3+ Reasons Why You Shouldn’t Buy Property in a Bad Neighborhood

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These are the reasons why you shouldn’t buy property in a bad neighborhood (based on a true story)!

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In this blog post, I’m going to tell you a story from my investing to discuss reasons why it’s not a great idea to buy property in a bad neighborhood.

Here are the reasons I’m going to review:

• Bad neighbors
• Higher crime rate
• Lower price appreciation
• Higher maintenance costs

But first of all, let’s set the scene with a little story.

The Duplex

It was mid 2020 and I got offered a deal on a duplex in Indianapolis. It was good price, but it was a bit of a rough neighborhood. If I were grading the neighborhood, I would give it a C+ based on my knowledge of the crime rates and property values.

In fact, when I looked up the area, I could see that there used to be some gang activity in the area. My real estate agent admitted that neighborhood wasn’t the best, but this was reflected in the real estate values. This made the property really affordable. It came with a tenant and one side was vacant. It was in overall good repair and I didn’t have to do major renovation, which was a plus.

When my realtor sent me a drive by video, I could see that while it wasn’t the best neighborhood, there were tons of revitalization taking place. The surrounding area was full of houses under renovation.

In the end, I bought the duplex for $160,000 from a wholesaler.

After the deal closed, the tenant starts paying rent and I start renovating the vacant side. Everything was going great, until one weekend when I get a text from my property manager.  

The Pitbulls

Apparently, the tenant was walking her dog one morning when the neighbor’s pit bulls got loose and attacked her. She was injured and her dog was hurt as well. After escaping, she called animal control, who collected the pit bulls and likely put them down. 

The Car Fire

The neighbor who owned the dogs wasn’t very happy about this. (This is where its gets crazy.)

The next night, my tenant is at home and notices that her car is literally on fire. Luckily no one is injured, but her car gets completely destroyed.

After this, she’s scared for her life so she decides to leave town. My property manager and I agree to not charge her to break her lease. Last I heard, she settled down in another city out of state.

Want to hear me narrate this story? Check out my post on TikTok:

@thedarwiniandoctor

Why you shouldn’t buy property in a bad neighborhood. ##investing ##MakeADogsDay ##financialfreedom ##realestate ##financialfreedom ##medtok

♬ Winter / Chill / R & B_No517 – table_1

With this crazy story in mind, I’ll now share my thoughts about why you shouldn’t buy property in a bad neighborhood.

Bad neighbors

The first factor is that comes to mind is a higher risk of bad neighbors. This isn’t something that a real estate investor might initially consider, but a bad neighbor can hurt you in two ways.

First, it can make your tenants’ lives miserable (like it did for my tenant). Second, evidence shows that bad neighbors can decrease the value of your investment by 5-10%. That’s a material difference!

I think it could be argued that you can get bad neighbors anywhere, even in a good neighborhood. For example, I live in a desirable neighborhood in Los Angeles in a typical “Doctor House.” Let’s just say that the neighbor on one side of my house isn’t the best.

We’ve argued about various things over the years, from border trees to noise. It’s certainly something that my wife and I would have considered negatively as potential buyers of the house… if we had known.

But in general, if a neighborhood’s overall quality is lower, I think it’s safe to say that the quality of your neighbor might be lower as well. This can lead to everything from an increased risk of disagreement over minor issues, to increased risk of violence.

Higher crime rate

Before I get hate mail for making blanket judgements about people who live in one neighborhood vs another, let me backpedal a bit.

What does the term “bad neighborhood” mean, anyway? One of the most important factors of a neighborhood is the crime rate. Even a great location might have a high crime rate with minor crimes like petty theft. But it’s really violent crime that is a red flag that marks an undesirable location.

You can recover from a burglary fairly unscathed. But arson, murder, or rape? Not so much.

In fact, robbery and assault are directly linked to lower property values.

Lower price appreciation

Crime rate is one of many things that prospective buyers will take into account when deciding whether or not to purchase a house. Other things that come to mind are factors like the quality of the local school and proximity to public transportation, coffee shops, and a grocery store.

None of these factors are necessarily deal breakers. But taken together, multiple negative factors will decrease the amount of money first time home buyers will be willing to pay for a starter home. Similarly, a real estate investor will not pay as much for an investment property that exists in a bad area. This limits appreciation that happens when comparative properties are purchased for higher purchase prices.

After the purchase of a house in a bad area, there also might be less incentive for homeowners to invest in things that increase curb appeal. Enough overgrown yards and degraded homes will also limit the price appreciation that can be achieved through property investment and maintenance.

Speaking of maintenance…

Higher maintenance costs

As a real estate investor, I realize now that maintenance costs are one of the biggest factors in the real return on investment. While my sample size is still low, I’m starting to see higher maintenance costs in the part of my rental property portfolio that aren’t in the best locations. I’m not sure if these costs are just random yet, but I’m definitely seeing more plumbing and appliance related issues in these rental properties.

In fact, the same duplex that had the car fire was recently hit during a drive by shooting. Bullet holes certainly cost money to fix.

Conclusion

I hope you enjoyed this post. In it, I discussed the true story from one of my rental properties in a bad neighborhood. It’s led me to believe that there are four reasons why you shouldn’t buy property in a bad neighborhood:

• Bad neighbors
• Higher crime rate
• Lower price appreciation
• Higher maintenance costs

As a real estate investor, cheap properties in bad neighborhoods are very tempting. They tantalize with high cash flow because they’re cheaper!

A rental property in a great neighborhood carries a big price premium that can make it harder to get good cash flow due to the higher mortgage payment. But as I’m learning, a bad location carries with it other issues that can degrade profit as well.

You can’t make money on a rental property that no tenant wants to rent, for example. Also, if tenants are not incentivized to maintain the property due to general neighborhood neglect, you’ll likely spend a lot of money fixing the house over time.

The tricky thing is to find that rental property that isn’t in the best house in a bad neighborhood, nor the worst house in a nice neighborhood. The best rental investment locations will offer a good house with that perfect mix of neighborhood and home prices. That will allow you to attract good tenants so you have lower vacancy rates, while still offering a reasonable purchase price.

–TDD

Have you ever lived in a bad neighborhood? What was your experience? Comment below and subscribe to the free weekly newsletter for more!

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