Investing in Foreclosures in Low-Income Neighborhoods

One the main attraction of buying foreclosures in low income maintenance and turning them into rental concerns the significant cash flow that can be gained each month from these properties. Although the rate of property appreciation will not be as high as it is in some of the better neighborhoods, the extremely high cash flow rate will make up for the low rate–if any–of appreciation .

However, if you like a higher probability of appreciation you want to do a bit more homework to determine the historic rate of appreciation for particular low income neighborhood because in some cases these neighborhoods can be revitalize and return to you a significant return once the area has been turned around.

Here are some considerations for purchasing foreclosed properties in low income areas.

Buying Foreclosures in the “Inner Cities”

One of the most challenging aspects of purchasing and refinancing foreclosures in inner city neighborhoods have to do with obtaining mortgages to purchase these homes. Based on the nice cash flow that is possible from these properties, your best option may be to pay cash for the property if you have the resources.

In the event that you have to finance the property, understand that most banks have a minimum loan threshold and loan- to-value ratio.

If you flip houses, be very careful about purchasing properties in low income neighborhoods with this as your only exit strategy. It’s not unheard for buyers to be able to obtain a mortgage to purchase the property but it is more difficult.
If you have money to buy these foreclosures for cash and received a deep enough discount, you may want to consider wholesaling the properties to investors who will turn them into rentals.

Rent Collection

The process of collecting monthly rent can be a challenge even in the best neighborhood. Regardless of the location, if the tenant fails to pay rent you will have to go through the eviction process. Many property owners that invest in these locations prefer to rent to tenants that have a Section 8 vouchers. Sometimes called the Housing Choice Voucher Program, this is a government program that pays a percentage of the rental amount and the tenant pays the rest. That means you are pretty much guaranteed to receive that portion of the rent on time each month.

Once you acquire foreclosed homes, call the local program office in advance to determine what repairs you will need to complete in order to bring the property up to the standards necessary to pass inspection.

Property Maintenance

Some—not all, tenants have more maintenance request than others. Although I haven’t experience this, the percentage may be a bit higher for the units to rent to Section 8 voucher holders. Many real estate investors set up a maintenance hotline for their tenants to call-which may or may not be forwarded to a handyman. With the nice cash flow generated by these units, it is worth it to have someone on standby to handle routine and emergency repairs.

Periodic Inspections

Whether you buy foreclosed homes in low income areas or other locations, after you ran out the units you need to make it a point to check up on your properties from time to time. If you are uncomfortable doing this, you should not invest in the area. This good idea to put a clause in your rental lease to advise tenants that you will be coming by to conduct an inspection from time to time.

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