C/D Class RE Investing

13 Replies

I have a house under contract that I knew was in a rougher area. However, after speaking with 2 home inspectors they both informed me that this area is "ground zero for gang activity." The purchase price is $33,800. Rents for $500/month. Cashflow should be around $125/month. Current tenant has payed on time every month for almost a year now. I'm going to speak with the property manager tomorrow and ask if she has other properties in that area and how paying rent usually goes, how long it usually takes to get the property rented again, etc. I spoke with my mentor and he said "Well, cashflow is the main focus right?" And I agreed. He then said, "If the property is cash flowing and the tenant is paying on time then I wouldn't be too concerned about the area. Everyone needs a place to live. If the tenant is paying on time every month then that's great. I wouldn't be to concerned with it." I know the unemployment rate in this particular city is close to 5%. Vacancy rate from what I've seen is close to 10%. Thoughts/guidance/etc? Questions I should ask?

Ask for a copy of the seller's Schedule E to check how much rents were received the past two years and what was spent in repairs.  How much time have you spent in the neighborhood?  Scout out the neighborhood.  

@Nathan Scott

If cash flow was more then it could be worth it. With only $125 of cash flow that’s barely anything. Most D class properties should have a higher return to make it worth it. Also there’ll be issues regarding crime and tenants, do you have the reserves/knowledge to navigate that asset class? I’d pass on it

@Sean Lambert Also, from what I can see on google maps. The area where the house is doesn’t APPEAR to be in a rough of an area as described. It starts about 2 streets over. That’s where you can tell it’s D class for sure.

@Nathan Scott

Hi, Nathan. This is my area of expertise. I understand the urge to buy a cheap property with a rent-paying tenant in it. I understand everything you're telling yourself about this property. But you're going to get screwed on this place. It's almost a mathematical certainty. Properties described as "ground zero for gang activity" do not get good service by property managers. Many contractors are unwilling to go to those neighborhoods. The only way to make place like this work, usually, are to be there yourself, handling the tenant, handling the maintenance. I think you're setting yourself up for a fall on this property if you go forward. I know of absolutely no one who has a 3-property-or-larger portfolio of SFR that would be described as "ground zero for gang activity" and runs them successfully from a distance, through a property manager or by themselves. Too much can go wrong.

Originally posted by @Nathan Scott :

@Jim K. Thank you for your advice! I believe I’m going to back out of this deal and just take a loss on my earnest deposit.

Rough way to learn about making money in D'class, Nathan. Just a very rough way. Please don't hesitate to ask me anything about this kind of property if you want to know.

 

@Nathan Scott ,

Definitely great advice from @Jim K.     I wouldn't recommend it either for a long distance investor.    Just because you really don't know the area, unless have boots on the ground.  Only locals know what's going on, and your best sources are the neighbors.

We heavily invest in C/D areas, and just picked up a house for $22.5K, long term tenant paying (SUPER sweet lady!), paying $500/mo.  She has continued to pay always on time, always friendly!  Rent isn't an issue.   You know the biggest issue--  NOTHING WAS DONE TO UPKEEP THE HOUSE.  Didn't even have a back door lock, in a D- area--scary.. you could see dirt from a hole in the bathroom floor, yes--dirt for under the house.   

It's a messed up system, tenants want their rent to stay really low, so they don't report problems, and always pay on time.. landlord is happy because not costing extra.. meanwhile the house goes downhill, and the next buyer is the one dealing with the issues fixing years of problems.. and then you raise rent, and the tenants hate you as the new big bad landlord who is greedy! Once you raise rents, you're going to be opening pandora's box of all the issues, and I promise they will tell you, and sudden expect you to fix everything immediately over a $25 rent increase!

 Just know that if you decide to pursue the D rentals,  this is what you have to look forward to!



@Nathan Scott You need a new mentor. Just because you have one tenant who has been good for a year doesn't mean the next one won't sell drugs from your front door. Or that this one may lose his job and default on rent. $500/month is really the hood. Unless you want to do on the ground slum lording (read Evicted to see what that's like) stay miles away. If you are out of state, you may as well burn the cash now and save yourself the heartache.

@Nathan Scott

If you were local and experienced, maybe. But you're not. Run away. This property will break your heart. 125 a month..doesn't add up to much. If you need to get onsite, flight, car rental, motel, there goes a year profits. A fridge, around a grand. Again almost a year cash flow.

Thats without a deadbeat tenant, or another serious problem. How long to replace the tenant if they leave.

If you must buy, install security cameras that you can access from the internet. You can keep an eye on things, you can even give the local police access to the live feed.