The Pros and Cons of Buying Houses in Bad Neighborhoods

Almost every real investor is faced with this dilemma at least once. You come across a great property that’s an excellent value. However, it is located in a less-than-desirable neighborhood. Maybe there’s a high level of crime or the houses around your good house are run-down. There are many things that might describe a “bad” neighborhood. You have to weigh your options and decide if the investment is worth the risk.

Location Does Make a Difference

At PropertyLark, we understand this dilemma. We get sellers throughout the country contacting us every day for cash offers, but unfortunately some of these houses are in bad locations. They say “location, location, location” are the three most important words in real estate, but we all know successfully investing in real estate is never as simple as that. 

There are some investors who thrive in lower-end markets while others will avoid any sketchy neighborhoods at all costs. Ultimately, it may come down to personal preference and professional experience if you feel the potential rewards are worth the risks.

Pros and Cons

Let’s look at some pros, some cons and some factors you need to consider when buying houses in bad neighborhoods…

First, your overall success may be a matter of what you intend to do with the property. If you confidently think you can buy it, fix it up and flip it quickly for a good profit, then you aren’t assuming too much risk. If you are buying it to renovate and then rent out, then you definitely have more things to take into consideration before you buy the house.

Even a nice house in a rough neighborhood will probably be fairly cheap, and this is one appeal of investing in markets like this. The mortgage will be easy to pay off, property taxes and other ownership costs will be pretty low, and you can easily expand your rental portfolio. The returns on investment (ROI) can also be high if done right.

Study the Trends

With any real estate investment, you will want to look at the past, present and future of the neighborhood in which you are buying. It may be run-down now, but it is on the way up because of gentrification or positive community initiatives. You can still buy a house for cheap and maybe later it will drastically increase in value and appeal as the neighborhood becomes more desirable. You might be able to snatch up several cheap properties and your efforts to fix up the homes and bring in better tenants could be a part of what helps that community become revitalized.

Dealing with the tenants is one issue that rental property owners/managers fear when considering low-end neighborhoods. The renters are often living paycheck-to-paycheck, so you might have to be flexible on rent due dates and, of course, you have to price your rent properly for the market. The good news is that low-income properties tend to hold tenants for longer periods. It’s expensive to move and people with less means prefer to stay put as long as they can. A lower vacancy rate is usually a very good thing for a rental property investor.

Understand the Risks

On the negative side, you do really have to look at things like crime rate before deciding to buy an investment property in a bad neighborhood. This could drive your insurance prices up or make it hard to keep good tenants in the house if bad things are happening around them. Again, you want to look for communities that are on the way up as opposed to the way down. This is where you study the trends and crunch the numbers to determine if an investment is worth your time or not.

To recap, here are the pros and cons of investing in a bad neighborhood:

Pros:
            • Properties cheaper to buy/own
            • Tenants stay longer on average
            • Possibly great ROI if the neighborhood is improving

Cons:
            • Lower rent/resale prices
            • Crime risks (insurance costs)
            • Poor ROI if neighborhood is trending downward

Making Smart Investment Decisions

Ultimately, you have to treat a real estate investment in a bad neighborhood with the same scrutiny with which you would approach any single-family house you are purchasing to rent out or to fix and flip. In fact, you have to be even more careful as you look at your expenses and potential return on investment. It may be a fantastic investment or it may not be worth your time. As we said, some investors thrive in bad markets while others prefer just to stay away.

Whatever type of investment properties you are looking for, PropertyLark has the connections and resources to provide you with excellent real estate investment opportunities. Whether you are looking in “bad” neighborhoods or “good” neighborhoods, we analyze every property and pass on what we know are the best deals to our elite network of home buyers. To apply to join our buying network, please fill out the contact form on our buyer’s pages.