In researching the rental market, I have often heard it stated as fact that low-income and working class neighborhoods offer the best return on investment for a landlord.
I’m willing to accept that this is true, but I wonder what factor is behind it. Is it that there is more demand for rental housing in these neighborhoods, and thus lower vacancy? (On the other hand, shouldn’t there also be more non-payment?) Is it that the property is cheaper and maintenance standards might be lower? (On the other hand, if buildings are older and crappier, shouldn’t maintenance costs increase?) Or is it some other reason that I have not thought of.
Usually the cheaper houses will still rent for a decent amount. If you start getting into nicer areas where it costs too much to get into a house, there will be a limit to what you could reasonably expect to get for rent. You probably know of people who have $100k+ houses and are getting $1000/mo for them in rent. They think as long as the rent covers their mortgage, it’s a good investment. What happens to that return when there’s any repair or vacancy? Then they come out of pocket, but still think it’s ok because it’s just a “one time thing.”
I know people that swear by low income areas. I look for working class areas. I want to drive down the street and see vans. Tile installation guys, carpet installers, plumbing and electrical, cable guy, etc. These people have incomes and want nice houses but don’t demand sub zero appliances. They have a background that can be checked they can hold a job and because of that they tend not to be the guy that gets drunk every night and kick holes in walls. They also rent for years and years.
Unfortunately I just can’t seem to find that many working people here in my town. There are so many hand-outs available and it’s apparently simple to become “disabled” that 95% of our applicants don’t work. You could also look at it as they’re so lazy they won’t move out and at least the rent is on time from sect 8 each month…
I just got a listing agreement on a 3 home investment property;
unit 1 rented $350/mo. the same lady for 30 yrs.
unit 2 $300/mo. same person 5 yrs.
unit 3 $200/mo. same person 3 yrs.
Rent to people that have a verifiable job history and have the property fenced for added security. 62 and older tentants have a dependable SS income and want that extra security fence.
Treat renters with dignity and respect if you want them to like you and stay with you.
Stop by every month and ask them if everthing is functioning and if they have any roach problems.
Finding the working class is the problem, with unemployment pushing 18% a local GM plant closed and more on the way. Low income usally means SEC 8 and thats a job on its own dealing with that.
Not finding the working class means good and that should be the case. It means economy is at it peaceful, stable place. Good for overall economy. Though bad for limited short term profit.
“Low Income” areas seem to be the only places that one can cash flow. You generally can’t really make a decent return in the “nicer” areas. Good luck trying to buy a nice middle class or upper middle class home and renting it out w/ postive cash flow. Keep in mind all real estate is local and each market is different.
Low income areas are cheaper which lead to a larger returns. Factors of supply and demand come into play (everyone needs a place to live) .
Of course some might argue that the “nicer” areas might appreciate more long term , but appreciation is speculation.
Section 8 and rental assistance keep the rents in low income areas up. Landlords are only going to rent to people at market rents. This plays a huge factor in the rental rates for lower income areas.
You will probably find that there might be a newer, nicer area of town where the rents are practically the same , but the cost to purchase is 200%+ more.
Most likely those owners of newer,nicer homes are not going to rent to Section 8 tenants.
Best cashflow will come in lower-income neighborhoods. We only do Section 8 in those neighborhoods and thus are getting guaranteed govn’t checks for rent. I expect to make most of my money on cashflow from those houses, not appreciation since some of these areas may never gentrify or get any solid investment in terms of infrastructure, business, etc to really make prices go back up.
Low income based off the tenant’s income. That’s what that means. Smaller houses you can rent out to low income people can usually be acquired at a cheap price. Therefore they will cash flow well. There is a ceiling to the market rent. If you try to buy a $400k McMansion and try to rent it out, you probably won’t get enough rent to cover the mortgage payment.