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5 Tips for Owning Low-Income Rentals in Less-Than-Ideal Neighborhoods

Mar 17 2017

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. You may ask me how I can say this so confidently. I’d like to tell you my own experience with this. 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 a $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 here 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. So, I renovated it with minimal funds of $6,000 and then put it up for rent at $600 per month. This means that I’ll get be getting 100% ROI.

Let us share with you to 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.

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 in place 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.

Also, keep in mind that the renovation you put into the house doesn’t stress you out. 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, don’t overcapitalize on the rehab (no, I don’t mean slumlord it), and make sure everything is durable.

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 interactions, which means that you won’t get unnecessary phone calls in the middle of the night from someone threatening to shoot you (yes, I got such calls). 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.

Be Fair But Firm

Being an alpha-type male or female is a must when you are dealing with low income properties. This is because you’re in a not-so-nice neighborhood where the nice rules are seldom going to work. If you don’t define yourself as an alpha person, then start acting like you are one, and you’ll get there. This means that you need to appear confident, tough, ambitious and should look like the kind of person who might compromise on a deal but would rather choose to lead it.

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 in renovation, and rent them out through an alpha-type property manager. Use the services of a good property management company, and while they do have fees to handle your property, remember that every dollar they earn is through sheer hard work — that’s how tough this market is. Also, understand wholeheartedly that its a hit or miss type of investment.

 

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If you’ve ever considered investing in a few rental properties in Philadelphia or Bucks County, PA now might be a good time. Prices are still low in Philadelphia, but have been on the upswing. According to the National Association of Realtors, the median price of an existing home in a US metropolitan area grew 13.7% between July 2012 and July 2013, the latest in a 17-month streak of year-over-year price increases. 

New landlords can choose from properties that are likely to appreciate and a large pool of potential renters.Licensed realtor Pat Mueller cites a few reasons for this trend: “Many families have lost their homes to foreclosure and are entering the rentals market for the first time in years. Mortgages are also harder to get now, so fewer people are qualifying for a new one.”The more skills you bring to the table to get into Houses for Rent in Philadelphia Philadelphia or Bucks County, PA and the more time you have to devote to your properties, the faster you can make a return on your investment. 

But investing in rentals can also be disastrous (or too stressful to be worthwhile) without expertise. Here are three professionals you may consult about your new rental properties, and what you can do to mitigate how much they cost you:Handyman:  You may need to hire a specialist for some work on your rental. If you need new outlets or new pipes, for example, hire an electrician, plumber or licensed contractor. Handymen usually tackle smaller, more manageable tasks, like:

  • Painting and paint removal
  • Drywall repair
  • Minor appliance repairs (fixing a leaky toilet or faucet, among others)
  • Installing tiling or flooring, moldings, windows, doors
  • Refinishing decks, cabinets and other wood items

When You Could Skip It: You could do any (or all) of these projects yourself if you have the time and interest in learning. Of course, this only works if you live relatively close to your rentals and are flexible enough to service them on short notice. And if you’re willing to respond to the occasional 5 AM basement flooding.

Average Savings: Any base rates or costs-per-hour vary from location to location in Philadelphia or Bucks County, PA , but nationally, you can expect to spend an average of $60 to $85 per hour for repair costs. It general costs less to hire an individual handyman than a handyman employed by a company. Expect an additional charge if your job requires a trip to the store for materials.

Resident Property Manager As the owner of a handful of rental properties, you may be able to manage them yourself, but if you want help, a single resident manager would probably be more cost efficient than a property management company. Resident managers may:

  • Serve as a handyman
  • Advertise vacancies in your units
  • Show apartments to prospective tenants
  • Review rental applications
  • Collect rents

When You Could Skip It: Again, the closer you live to your properties and the more spare time you have, the less likely you are to need a manager. The obligations of being a boss will also cut into the time you save on maintenance.

Average Savings: The national median wage for residential managers is just over $25 per hour. Research the wages in your community and adjust according to how much responsibility your manager will take on. 

Real Estate Agent: Once you’ve gotten your financials in order and done your own research on the neighborhood(s) you’re considering, you might contact a realtor to show you potential properties. You can also arrange for a realtor in Philadelphia or Bucks County, PA to show rentals once they’re ready to rent.

When You Could Skip It: It depends. Even if you’re a local, or have thoroughly researched the neighborhood(s) you’re considering, a realtor is a great resource for a first-time rental buyer. Realtors have access to data and statistics not necessarily available to the general public and first-time buyers may not know all the right questions to ask. Using a realtor to fill your Houses for Rent vacancies is less of a no-brainer, depending on your other time commitments or whether you plan to hire a resident manager who could do the same thing.

Average Savings: As a buyer of rental properties, as when buying your own home, sellers typically pay most, if not all, of the buyer’s realtor fees. In this case, Mueller points out there’s little reason not to work with a realtor. For help in filling your units in Philadelphia or Bucks County, PA, the services of a realtor would set you back between 10-20% of the unit’s rent per month.  Mueller recommends interviewing with several brokers before making your final decision to invest into Houses for Rent .

The Bottom Line: As a new landlord, you can’t necessarily control the flexibility of your schedule or the amount (and cost) of unexpected repairs to your properties. Rentals are a long-term investment. However, to maximize profits from your Houses for Rent, new rentals, you can buy close to home and start small. It is best to begin with just one or two properties. This will allow you to maximize the time you spend on your properties’ needs, and minimize the amount you’ll have to pay anyone else.

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