Stop! Low-income housing usually fails! Solve it!

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Low-income housing is a bit of a trap in the world of real estate investing. Before investing in a low-income house. STOP! Most people fail horribly at it but today I will show you why and how to actually make it work.

How’s this for a proposition: let’s make money by getting hundreds of thousands of dollars in debt?

I think that’s what most people hear the first time they consider how to get into real estate investing and a low buy-in is why low-income housing is so alluring to most people. The price is low so your debt is non-existant and the yield should be through the roof.

Well, I’ve done it! I’ve bought into low-income housing as part of my real estate investing portfolio experiment and it easy really easy to lose money. I want to teach you the good, the bad, and how to make low-income housing work as an investment.

This is the kick-off to a Real Estate Investing Series talking about different types of houses you can buy, the pros, cons and how to make them work.

Today, we start with low-income housing because I think a lot of people mentally start there, ‘Hey, I can buy a house for $40,000 and rent it for $750 per month. How could I possibly lose?’ 

You know the neighborhood isn’t exactly inviting, but the numbers are too alluring to pass up. Then, at the same time, your gut tells you that if it sounds too good to be true – it probably is. So what do you do? You read this article!

Table of contents:

This cat would be a better tenant than most of the ones I had…

My Experiment with Low-Income Housing

I had a brief stint where I bought into some low-income housing in the Mid-West.

I knew the place was no San Francisco with skyrocketing property valuations but the rent you could get on a $41,000 house was incredible.

After doing a lot of homework, I bit the bullet and bought two houses for $41,000 each which already had tenants paying $720 per month. It’s a staggering rent for that home price. That’s about 20% of the house’s price coming in as rent every year so I thought even if things went wrong, I would still win.

Low-income housing Definition: I define low income housing as houses renting for <$800/month, under $50,000 purchase price, targeted at low-income earners who are typically assisted by section 8 welfare.

The most important part is the low rent per month.

Well, fast forward 5 years and I wouldn’t do it again. At least not without changing some things.

I sold one of the houses and will sell the other if my current tenant moves out. So why the change in heart?

Let’s discuss what you’re getting into when you buy a rental property geared for low-income tenants: 

Low-income housing rental benefits: 

1 – Cost of entry is very small

Buying your first home is scary enough, but buying an investment property is terrifying.

The numbers you can be dealing with in real-estate investing are HUGE! All of a sudden you can be hundreds of thousands of dollars in debt hoping that everything works out and you don’t go bankrupt. 

And then you see a house for $50,000 – essentially less than the down payment of a typical suburban home. There’s a certain peace of mind about keeping the stakes small and playing with smaller numbers when you’re starting out. 

Even if you already have experience with real estate, or you have the money to spend on a more expensive home, there’s still something appealing about having a bunch of cheaper homes compared to one expensive one. Diversification and what-not.


2 – No Debt!

Mortgages can be scary. Mortgages are amazing too but if a house has a low price tag you can just skip all the debt, complexity and fees associated with getting a mortgage.

That means you get the peace of mind of a debt-free investment property PLUS you get to feel like a baller with an investment property at little cost to you!

3 – The cap rate is really high

The what now? The cap rate is the ratio of your annual income to the home’s purchase price (ignoring additional expenses and mortgages). These houses are cheap but it still brings in a decent rental income, so that percentage yield looks absurd when you first look at it on paper

For example, if you buy a house for $40,000 and get $750 in rent every month – that’s $9,000 annually or a 22% cap rate. I mean that’s a pretty sweet return on real estate investment when you compare it to a suburban home where people are often looking at less than 10% cap rates.

Add up a few of those homes over time and suddenly you should be making a lot of money.

The Bad Stuff – There’s a lot: 

The points I’ve mentioned sound pretty sweet, but I know firsthand that there are some downsides that drove me to sell one of my two places and not get more into this end of the market.

1 – Small expenses can be crushing 

I just mentioned that the percentage return on investment with a low-income property is pretty awesome, but unfortunately, the numbers we’re dealing with are small. 

If your house is mortgaged and managed, the $700 in monthly rent, might mean only $200/month in profit. $200 is pretty easy to spend if pretty much anything comes up.

If you were bringing in thousands of dollars per month, a small repair like a broken toilet will barely put a dent into your income. Not so with these cheaper rentals – a broken toilet might mean you get no profit this month

Now that’s crappy for everyone! *ZING*


2 – Larger expenses can destroy you

When a tenant moves, you’ve got some work to do. Repairs, repainting, advertising… this work has its costs.

Basic turnover repairs will be at least $480 which is pretty bad by itself – but it gets even worse. The typical finder’s fee for new tenants is one-month’s rent (which is $720 for me,) which means the minimum turnover cost is about $1200

So if my profit is $200 per month, that turnover costs me six months of profit and that’s ignoring the vacancy time. So if your tenants decide to move out frequently your profits will feel some pain. 

Which leads to the next point. 

