Why the Vast Majority of Investors Should Stay Far, Far Away From D-Class Properties

by | BiggerPockets.com

There’s been a lot of chatter on BiggerPockets lately about D class properties and the dangers that such properties pose, particularly to newbies. Mark Ainley says they’re for advanced investors only, Ben Leybovich advises against buying anything under $30,000, and even I have thrown my hat in the ring by denouncing the devious impostor known as the 2 percent rule.

But I think this point needs to be highlighted again, as I’ve seen multiple newbies or out-of-state investors see their equity go the way of the Dodo bird with properties that look fantastic on paper, but only on paper.

A real estate agent I work with used to find properties for a hedge fund shortly after the crash. He set a brokerage record by closing 86 properties in one year, all under $10,000. The hedge fund’s goal was to buy properties for no more than $9,000 and be all in to them for no more than $13,000. Then they would sell the properties owner-financed for $500 down and $500 a month.

At first, it appeared to be working. Even when a property was so thoroughly damaged they couldn’t bring it back, they were into it for so little that it didn’t matter.

But these types of mistakes stacked up on top of each other over and over again. Buyers who had made their payments for a few months started missing them more and more, and eventually the fund collapsed under the weight of countless boarded up, dilapidated properties.

Related: Investing in Cheap Real Estate: Is a $30,000 House Necessarily a “Pig”?

And I should note, this was a large, seasoned company that fell to the D-class property temptation — not some first-timer.


The Temptation to Buy $20k Properties

Indeed, I experienced that temptation myself when I first came out to Kansas City from Oregon. Where I was from, houses started at $100,000. And that was for turds. Now there were houses that looked OK listed for $20,000 or less! Apartments being sold for $15,000/unit. Oh my!

A friend of ours who was investing there from out-of-state would run the numbers on these properties and come to ridiculous cap rates of 15 or whatever. But the thing is it doesn’t matter if it looks good on a pro forma. No one ever got rich off of a pro forma.

Our friend ended up losing the properties he bought out here, and we took it on the chin on the first property we bought that was in a rough area (an apartment we bought for $16,000/unit).

And we had been investing in real estate for decades.

I have seen investors who have made it work in rough areas. There are good tenants there so it’s certainly possible. But they all fall into one of three categories:

  1. They live there and know the area extensively.
  2. They are a seasoned investor and have decided to specialize in D properties.
  3. They wholesale and flip (i.e. they don’t hold them). Often they sell these to out-of-staters and some of them, unfortunately, a bit unscrupulously.

If you don’t fall into any of those three categories, I would highly recommend you stay away from D properties in rough areas. (And if you fall into the third, you should really up the quality of property you are turning to ensure your clients make money.)

The Reason It Is So Hard to Cash Flow D Properties

I’ll let Mark Ainley paint you the picture on how it can be to try and lease such a property:

“We got some leads on the property and some applications, but they were terrible. Criminal records, evictions, extremely low credit scores — you name it, and it was probably on one of the applications. So the property continued to sit on the market. The cost of getting a bad tenant is much higher than the cost to let the property sit, so it continues to sit until we can find the right tenant.

This isn’t uncommon for these few properties that I have. Tenant moves in, stays for a couple years, then moves out, and it takes me a couple months to fill it. The vacancy rate of property management companies and individual properties can be very different, especially if the properties are spread over different classes.”

Square foot for square foot, a roof costs the same on a D property and a B property. Cash flow simply does not go up evenly with rent. Instead, it looks more like a bell curve, with the best cash flowing properties being near the lower middle of the market. The very bottom and the very top usually lose money.

