Risk of investing in a socie-economically bad area?

If you find an area with seemingly good price and growth potential while it's been said a "bad" area full of welfare people & bogans etc, would that become a trouble even if you require a property management firm to maintain the property there?

 

Nothing wrong with bogans, especially the employed variety.

Simple answer is yes, it could be trouble, depends what you mean by “bad” area?

For some that might mean an area where they wouldn’t live. To me it is an area where is it harder to get insurance, one where some PMs don’t want or worse, won’t manage property there. If that is the case then they probably know better than you, avoid.

I had a property in Coledale, West Tamworth. Great yield on paper, over 9% but low life tenant turnover was really high and the good ones tended to move on to nicer area’s.
If you don’t mind endless trips to the tribunal, playment plans and damage go ahead.
An area which isn’t fashionable though isn’t necessarily a bad thing.

 

Sas, nothing to worry about.

You'll have nothing to worry about in a big city. Those bogan areas just piggy back on the rest of the city when it comes to capital growth.

You'll find the rental yield good once you find a stable tenant.

The down side is you may receive some flak from a wide range of the community. Well lets say 90% of Sydney for example.

It's not anybody's fault that your future tenants may look like mutants who dress and speak differently and drive certain type of cars.

What you have to consider is the end game. And that's after the property boom when your little investment bears fruit. You can then sell with profit or dive into the equity pool and buy another property.

 

They are NOT for long term holds but great in a rising market. When the market is flat there is much better value to be had in good quality suburbs.

The high yields disappear very quickly with tenant turnover and property damage. PMs (as hardy as they are in these suburbs) can be just as bad.

 

All areas have risks. Have a plan to deal with the ones you can.
Factor insurance etc into your diligence(get quotes, dont assume), talk to PM's.
If it still stacks up, go ahead, if it fits your strstegy. There will always be snobbery from some. Ignore it.
You dont have live there, as long as someone is prepared to pay you to live there, it doesnt matter if you want to live there, unless you plan to make it your ppor.

 

Sorry my words may sound offensive to some. I don't intend to discriminate against any people personally you know I would happily say hi to a bogan on the street. The real concern I have is like HUGH72 has said, the issues like damages of properties or things you have to go to the tribunal to solve. I recently saw a news in New Zealand, a group of gangsters occupied the house in a "bad" area in Auckland even the police couldn't sort it out immediately and I believe that'd be the nightmare for any home owner thus everyone wants to avoid. I think if such thing ever happened and reported from the news, it might be very hard to sell out that house...

 

Apparently it's much better to rent out that kind of house rather than living in it myself. Even though, you may find have difficulty collecting rents then.

I'm probably not brave enough, while I know who don't want to invest in a "good" area which is just too expensive.

 

That's what good PM's are for. i've had one bad tenant in 20yrs across 7 IP's. All but one have been in outer areas. Took month or two of tribunal appearances by the PM. Ended up costing me $2k. no big deal in the overall scheme of things. I find PM's (good ones) are pretty strong on weeding out the problem people before they put them forward to me..

 

What are you planning to spend, if you don't mind me asking? Once you work out your strategy of CG, cashflow, value-add etc then you can worry about the prospect of the suburbs/properties that you are looking at.

 

For instance, Melton VIC, known by many as a murder/drug user capital. Other than that it looks pretty good to me.

 

If investment stacks up, make sure of appropriate Insurance(s) and great property manager..

Had one of my properties after 5years of holding and great growth, tenants burnt it down to ashes (Month ago). Right insurance(s) and PM is your key ..

 

Mt Druitt could hit sub 400K for a house. That will be a bargain come next boom.

From 2013 to 2017 house prices went from 250K to over 500K. Ezy money.

 

Thanks for your info, Datto. I'll do some research!

 

Hi Sasa,

Thanks for your question.

Question: are you purchasing in a lower socio economic area because it is the only area you can afford and need the higher yield? Or is it because you are hot spotting, and trying to pick future growth?

If the former, by all means go for it, but hire a good property manager, and be prepared to wait for a better tenant. This may be a stepping stone for a better property later on, and we all have to start somewhere.

If you can afford somewhere better, it is preferable to invest elsewhere. For buy and hold investors, you are looking for suburbs where incomes are rising, and these are generally white collar areas in middle ring suburbs near the CBD. Yes, there will be a lower yield, but lower yield is reflecting the reduced risk of a property like this (yield is not just about cash flow, it is about risk also).

Typically, "boring is beautiful" so no fuss investing would guide you to a better demographic.

I hope this helps.
John

 

What happens if it goes back to 250k in 2020 from the way I read some posts ,your back to where you started
at least you never lost anything ..

 

Hey John,
Thanks for sharing your idea.
Yes, I'm indeed seeking an "affordable" opportunity with good yeild & growth. As you said, lower yield might be a trade-off of "good" areas while it's safer, which is just the rule there.

However if you look at the history, some areas perceived "bad" a decade ago have become "good" thanks to the urban-sprawl, in other words, some "bad" areas may become more expensive and people-friendly some where in the future. And that's the real thing we are thinking about.

 

Nothing worse than watching your asset retreat in value.

I think a way around would be to at least sell some property at the height of the boom. Then hold cash or buy some other income producing asset.

 

After a while one gets use to it at least it takes time to go up or down in property,try equities day trading investing one day your heads stuck in the vice with your pants down,the next your on a upwards trend and think your a genius and running on 8 cylinders till it puts a piston through the block and your heads back in the vice..

 

This is the key in my opinion. I have several properties in Logan, can’t be shoving the first applicant with a pulse in. Need a good rental history/TICA checks with no red flags in the application.

I have had good luck with migrant families, older people, older divorcees etc. I’d rather leave the place vacant or accept a bit lower rent to widen the pool than just take the first applicantion received. Have to push back on PMs on this point I find sometimes.

 

Ah yes, gentrification. Not all areas gentrify.

The signs of gentrification (worth Googling), are typically inner ring suburbs, with emerging cafe's and things like falling birth rates.

So if you are looking at an outer ring suburb with high crime, it is not obvious to me that it will gentrify if that is the case.

There is a lot we don't know about your choices. What i can say, is that when i was building my portfolio (most boring portfolio in history), it started with old, tired red brick "walk up" units in inner ring suburbs. As the portfolio grew, I took more chances in lower socio economic areas with larger blocks. The inner ring units have performed better.

I don't know the market in NZ, so this is just a suggestion. But in Sydney, apartments are perfectly acceptable investments and you don't need to own houses to make money. If this is the case consider an apartment in a better area.

Depends on your goals and your means of course.

Good luck!