The reason why I chose to purchase rental property in low-income neighborhoods is because of the return on investment or ROI. With enough research and due diligence it’s not uncommon to get anywhere between 20 to 30% on ROI. So you may be asking what’s the catch? Why aren’t all Real Estate Investors buying everything in low-income neighborhoods? The truth is that there are many Real Estate Investors that specialize in buying rental properties in low-income neighborhoods. There are also other investors that diversify in having rental properties in low-income neighborhoods and rental properties in upper to middle-class neighborhoods as well. However you will find a group of investors that would not purchase rental properties anywhere near a low-income neighborhood. The reason being is that low-income neighborhoods require more work to manage. It requires a more Hands-On property management. For starters, you have a higher percentage of evictions. Many of your tenants live paycheck-to-paycheck. If they lose their job or have an unforeseen emergency expense such as their car breaking down, could mean a tenant paying rent late or not paying rent at all. Most low income neighborhood property landlords know that this is a reality in their pool of tenants. The way landlords have managed to leverage this reality is by accepting tenants that are enrolled in Section 8 vouchers. The Housing Authority helps low-income families pay rent. The Housing Authority will deposit up to 100% of the rent amount directly into the landlords bank account. It is a stable and secure way of always getting rent paid on time. Uncle Sam pays its bills. However there’s still the caveat of the quality of tenant that will be residing in your property. As a landlord you still need to provide proficient screening to avoid getting a destructive or problematic tenant regardless if the rent is being paid on time. However if you screen your tenants right and use a backup system such as Section 8 you can have very good ROI and your property.
When purchasing a new rental property there are things to take into consideration that may not show up on your checklist or even a professional inspector’s list. One thing I recently confronted was a damaged city trash dumpster used by the tenants to throw their trash. Its so happened that the bottom of the trash dumpster was deteriorated and so when the city came to pick up the trash, half of the trash
would get poured out to the middle of the alleyway. It did not take long for me to realize that I had a mountain of trash all over the place right outside my rental property. It took me about two and half hours, a pair of thick gloves plus holding my breath and ask him myself “what did I get myself into??” I ended up calling the city’s trash division to get it replaced. They said it would take up to two weeks to get a trash dumpster replacement. Although this has no direct financial effect on you as far as purchasing the new rental property, you may want to ask the new seller to manage that issue before you become the new owner. Ideally it could be taken care of while in escrow so that it has ample time for to be resolved or replaced. And if
you have new tenants coming in, it will definitely help not having a mountain of trash in your alleyway. This is today’s food for thought in real estate rental business