Before I dipped my toes into the waters of flipping houses in low income areas, I assumed the worst. Though I hadn’t really thought about it in depth, my impression was that real estate investors in less advantaged cities behaved much like pirates on the high seas—pillaging everything in sight and without regard for the people left behind to clean up the mess. As it turns out, I couldn’t have been more wrong, and it set my business back by quite a bit when I was starting out.
Low-income neighborhoods, towns, cities, and regions are actually the areas where your work as a house flipper can benefit society more than anywhere else. Rather than exploiting a community to gobble up its cheap homes, you’re empowered to contribute to it with your investment activity. And your contributions can be beneficial. So what’s stopping you?
If you’re like I was, the biggest barrier to getting started is not understanding why house flipping in low income areas is helpful. Let’s clear that up by looking at the issue in more detail.
Investors Flourish In Low-Income Areas
In my experience, low-income areas are a great place for real estate investors to start their careers. Lower average property values make it so that you won’t need to borrow as much money to close your deals, which can keep your interest costs lower in turn.
Generally, when investors are flipping houses in low income areas, they get a handful of benefits, including:
- Lower home purchasing costs
- Lower labor costs for renovations
- Wider access to motivated sellers
- Higher value add from exterior cosmetic improvements
If you play your cards right, these advantages can possibly yield wider profit margins than you’d normally be able to command in middle-class areas, so it might be easier to come out on top. But it’s important to remember that there are a few caveats.
In particular, lower home purchasing costs are going to be partially offset by the fact that people in low-income communities have less money to purchase refurbished properties. So, you’ll need to carefully calibrate the renovations you plan on making to account for the purchasing power of local buyers. There’s no point in adding a huge amount to a home’s value if nobody is going to be able to buy it.
Likewise, there are a few moral hazards you’ll need to be aware of. It’s true that low-income areas have more motivated sellers. Many of these motivated sellers are motivated because they’re on the brink of getting foreclosed on, which means they’re willing to take deals they normally wouldn’t so that they can avoid losing 100% of their equity. That means you’ll be able to get away with some relatively lowball offers – but at the expense of the homeowner.
Of course, the more aggressively you can negotiate selling prices down, the better your margin will be. Figuring out how to navigate this tension on a case-by-case basis can be challenging, but the good news is that there is training that can help.
Communities Need Flippers, Too
Flipping houses in low-income areas isn’t just great for investors, it’s good for communities too. And understanding why that’s the case is key if you’re planning on being an ethical and successful house flipper in these areas.
When house flippers are active in a town or city, they tend to help with:
- Improving the area’s housing stock
- Avoiding foreclosures via pre-foreclosure sales
- Creating new jobs for contractors and marketing staff
- Providing liquidity to aspiring home sellers with run-down or otherwise unsaleable properties
- Increasing the appraisal value of homes, thereby increasing the municipality’s revenue from property taxes
At a minimum, fixing up dilapidated properties is a big positive for any municipality. Even if you’re only slapping on another coat of paint, it’s undeniable that neighborhoods are much nicer places to live in when things look fresh. And, from the perspective of the community, they won’t need to spend a dime to see those improvements when you’re flipping houses in low income areas.
You’ll also be providing work for local contractors and possibly local office staff as well. The money you pay them to make home repairs will flow right back into the community and stimulate more economic activity. Of course, you probably won’t be hiring so many people that your status as an employer makes a massive economic impact in and of itself, but every little bit helps.
Furthermore, don’t underestimate the additional tax revenue impact of the value you add to local homes. If an area’s property tax rate is around 1% and you add $30,000 to a home’s appraised value via renovations and then sell it, you’re making the town or city an additional $300 per year, forever.
That’s money they wouldn’t have otherwise, and it just adds up as you continue to fix and flip houses in the community. It might not sound like much, but imagine what that sum could do on a yearly basis for high school students in a low-income area.
Learning To Invest Responsibly
If you’re interested in flipping houses in low-income areas, becoming a well-rounded and fully-educated investor is the first important step. You should spend some time learning and understanding the moral and ethical implications of your work in low-income areas so that you can maximize the beneficial impacts of your business on the community.
If you’re not sure where to start, becoming an independently owned and operated HomeVestors® franchisee is a highly effective way to get the ball rolling. All HomeVestors® franchisees are comprehensively trained in multiple aspects of the real estate investing process, including the ethics of house flipping. Plus, you’ll learn how to vet your purchases in accordance with the company’s Systems and Standards to make sure you aren’t falling astray of any regulations or best practices.
As if that weren’t enough, HomeVestors® franchisees also have access to proprietary home valuation software to help them research neighborhoods and quickly find properties. And a built-in lead generation national brand means motivated sellers can come to you.
If you’re considering starting a real estate investing business in a low-income area and would like to know more about how to flip houses, request more information about becoming a HomeVestors® franchisee today.
Each franchise office is independently owned and operated.