Flipping houses in a "bad" neighborhood might seem counter-intuitive to you because industry pros constantly say "look for the worst property in the best neighborhood." Of course, this is to ensure that once you have turned your ugly investment property into a beautiful home you won't have any trouble finding someone willing to buy it.
While that can be sage advice in some markets, not every fix-and-flip investor can expect to find a viable distressed home in a highly-desired neighborhood with a sufficient profit margin built in to the deal.
Flipping houses in highly competitive markets has risks as well
If you are flipping houses in highly competitive markets where on-list distressed properties are selling at prices that don't leave room for a sensible ROI, it can be beneficial to widen the search into "bad" neighborhoods. These areas have been deemed "bad" based on certain indicators, such as high crime rate, low school scores or high number of vacant or neglected homes in the vicinity.
What are the risks of flipping houses in a "bad" neighborhood?
The biggest risk you face in flipping a house in a neighborhood that is perceived to be undesirable is you may not find a home buyer that is willing to call that "bad" neighborhood home.
To mitigate that risk, the most important thing you can do is research the neighborhood thoroughly and look for "positives" that you will be able to use when marketing the home later. The vast majority of the information you need about the local area can be found online. If you do your homework, you may find that there are plenty of positives in the data that can make your investment a viable one.
For example:
- Are crime rates in the area trending downward? Many neighborhoods that have had a reputation for crime in the past may actually be improving. If you find a fix-and-flip investment property in an area where crime rates have been steadily falling, that neighborhood may be transitioning upward--and that can be an ideal place to invest.
- Are there other homes on the block that have recently been improved, or that appear to be well-kept? If there are other homeowners or renters who take pride in their homes, this can be a selling point later.
- Look for signs of recent development in the area. Have real estate developers taken an interest in nearby neighborhoods and begun building apartments, condos or housing developments? Have there been recent improvements in area shopping centers, or the addition of new markets, cafes or coffee shops in the vicinity? These are all signs that a "bad" neighborhood is in transition.
- If the local public school scores are low, investigate whether there may be a magnet, charter or private school in the area that can serve as an option for concerned parents.
Take precautions to prevent theft or vandalism of your property
Another risk of operating in a "bad" neighborhood is the threat of crime during the renovations. There may be criminals in the area who look for opportunities to steal unattended tools, materials, fixtures and appliances, so you may need to incorporate increased security measures to mitigate that risk. Read our blog post "Preventing Theft at Your Fix-and-Flip Work Site" for tips on how to avoid this potentially expensive threat to your project.
What are the potential rewards of flipping houses in a "bad" neighborhood?
ROI -- If you can purchase your fix-and-flip investment property at a great price, repair and renovate it and find a buyer who sees the same positives about the surrounding neighborhood that you found in your research, you can reap a healthy profit on your fix-and-flip project.
Improving communities -- When you purchase distressed properties in neighborhoods that are in transition, you are providing desirable homes for hard working home buyers and their families, and helping neighborhoods improve--and that helps entire communities improve.