3 – High turnover

So the above scenarios wouldn’t be such a problem if they didn’t happen all the time. Unfortunately though, from my experience, the turnover rate is high with low-income housing. This means more repair costs, more finder’s fees, and more vacancy time. 

If you think about it, if your tenants need to rent a cheap low-income home, they’re probably pretty motivated to save their money.

If they’re able to find something cheaper or want to move out for any other reason – they’re out of there. Nothing against them, but they need to keep what money they have.

Losing a tenant is always a pain, but this happens very often with lower-income houses which causes big problems for your cash flow. 

For me, this was happening every 16-months. Very painful!
(For reference, I’m able to keep my turnover rate at near-zero for the other houses).

4 – Section 8 isn’t all that great

So my two low-income properties were paid for through the section 8 welfare system. Initially, it sounded like it would make life easier as the government pays for the rent directly. (And talking to tenants or chasing them for rent isn’t exactly my favorite thing.)

Yay! Thank you government!

I can tell you, the government is great at paying things out on time, like clockwork.

Know what they aren’t great at? Speed and changes.

Changes take forever, they need to approve a renter before they move in which increases vacancy time.

Then before they move in, they have to re-approve and re-audit your house which takes even more time and causes more vacancy. 

5 – Property managers for low-income housing aren’t that great either 


This one is my dealbreaker. Personally, I need a property manager because I live really far from that rental property.

They suck.

I spoke to a highly recommended management firm to see if they’d take over, and they laughed in my face. (I don’t blame them). 

Good property managers don’t really want to deal with these low-income houses. It’s just not worth their time for the minimal monthly payments they will get. So if you need a landlord you might be stuck with sub-par ones.

Meaning, you’re basically trading dealing with a bad tenant for dealing with a bad manager.

Never get yourself stuck with a bad property manager, it’s annoying AND they make you pay them. Uggg.

A lose-lose situation? Nope!

So I just laid out a bad scenario right?

Yeah, totally! It can suck. However, you still do make money, and there is one way to get more of the good and less of the bad if you want to take advantage of low-income rentals. 

The fix – Be your own property manager 

To recap, you likely won’t find a good manager for low-income houses,
PLUS they take a 10% cut from your rent,
PLUS they hire expensive contractors to do repairs,
PLUS you lose one-month’s rent for every turnover (which was happening for me every 16-months).

So what’s the solution? Don’t pay for a property manager or hire out the work. Boom. Solved.

It’s annoying but you can save a lot of money by doing the simple repairs yourself and shop around for the more complicated ones. Then you can handle the tenant management yourself too to avoid the 10%/month fees and finders fees for new tenants.

These small costs add up to kill your returns on these houses so when it comes to low-income rentals being a DIY landlord is the only way to make it work out.


If you decide to be your own property manager, you can take advantage of the high cap rates and the low cost of entry while minimizing the profit-crushing costs.

Honestly, if I knew this existed a few years ago, I would have reconsidered getting out (if I lived nearby 😛 )

Is DIY property management smart? 

I never would have recommended being your own landlord for a real estate portfolio but being a DIY landlord is totally possible now due to modern landlording apps.

If you don’t mind getting your hands a little dirty and know how to use a smart-phone, you can make this type of real estate investment work.

I did hours upon hours of research and tests on the available apps (which is summarized here) and I think it’s the only way to make low-income housing work. These apps almost make landlording fun, automates almost everything and costs very little! 

In fact, if you don’t have a property management app these days, you are just flat doing landlording wrong. Do yourself a favor and do it right.

Another quick tip before I go!

If you do get into low-income housing rentals. Don’t get too many. You have to self-manage to make it work and even with the nice apps you can’t be relaxed and manage hundreds of houses.

Low-income houses are a stepping stone to bigger more manageable houses so cut it off at 10 and slowly replace them with pricier places.

Otherwise, you will be giving yourself another full-time job 🙁

TL;DR – Low-Income Housing

  • Cheap low-income housing has low buy-in and high yield
  • However, in this end of rental investing the tiniest expenses can really grind your profit margins to zero. 
  • Turnovers can really kill you when you have a property manager.
  • The fix to this problem is to forego property management. 
  • I wrote a summary of how to be your own DIY property manager with a review of property management software programs.

And now I’d love to hear from you. What are your thoughts on getting into low-income housing and do you have any interesting stories from your experience? 

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2 thoughts on “Stop! Low-income housing usually fails! Solve it!”

  1. Another nice article.

    Problem with 22% cap rates is they aren’t really 22% once you account for vacancies, property management fees and other expenses.

    Unfortunately too many people don’t account for those in their analysis. I see properties (not low income) trade at sub 5% cap rates which tells me buyers aren’t accounting for a big chunk of the costs or have very optimistic expectations on price growth.

    • True. The concept that the sellers rendition of projected cap rate doesn’t include vacancy is ok to me because the cost of vacancy scales with the rent (also surprisingly the PM fees scale nicely with rent).
      BUT frequent vacancies and the flatrate nature of the repairs really blew everything up. The rule of thumb that 1% of home value = annual repair costs is certainly out the window with these cheap houses 😛


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