Let’s run the math. So let’s say you have 123 OK Street. You’re all into it for $100,000, and it rents for $1,000/month (a 1 percent rent to cost). You get a 75 percent loan at 6 percent interest only. The expenses add up to $4,500/year, and you have 10 percent vacancy:

Scheduled Rent: $12,000 ($1,000/month)

Vacancy: $1,200 (10 percent)

Expenses: $4,500

Debt Service: $4,500 (6 percent interest only)

Cash Flow: $1,800

Now, let’s say you buy a property on 456 Skid Row. You are all in for $30,000, and it rents for $600 a month (a 2 percent rent to cost). You somehow get the same loan on this one. But because it’s in a bad area and you have to deal with what Mark Ainley described, the vacancy is now 20 percent. While the taxes are lower, the maintenance and turnover are higher so the expenses are the same. Here’s what you have:

Scheduled Rent: $7,200 ($600/month)

Vacancy: $1,440 (20 percent)

Expenses: $4,500

Debt Service: $1,350 (6 percent interest only)

Cash Flow: -$90

Now, maybe you think you won’t use a loan or you can beat 20 percent vacancy. You very well can. Some do, and they do well. But what it leaves aside is that you have a very small margin of error. And what really kills these properties is what I will refer to as the Disaster Tenant.


Disaster Tenants

Oh, the dreaded Disaster Tenant. If you think a tenant can’t do $10,000 worth of damage, you are unfortunately quite mistaken. I’ve seen it done, and it has even happened to us before. And usually you won’t be collecting any of that above the deposit once you finally regain possession of your broken, decrepit property.

Related: The $30k Rental Property: How to Finance & Profit From Cheap Real Estate

Yes, you must screen diligently. And for the most part, when you do, you can avoid such problems. But sometimes bad tenants slip through the cracks. Or if you keep a property vacant too long, especially in a rough area, you may have an unwelcome, short-term Disaster Tenant who decides he likes all of the copper in your house and it should belong to him instead of you. An HVAC system can cost $4,000 to replace. How long will it take for the cash flow from such a property to make up for that? And that’s assuming the plumbing is left alone.

Such properties require too many things to go right for too long to make sense to most investors and all newbies. It can certainly be done and done well for a good profit. But if you don’t specialize in these areas, I highly recommend you don’t try your luck at them.

[Editor’s Note: We are republishing this article to help out investors newer to BiggerPockets.]

Investors: Do you agree with this assessment? Do YOU ever invest in D-class areas? Why or why not?

Leave your comments below!

About Author

Andrew Syrios

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.


  1. karen rittenhouse

    I’m not interested in holding D properties for my own portfolio, however many landlords are. We buy these all day long and wholesale them to investors who think D properties are cash cows. They work for others – not for me – but I’ve made a ton of money wholesaling them to the next guy.

  2. Michael Noto

    I agree with Karen. There is definitely a market for these properties but they are not for me. It’s basically a job to manage these types of properties.

    This is a very well laid out article and I am going to be sure to send it to any newer investor I know when they ask me about class D properties.

  3. Think there’s a typo in the page title. It reads “Why the Most Investors…” :/ I assume it is supposed to be what the title actually is: “Why the Vast Majority of Investors…” Just FYI in case this bothers anyone lol.

  4. Stephanie Goodman

    I like investing in D areas but only in flippers. I have bought multiple houses for under 30k, rehabbed them and then sold them in the 70-80k range to owner occupants. I’m in Michigan, and around here those are the areas that gained the most value in the past few years so they made for great flips. I could never justify the risk in holding them as rentals so I never have. I did sell one on land contract and then I turned around and sold the land contract to a bank, that worked out pretty well also.

    • Andrew Syrios

      It depends on the area, but I don’t see $70-80K resale values as D areas. I was talking about being all in for $30,000, not buying for $30K, putting in $15-20,000 in rehab and then selling for $70-80,000. We do a lot of stuff in that price range.

  5. Timothy Riley

    I went into this with negativity, but after seeing the categories one should be in I totally agreed.

    Under 30k properties are great for me but I wouldn’t advise anyone unfamiliar with the areas to gamble on.

