Many investors argue that the better the neighborhood the better the investment, but is that always the case? Recent trends are encouraging real estate investors to invest in cheap rental properties in low income neighborhoods.
Finding the Balance With Location
First and foremost, you should know that a low income neighborhood does not directly translate into a bad neighborhood; the words ‘bad’ and ‘low income’ should not be used interchangeably. Low income, as opposed to many bad neighborhoods, can in fact be good to invest in.
Reasons to Invest in Cheap Rental Properties
There are several reasons to consider investments in cheap rental properties. Low income neighborhoods have opportunities for substantial profit and generation of high cash flow. There may even be room for improvement and growth potential for the neighborhood itself. In low income neighborhoods, you can buy a property for half of what you would pay for the same property in a class A neighborhood and charge solely 15% less in rent. The numbers differ in different neighborhoods and cities, but there is always a great opportunity for generation of cash flow.
Additionally, low income neighborhoods are not as affected by economic downturns as other neighborhoods. So you may guarantee some sort of stability when investing in a cheap rental property.
Tenants in cheap rental properties tend to move less due to the high costs of moving. Therefore, they are more likely to stay in the long run, meaning you will have lower vacancy rates. Plus, if they end up being pleasant tenants, you are less likely to have trouble with them.
Another reason is that investing in cheap rental properties will allow you to buy more than one property with the same amount of money. The median home price in San Francisco is $1,444,650. So you can either buy one property in a class A area with that kind of money, or multiple ones in class B or class C neighborhoods.
Reasons to Not Invest in Cheap Rental Properties
Now we do not want to generalize, but some concerns surface when dealing with lower income tenants. For one, most tenants of low income neighborhoods usually live paycheck to paycheck. This means that they may sometimes be late with paying rent which makes collecting payments a rather difficult process.
The process of renting out the property is not easy. You will need to conduct thorough tenant screening to ensure you choose the right type of tenant.
Moreover, cheap rental properties usually exist in neighborhoods where crime is present, so that is something to definitely consider.
Tips on Investing in Cheap Properties
Conduct Thorough Tenant Screening
Choosing the right type of tenant will save you a lot of trouble. The process of tenant screening itself, however, can be hectic and time consuming. You will have to go through applications, request credit checks, run background checks, conduct interviews, and invite people over to view the property.
Conducting thorough tenant screening for cheap rental properties will help you avoid problems such as evictions, late payments, and the need to run high maintenance repairs. So make sure to find a tenant that will save you future headache.
Related: 8 Things That Make a Good Tenant
Play By The Numbers
When it comes to investing in cheap rental properties, you should learn to focus on the numbers. It is easy to be discouraged by the appearance of the area or neighborhood, but remember that this is a money making venture. Do not walk away simply because a property or a street does not look nice. At the end of the day, you are investing to make money. Forget the saying “if you would not live there, it is not a good investment.”
Mashvisor can help you view properties within a budget. You can adjust the budget and then view projected cash on cash return, cap rate, and other important data. Make sure the numbers add up to guarantee maximum profit.
Consider Hiring A Property Manager
A property manager will make your life much easier. They can help you market your property, screen for tenants, choose tenants, and then deal directly with them. This includes collecting payments, attending to tenant complaints, and if needed, pursuing evictions. This can be especially valuable if you have little tolerance and/or time in dealing with tenants.
Indeed, property managers do save you time and worry, but they come at a price. Consider the following: Can you afford to hire a property manager? Do you trust a property manager to do the same work you do? Do you have the time to oversee the property?
Are they worth it? That is up for you to decide.
Try To Find A Property On The Edge Of The Neighborhood
Even if you are considering buying a cheap rental property, try find one at the edge of a neighborhood rather right in the middle. If the part of the neighborhood you are investing in is improving, you may petition for a zoning change request and the zoning board may help you get a new zoning.
This is not an easy procedure, and it will require a court hearing, but definitely consider investing on the edge.
Lower Income Tenants Do Not Expect A Lot
Do not go overboard with the renovations and reconstruction of the property after you make the purchase. Keep it pretty basic. A fresh paint here and there will do just fine. The tenants are not expecting fancy kitchen cabinets or brand new carpeting.
Find A Good Lawyer
Investing in a low income neighborhood can present challenges, especially with tenants. A good lawyer will help you review and facilitate leasing, negotiate for you, deal with evictions, and defend any lawsuits if something goes wrong, or to help you avoid legal battles in the first place.