The reason why I chose to purchase a rental property in a low-income neighborhood 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 is that low-income neighborhoods require more work to manage. It requires 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 landlord’s 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 the 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.