    If I couldn’t ever see myself living there or being comfortable in the area at anytime of the day – I don’t invest in it.

  6. Ruben Prieto

    I’ve got a B class rental generating $550/mo cash flow in a D class neighborhood. The most important thing is tenant screening, for sure. The current family is from the neighborhood with family around the corner so I know they have a vested interest in maintaining the property to prevent the boot. They’re entire familia is always hanging out there for parties and holidays. What’s great is they all care about taking care of the place since they all hang there. It’s a win-win every month, so far. $$$ You just have to find the right tenant.

  7. Albert Okagbue

    I have a contact who can be accused of over-rehabbing. He buys for about $15K and spends much more with rehab costs. The place ends up much nicer than it absolutely has to be to make money. I will share this with him because this article explains things that he intuitively felt and only recently has been able to articulate to me. Real estate (rentals) seems to be a lot about people. The right contractors so you don’t get screwed, the right tenants, the right property manager, etc etc

    As the writer said, flippers & wholesalers can do this stuff because the property doesn’t stay with them.

  8. I currently invest in D class properties and I strongly believe if you are not familiar and live close by to he area stay away. One way we have avoided vacancy is by using section 8 tenants which has been working out very well so far.

  9. Dorothy Osgood on

    Our rental doesnt quite look like the pic, for the house we purchased was in a high rental neighborhood and was move in ready when we purchased the home for a rental.. First tenant was section 8 but she left for a lady came by and sat on her front porch. She asked the lady if she could help her and she told her that she just wanted to sit there.
    She said that was the last straw. Also before you can have a section 8 tenant, the home is inspected to be sure home is in good condition which is another pair of eyes on your property, especially if you are out of state like we are. Also i whole heartedly agree that the type of tenant you have will make or break you.

  10. I might be new to this real estate game but somehow I think those numbers are way off. How can you have expenses the same if you’re dealing with a $70k difference on the mortgage? I agree that you won’t have as high rent as the $100k home but certain low income areas change close to $900+ in rent. Can you please clarify on this a little more?

    • Actually, I’ve encountered people in the Indianapolis area who have rents in the $200-300 range, with $550 being semi-high. I live in what many consider a D-class area, and for a long time never really thought about anything different. But then, I’ve always lived kinda broke. It’s a thought pattern I’m working to resolve.

  11. Celia Rudder

    I agree with you to a certain extent but I believe that good money can be made with properties under 15K. It is being done and a lot depends on the market and how well you know it. I have seen solid profit made in areas that more sophisticated investors shy away from and lots of people lose their shirt investing in higher-end properties, especially when the market drops. Also, people in class D areas need housing and not all of them are bad tenants.
    I think the photo you used is not in the US. Most likely a Caribbean island.

  12. Sara Eastler

    Interesting comments. I live in an area where most new MF REI do begin with investing in D class apartments, or as we say, C-, because let’s face it, no one sells their asset as a “D.”

    We follow a strict program where the first 2-3 months comprise the clean out period, involving evictions in week one, tagging vehicles and extensive towing of non-tagged vehicles, hired police officers, security cameras, lights, etc. During this time the drug dealers and prostitutes have their business interrupted and move on, if they’re not outright evicted for lease violation or something caught on camera or by the police. After this negative carry period, during which the exterior rehab is completed, we begin renting the renovated units to security screened tenants. Any remaining tenants are so grateful for the clean up that they often refer their own family, friends, and colleagues now that there’s more pride in where they live. Families are safer, the neighborhood becomes safer and cleaner and residents start to keep an eye out for anyone who poses a threat to their safe, clean, renovated housing. I feel it’s a win-win.

  13. Spot on. I specialize in Class D properties and make good money doing it. That said, it’s not for the inexperienced. You can quickly get upside down or find your self in very difficult situations if you don’t have the skills/experience to navigate through them. By all means give them a shot if you think it’s a good way to go, but go into with your eyes wide open. No such thing as easy money.

