Buying in an undesirable neighborhood can make financial sense, but is it worth it? The short answer is, it depends. Of course, it depends on the property and the neighborhood, but it also depends on the investor. Buying in a challenging neighborhood can end up being a disaster, but it can also produce good returns and involve minimal headaches if you do it right. But proceed with caution. This type of investment is not for everyone.
In this article, I provide pointers on what to think carefully about as you consider investing in a challenging neighborhood. These are followed by tips for making the right investment if you do decide to buy in a less desirable area.
If you think you've found a great opportunity in a less than desirable neighborhood, make sure you carefully consider the following points before jumping in. Remember, don't just think about these points purely from a numbers perspective. Be realistic and consider if the property is right for you as an investor.
If you are new to real estate investing, make sure you understand what type of neighborhood the property is in. There are loosely defined definitions that investors use to classify neighborhoods. Most challenging neighborhoods that offer decent investment opportunities fall into the C class. These areas are generally characterized as having older homes (older than 40 years), predominately investor-owned properties with homes and neighborhoods not well maintained. These areas also tend to have higher crime rates, but they are not "war zones." Make sure you know the difference and stay away from areas that have high crime or increasing crime rates.
2. Consider your goal with the property.
Fix and flip or long-term rentals? A good property in a C-class neighborhood can be a good long-term rental investment. Of course, tenant selection is key but more about that under my tips section. Tenants in these neighborhoods are typically blue-collar workers who, in my experience, stay a long time. If your goal is fix and flip, you might be able to invest in a riskier neighborhood, provided you can get in and out quickly and you and your contractors are comfortable spending time in the neighborhood.
3. Understand whether Section 8 is a possibility for the property.
If you buy in a challenging neighborhood, you will likely have Section 8 in your tenant pool. In some places, these can be a good, even great, way to go—but in others, they can be full of problems. I've heard of investors in some states making a real killing by focusing on Section 8 tenants. On the flip side, I've also heard of investors who've had nothing but problems—bad neighbors, property destruction etc. The Section 8 approval process differs by locale, but there is usually an extra inspection as part of the process by a Section 8 inspector, so be sure to budget time and money accordingly.
Next articleIs Buying a Rental Property with Negative Cash Flow Ever OK?