Investing In Low Income Areas
By Paul Esajian on February 16, 2015
How you envision your real estate business and how it really is are often two very different things. Most investors want to jump right in and start with a high priced rehab that offers a strong yield. If you opt for a rental, you look for a safe single-family property that requires minimal attention. These options require capital. Without it, you will be forced to look elsewhere. This can lead you to neighborhoods that are more in line with your price range and affordability. The properties and areas may seem unappealing at first, but a good deal is a good deal – regardless of the location. Subsequently, investing in low income areas has a lot of advantage.
Not every low income area is a bad investment. There are many investors who look exclusively at lower priced properties in low income areas that can offer tremendous upside. The first key to evaluating these properties is to look at the neighborhood more than the actual property. You can have the nicest house on the block, but if buyers or renters won’t go in the area it won’t do you much good. You need to do some homework on the crime rate, unemployment, demographics and new housing starts. It is also a good idea to drive the area in the day and at night to get a true sense of the appeal. Regardless of income level, families want to feel safe and secure where they live. Affordability is certainly a plus, but if you don’t feel safe, the odds are that tenants or potential buyers will feel the same way.
When evaluating the neighborhood, there is a careful balance between what currently exists and what may be in store for the future. Take a look at local publications or local websites to see if there are new businesses planned or other new areas of growth on tap. Something as seemingly innocent as a new chain restaurant on a main street a mile away or new houses being built a few streets over can completely change the appeal of your area and the property. Conversely, if there are foreclosure signs on every other house or for rent signs on businesses, it should be viewed as a sign that things may still be on the decline. Every purchase you make requires due diligence, but on low income properties it really may make all the difference.
If the neighborhood is acceptable, you need to take a look at the property. An inexpensive property in a low income neighborhood doesn’t mean that it isn’t a good property. It may not have the updates that you normally look for, but those are a relatively easy fixes. You need to look at structural and physical characteristics that can impact the value and your purchase price. Plumbing, electrical updates, structure strength and the age of the roof are all items that can be costly if they need to be updated or replaced. If they are in good shape, you can get away with doing minimal work and get a great deal on the property. If the house has been on the market for a considerable amount of time and the price is dropping you may be able to get the property well below market value. The neighborhood and age of the property will scare many buyers away but if you know what to look for there can be real value.
The key to finding good tenants, regardless of location, is taking the time to screen them. Run a full application and follow up with any references and ask questions. There are many people that went through a tough time when the market collapsed and are still struggling finding their way. Just because they couldn’t afford other homes doesn’t mean they won’t be able to afford yours. You can certainly be firm and never waiver on the amount of security deposit, but tenant screening should be the same regardless of where the property is located.
Because of the age of most low priced properties, there may be minor items that pop up from time to time. You can eliminate some of them with the work you do before you rent, but even then there can be lingering items throughout the lease. This means that you need to have a property manager or someone handy ready to deal with these issues as they come. Many new landlords get a bad taste from getting calls at all hours of the night, but this should be expected with older properties. If you don’t want to deal with this, you need to budget for a property manager that is easily accessible.
Low income properties can give you the opportunity you need to start in the real estate world. They will not be without their fair share of risk and concern, but such is the case with almost every property you buy. You should never completely ignore an opportunity regardless of the location. Low income areas and inexpensive properties will require greater due diligence, but they can also offer a greater return if you know what to look for.