    • Andrew Syrios

      I think another reason newbies should probably avoid them is that they can look like they’re doing great for a while as the cash flow comes in but then one big turnover hits you and then all that cash flow is wiped away. It’s definitely a job for experts.

  14. Calvin Cassady

    ^Sara, I love that strategy. That is exactly what it takes. And once the residents start taking ownership and pride in their community it sounds like things turn around really fast.

    I disagree with this article. My situation might not be the same as others but my real estate business is exclusively properties under $30k. I bought my first home to live in for $30k in 2010 (really lucky timing) in east Knoxville, TN and began noticing good looking properties around the neighborhood (up and coming/service workers/older established working class) from about $16k – $25k. Some were worth it and some not. It never hurts to look. Not all are created equal, but I can tell you Deutsche Bank etc are not going to come in and nickel and dime on the price. They accept low ball offers because of their liability of holding vacant properties.

    Since around 2013 these types of prices are pretty much non-existent in the neighborhood. So I know I’ve had substantial price appreciation. I have also seen an uptick in quantity and quality of renters interested in the $700/2br price point. Probably due to the gentrification of downtown and our close proximity. I did move away and managed from out of state and I did end up with 1 disaster renter. I figure thats just part of the game.

    My biggest benefit from focusing on this market segment is $0 debt. Closing costs, appraisals, home owner’s insurance eat up a much higher percentage at the lower prices. Now I focus on Cincinnati and have (or am in the process) of purchasing 11 units for about $9,700/unit or around $16k/unit renovated. Due to the rapid appreciation in Over-the-Rhine I also know that my values have gone up substantially in just a few short years.

    • Mario Simpson

      Hello Calvin, as a local Cincinnat resident I am watching first hand the rapid appreciation of property in and around OTR as well. I have just started my REI journey and I would love to talk to you more about your experience investing around here if you’re open to it?

  15. Shelly Scruggs

    I have a Class D property by default….meaning I used to live there years ago, moved out in 2007 and had a management company. That company downsized and I decided to keep the property and manage it myself. Thus, my property management company was born. Before I got serious (now) about investment property, I was unfamiliar with analysis and running numbers. All I knew then was that I was collecting rent and making minor repairs. I have had more than a few turnovers over the years including now and preparing property for yet another tenant. There is no equity in the property and I stuck with keeping it until the market rises in that area. I must say, BP has enlightened me to a new and brighter screening process and some awesome ideas as to what to look for with tenants and ideas and planning as far as taking my business to acquire more properties, definitely not in Class D areas.

  16. Jeannette Lopez

    When we started out we took any property we could get to grow our property management company. We endured the educational curve and now we won’t consider D’s (D=Dogs). Not even in my personal portfolio. Between the tenants and the building conditions, it was not worth the time involved. Flipping D properties can be fine, if you know what you are doing.

  17. Erik Whiting

    I’m seeing lots of comments on liking Class B or Class D. I specialize in, Class C, which I define that as a two bed SFH in a non-war zone neighborhood. Clean, functional, and nothing fancy. Carpet? No way: hard woods, ceramic, or vinyl. Fridge and stove (both used) are the only appliances provided. 700 – 900 square feet. I can get “all in” to them at $25K or less and rent for $550-$600. The vacancy rate for my portfolio is less than 3% of potential rents goes unpaid from vacancy and/or non-payers. No appreciation to speak of, but I treat them more like ATMs. Clearning plenty of $ on them.

    Maybe some would call these “Ds”, but that’s okay.

    • Andrew Syrios

      Small houses that are cheap and rent for decent prices in so-so neighborhoods are definitely not D properties, so your strategy should work fine (we do some of what you do as well). Unfortunately, there is no easy line between A, B, C and D. A lot of is somewhat subjective.

