Renting to/screening a C Class welfare tenant profile

[TangoWhiskey]

I've heard from US multi family guys that a C Class tenant profile - which will have a lot of welfare tenants at the lower income levels - is a good tenant pool so long as you screen for the tenants that work a small part-time job to top up the welfare, have no violent or property crime records, and have lived in previous apts for at least two years. And of course you need to pay a low going in price and have very hands on tough mgmt.



I can see some real advantages of this group- if treated properly and given decent safe housing they are very unlikely to leave. Disadvantages would be that rental upside and building values are capped at the welfare max, likely higher repair and maintenance, and you're unlikely to be able to reposition beyond the original tenant profile without wholesale change of the area which would take probably 10 yrs or more (although if that happened cha-ching!)



Brent/Chris/Adam/Thomas - anyone with experience in successfully renting to this profile and income group? Any additions or experience on the welfare screening tools?



Thks

 

[TangoWhiskey]

And one other criteria I just thought of would be screening for prior evictions.

 

[housingrental]

I have not seen everything but from what I have:



I never see someone have success with this

I have seen many lose $, be unhappy with result, and give up

I have seen many of these types of properties come up for sale soon after purchase with an unhappy owner

I have seen a few of these properties sell for less on resale even in a rising market



Why I have seen what I have seen:



Owners with too much leverage on initial purchase

Owners creating unrealistic pro-forma's on initial purchase (too low R&M, Uncollected rent, LTB / paralegal fees, etc.)

These have been in markets that have much lower rent to purchase prices than you purchase in - so maybe you can do better - but I'd caution some of these buildings are barely profitable even before mortgage payments.



I don't know - maybe it's possible to have success with expert management + purchasing at correct price - but I have not seen someone do this in Waterloo and GTA yet

 

[orei]

I have experience working with a tenant profile such as this.



As Adam indicates, you need to have a PM with thick skin and have a good para legal at the ready. Also, when purchasing you need to adjust your metrics to reflect higher property management fees, higher vacancy loss AND higher collection loss. Be prepared for tenants to 'suddenly' stop paying rent after months of timely payment. Also be prepared for the courts to be very hesitant to enforce evictions (my experience is in Ontario). The advantage of tenants being unlikely to leave can also be a risk when operating in rent controlled locations - as you cannot bump rent to market levels (tenant transitions are a key to this).



Yes, also include higher R&M for clean up and repairs on tenant transitions. Tread lightly and learn from a smaller multi-tenanted property. This is not hands-off investing and not for the faint of heart....



Also, IMHO a 10-year investment horizon for repositioning in the market is simply too long.

 

[TangoWhiskey]

Adam, what size of properties are you typically talking about for the folks who have made a mistake and get burned out? Are these smaller investors who didn't think it through and who don't have a tough love property management company so they get sucked in themselves? And what kind of price/cap rate are we talking about - example a C class unit in Halifax will get you maybe 600-750/month in rent for a 2 bed. Welfare max is 535 I believe for a one bed unit and I think 600 for a two bed. That C Class unit would cost you about with 45-50K on the low end and up to 70 K depending on location and a few other variables. Realistic long run cap rate probably around a 6.5 although I don't know the Halifax market too too well. It seems to be a very competitive sellers market right now.



Thomas, you seem to be pretty emphatic in steering away from C Class, several times you've mentioned Queen Marys Park in Edmonton as being harder to make money in and it sound like this area would be a C or maybe a C plus area. Any comments at all? Thks

 

[housingrental]

I've seen this in everything from chopped up houses to 30-plex 3 storey walkups



The cap rates are often 7-9%+ as marketed - the actual real rate of return when factoring in repairs, uncollected rent, etc. if is often less than 3% - you need to have the expertise with the particular area / tenant profile to analyze the building prior to purchase. If not, expected $200,000 rent will be $150,000 rent.

 

[brentdavies]

One of the primary reasons Investors (Out of town especially) buy in bad neighborhoods is the price is cheapest and lost of properties to buy. The same properties are always for sale. New buyer purchases, loses his investment with many bad tenants, and then gets out at any price. Many very experianced investors and big property management firms don't last long in a poor neighborhood.



I cut my teeth in these neighborhoods since 1990, and really learned the property management business. Boyle Street, Eastwood, Alberta Ave, are a few of the neighborhoods. Yes you need steel underwear. You must be very pro active in the management of the property. Be prepared to be vacant until the RIGHT tenant comes along. Renting to the wrong tenant cost much more than sitting vacant.



Edmonton's ghettos are NOT like Detroit or Chicago or any other major US city. Edmonton has poor areas, not ghettos.

Canada does not have "Ghettos", but does have ghetto like areas. Jane and Finch in Toronto, East Hastings in Vancouver, Forest Lawn in Calgary, and the Black Triangle of East Edmonton.



The basic concept of operating in the poor neighborhoods is to understand people and human nature. Forget credit scores, and renting off the street. Go visit the local grocery store and observe the people, who are your target renters. Compared to your neighborhood store, clothes don't match, no designer clothes, teeth missing, are some of the differences.



Being poor does not mean that there are no good tenants, but you have to sift thru a lot more to find the good ones.

The working poor are mostly honest, hard working people who just want to treated fairly, just have difficult time making rent every month.



Welfare or social assistance tenants have very few resources or assets, so if the rent is not there on time, chances are the rent will never get paid. You have to be very proactive.



"Disadvantages would be that rental upside and building values are capped at the welfare max, likely higher repair and maintenance, and you're unlikely to be able to reposition beyond the original tenant profile without wholesale change of the area which would take probably 10 yrs or more (although if that happened cha-ching!)" This may be a strategy in a rent controlled province, but in Alberta, the values will dragged up by the other areas. Poor areas never get the best rents, and always lag the great neighborhoods. Neighborhood changes can take 20-30 years to happen, or as in Boyle Street, 70 years.



Buying a property in theses neighborhoods are very easy (motivated sellers), but exiting the area is difficult. Many times is it much easier to move 30 blocks into a better neighborhood, and pay a little more.

 

[TangoWhiskey]

Thanks Brent and Adam. Thomas - any thing to add at all? On the PP website there's one property that you mention in the property description as teaching you to not buy the best property on the block or words to that effect.



This is the detailed feedback that is the real strength of REIN.



Tris

 

[invst4profit]

You should also be aware that the majority of those on welfare generally have a very low level of respect for anyone they feel are financially above them. Landlords are considered to be wealthy living/collecting rent from those less fortunate and are generally dispersed by their tenants.

Every expense, including beer and lottery tickets, will take priority over paying rent if money is short. There is no end to the pathetic excuses they will give to justify not paying rent. Generally it is their bank's fault.



Those living on welfare are considered "untouchable" by the government. Their income can not be garnished in a court settlement.

Do not depend on receiving the rental income to make your monthly mortgage payments.



Bottom line is if a welfare tenant stops paying rent you will not collect another dollar from them and can expect them to live rent free for three months or longer depending on how resourceful there free legal aid lawyer is.