listen for any hint that the prospect might not be the upstanding citizen they represent themselves as.
You have to be reasonable — if you kick out everyone that seems vaguely suspicious, you’ll never get a tenant — but you also have to be canny and discerning. The wrong tenants will turn your dream investment into a nightmare — the right ones will have you wondering what all the fuss over low-income neighborhoods was about in the first place.
The bottom line is that you expect to make money from your investment in any property you buy. So make sure the numbers make sense on paper, do your detective on properties that have been for sale for far too long in questionable areas and Remember... a property in decline or one that has been neglected for far too long might cost more trouble than it’s worth if you expect to make a profit.