It’s tempting to buy a property in a less than awesome neighbourhood. The houses are cheap! The cashflow is amazing! You can often get some nice seller financing! There are lots of tenants to choose from! Seems like a no brainer right?
Well, yes these points are all true but they come with caveats. Lets talk about each point and drill down why they are true.
The houses are cheap: Yes they are, but this is because they are often in very rough shape. They will cost a lot of money to get back to a decent state, and if you decide to leave them as is you will run in to many problems just maintaining what is there. They are also cheap because no one else wants to buy them. House prices are based on supply and demand. In the hood there are lots of houses but not much demand for them as landlords or other home buyers don’t want them, therefore the prices are lower.
The cashflow is amazing: This is true because your monthly financing expense is very low, leaving more money for your pocket. Yes, rents will be lower too, but generally the house price to rent ratio is much more narrow in the hood than in a desirable neighbourhood. However, you still need to be careful. The numbers may look great on paper but if the house is in very rough shape, it will be impossible to know what your monthly repair and maintenance bill will be which can very quickly eat up your profits.
You can get seller financing: Seller financing is a great way to get in to a property with none of your own money. Have the bank finance 80% of the purchase price and the sellers finance the remaining 20%. It makes the return on your money infinite because you have none of your own money in the deal! However, sellers are often more open to this option in the hood because they can’t find anyone else to buy their property. They sometimes have other reasons to provide seller financing but just make sure you do your due diligence to figure out if there are some large and unforeseen issues with the property causing the sellers to want to get rid of the house quickly.
There are lots of tenants to choose from: This is true because the hood generally attracts the more transient type of tenant. They are maybe just going to be there for a month or two before they disappear. Maybe you have lots of tenants looking for a place last minute because they just got kicked out of their last place. **News flash** They got kicked out for a reason and they will most likely not change their behaviour in your property! So yes, you will probably not have a problem filling your property, but you will definitely have tenant headaches, dealing with late payments or non-payments, evictions, and many other issues.
The reality of hood houses is this: They can potentially make a lot of money for you but you have to be willing to put up with the headaches that come along with it.