Reprinted from Bigger Pockets Blogs
5 Tips for Owning Low-Income Rentals
Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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Low-income properties may seem like the worst meal on the table, but that doesn’t have to be the case. If you know how to invest successfully in these types of properties, you can actually make a good profit out of it.
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You may ask me how I can say this so confidently. I’d like to tell you about my experience with it. I picked up not one—but two—of the cheapest houses in America. They weren’t in great locations, but I got an amazing can’t-be-missed deal for the both of them.
And what’s that deal, you may ask? Well, you may have heard of properties that get sold for $1,000 or even as little as $100. Here’s the thing: I spent even less on these properties.
I got these two houses for free from an out-of-state investor. Yes, I’m talking zero dollars for both of them.
And so I “took” the properties and decided to invest the lowest amount on renovation possible. Thankfully, they weren’t in an extremely bad condition, and I did the bare minimum to make the houses livable.
My company would never sell such low-end properties, and I strongly recommend everyone reading to not get into such investments. But I renovated it with minimal funds of $6,000 and then put it up for rent at $600 per month—getting 100% ROI.
Let me share with you what I did to make money (actually, good money) off a low-income property.
But First, Here Are the Properties I’m Referring to
I’m referring to low-cost properties that are usually run down, are not well maintained, and are located in bad neighborhoods with higher crime rates. This means that the chances of vandalism are quite high compared to other neighborhoods. Understandably, the resale values of these homes are low, as not many people are keen on buying these properties.
Related: “Low Income” vs. “Bad” Neighborhoods: Yes, There IS a Difference. Here’s What Separates Them.
Another defining factor of this type of neighborhood is that there are often lots of empty houses. The risk involved with such properties is quite high, and that’s one of the reasons many real estate investors look the other way.
Also, don’t mistake these properties for “pig properties” that sell around $30K. These low-income properties are way cheaper. That said, these properties aren’t a lucrative option for flipping, as you won’t have an end buyer, except for an unsuspecting foreign or out-of-state investor. Please DON’T BE A SCAMMER and sell these properties to those folks.
Accept It for What It Is
The only way to make such properties work for you is by first fully understanding what you are getting yourself into. This means that you should completely know the risks associated with them. You need to come to terms with the fact that some years might be very lucrative for you, while other years might not be. You must embrace the fact that resale values of low-income properties will usually be abysmally low until some miracle comes your way.
Miracle, right? Which usually involves the neighborhood going through a complete gentrification phase.
Understand the Cash Flow
Surprisingly, what many investors overlook is that the cash flow rates are usually very high when it comes to low-income properties. This means that while the buying price is low, rental rates on them are high. You will need to understand that the acquisition cost isn’t the real cost with these properties.
But you need to understand that because you are already making a purchase in a low-cost neighborhood, the property will not necessarily go up in value. It may, however, do so if the neighborhood is going to revamp in the next few years.
Do the bare minimum if you renovate in the meantime, but make sure everything is durable. Don’t overcapitalize on the rehab. And no—by that, I don’t mean slumlord it.
Work With a Responsive Property Management Company
The key to success in low-income investments lies in having a very responsive property management team. A good team can help you to identify suitable tenants, improve rent collection, and ensure that you get your rent on time. The extensive knowledge that these teams have about the local neighborhood and markets can be an added advantage and can save you a lot of time, money, and resources.
Such teams will also act as a buffer between you and your tenants, allowing only for the least amount of interaction, which means that you won’t get unnecessary phone calls in the middle of the night.
Finally, the marketing expertise and experience they have in the online and offline markets can work as a big advantage and help you get your property rented faster. All of these are important areas, and this is one special region where you are better off working with a good property management firm.
Related: 6 Tips You Should Know Before Investing in a Low-Income Neighborhood
Finally, Give it Time
You need to be patient with real estate, and low-income properties require much more from investors. So instead of being in a hurry to get these properties and then rent them out to the first tenant you see, spend some time researching the area. Keep in mind that every market goes through a recession phase and a good phase. So, if you really want risky properties to make you money, first be willing to take the risk and second understand that you will be investing much time and energy on them.
Low-income properties aren’t a bad investment at all. In fact, they can really be the cash cows that throw gasoline on your portfolio if you know how to go about it. However, know that this is definitely a tricky area and venture into it only if you’re ready to take losses, as well.
Affordable homes are, after all, the need of the hour, and if you can find an ideal deal (like I did above) that gets you a low-cost property and good rental return, then there’s nothing to beat that wonderful combination.
Let me wrap up by recommending that if you’re planning to invest in low-income areas, buy the really low-cost properties that come dirt cheap, spend a minimal amount on the renovation, and rent them out through an experienced, fair but firm property manager. Also, understand wholeheartedly that it’s a hit or miss type of investment.
Reprinted from Bigger Pockets Blogs