  18. Christopher Smith

    I always wondered about these “gold mine” D class propertIes. I’m way to lazy to deal with all the issues implicated by slummin it. I’ve gone with B & B+ properties in B+ & A- neighborhoods and it’s been very smooth sailing with solid cash flow and great appreciation. Good timing and thoughtful selection?properties and neighborhoods) have helped support what has become a very viable business model.

  19. Alejandro Riera on

    Excellent article, Andrew! As a newbie, I was thinking that it is too much to handle the extra headaches of even go to the place to supervise the rehab or collect the rent. This good comments and replies confirm my suspicions. But it depends on the markets you are investing. Every city has areas that are considered D for most people but are a mine for others. Certainly not advisabel for the newbies.

    Kepp going people with the good posts!

  20. Frankie Woods

    Your example has come true in my experience. I have 3 4-plexes in rough areas and 3 SFRs in extremely good areas. Pro-forma on the 4-plexes showed about $1000 cashflow. However, I’ve lost money for the past 2 years owning them :/. The 3 SFRs in good areas have been breaking even, but are appreciating nicely. I need to be a better investor and get into the C-/B- areas…

  21. Michael Sarrail

    I am on another planet, California and the region is known as greater Los Angeles. On our planet war zones are in the 100’s of thousands.

    Can you please give your definition of F/D neighborhoods and what needs to be there to graduate to C and higher?

    I am pretty sure there are several definitions but I would expect most of you to be close to the same page. As long as you are sharing similar planets, not one like mine.

    • Andrew Syrios

      Yeah, California basically is another planet from the Midwest where I’m writing about. But unfortunately, I’ve seen a decent number of Californians lose their shirt buying cheap D and F properties in the Midwest and South falling right into the trap I described.

  22. Mark Waldrip

    We have 5 houses on a single street with avg costs of $30K. They rent for $600/mo (the dreaded 2% Rule!) and tax+ins=$50/mo. 4 of the 5 are Sec 8: 2 elderly widows, a single Mom with child, and a husband/wife & baby.
    The 5th will be Sec 8 when current tenant lease up in April.

    We’ve had no vacancy issues; in fact, I can’t put a sign up until house is move-in ready or I’ll be swamped with calls. There are more Sec 8 vouchers than good houses, so we can screen carefully and be very picky.

    Though in a rough area, the street is actually nice and quiet. There is a sense of community and the homeowners appreciate how we’ve improved the houses we rent. We’ve even seen them take more pride in their own places as a result. Everyone looks out for one another, and tenants appreciate that we act quickly to resolve issues they might have.

    Though I wouldn’t want to specialize in these properties, having all 5 on one street makes them pretty easy to manage and maintain. There are a couple more I will try to pick up, but just because they’re close by. Our exit strategy in the future for them could be a package sale to an investor looking for a turnkey situation.

    We have a couple more houses in the area, but have owner-financed them to the long term tenants. The cash flow is a little less, but no more need to manage them is a good thing!

  23. Ryan Schroeder

    The numbers in this post are quite foreign to me. I couldn’t buy a lot in my area for $30K and most would be 2 or 3 times that in the rental market.
    I will say that my first property 30 years ago was definitely a D property for which I paid $129 K for 13 units. According to the pro forma/ rent roll I should have received $40 K in annual rent; property was ALWAYS full but I never did better than $20 K in rent as paying the landlord wasn’t a high priority for tenants (I have tons of stories from this era). I got lucky because over a short period of time this D neighborhood went to a B+ due to public investments and all of the property owners rehabbing…which I did as well (some two story units, skylights, new kitchens, baths, etc). Now this is an A property and cash flows nicely with no problems…but I got lucky… could have just as easily gone the other way… and I’l never enter that market again.

    • Andrew Syrios

      These numbers would have been completely foreign to me too when I lived in Oregon. Actually, the biggest risk I see of people falling into this trap is those from more expensive areas (particularly California, New York and Australia for some reason) buying out of state and being infatuated by the cheap prices.

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