Why class A areas actually cashflow higher long term then "cashflow areas"

[Henry Lazerow]

For any new investors out there who may be tempted to go for cashflow areas wanted to give some real life examples of 2 buildings I own both very similar 1960s built 4 units. One in a class A side of a major metro and one in a working class area.

Class A 4 unit. Bought $425k put in $80k rehab now worth around $900k 7 years later. Rents market was $1100 7 years ago now is $1700-1800. Vacancy has ran 1-2%. The biggest differance with class A in a major metro buildings is you lease the unit so a new tenant moves in same day as past tenant leaves. My brokerage manages over 1100 units on north side Chicago and we do this for all the units it works great and saves SOOOOOO much money for landlords, I don't think many new investors realize the differance this makes in your net. People with 680+ credit scores typically don't destroy your buildings and I have never had a eviction or even a late payment notice needed. Many hate on Chicago tenant friendly laws onlie but as long as you buy in a good side of town where there are good tenants these laws have 0 influence on the management and I would assume the same is true for other tenant friendly cities as long as you buy in the nice side of that city. I have several california clients who self manage these Chicago buildings with a leasing agent and handyman with tenants just texting when need something, its that easy. Huge savings vs paying a manager that costs normally 5-10% of rents. I raise rents every year. Time I spend managing this building 0-2 hours a month.

Class C 4 unit in a landlord friendly city bought $135k put about $50k in and cash out refi'd at $265k. Nice made some equity, wish had just sold it for top dollar when was all fresh and new updates so no management headaches! There are no high credit tenants who want to live there so people are always late on payments. Even the section 8 tenant you have to bug to get their tiny portion of the rent. Most importantly you don't know if the tenant will actually move on time so you CAN NOT lease a unit for the same day a tenant is supposed to move out. This increases vacancy and it adds up fast. Then there is the fact that working class people destroy things. While the other building is almost aways rent ready other then a few hundred in small things when someone leaves this building typically needs $1500 or so of turnover costs each time tenants leave. Vacancy rates including turnover/repair needed times are high. Appreciation I think $0 so far and doubt it appreciates faster then inflation if it even matches inflation, same for rent growth likely that has increased by about inflation but these tenants are in no shape to be able to afford rent increases. Time I spend managing this building 10-20 hours a month. 

Another big thing I thankfully have not had to deal with is liability. Property insurance on 2-4 units in working class areas is typically 2-3x as high as class A areas in the same city. The insurance companies are pricing in the fact that the lower income an area, the higher liklihood of a tenant suing the landlord or destroying the building is. I just recently heard of a police officer who lost an eye during an eviction, seems like not the landlords fault right? Well guess what he is suing the landlord as a personal injury claim for $25 million. https://katu.com/news/local/washington-county-deputy-charles...

There is an inverse relationship between how high or low an area cashflows year 1 vs how high it will grow its cashflow/total return in the future. YEAR 3, 5 AND 10 CASHFLOW AND TOTAL RETURN IS WHAT MATTERS FOR LONG TERM INVESTORS. I built in Excel a DCF model that lays out year 1-10 cashflow with a set growth rate for rents, cap/ex, turnover costs, appreciation, etc. It also adds in your loans principle amortization ammounts each year and subtracts closing costs on sale to show you your total return. Feel free PM me anyone who wants the file, its awesome way to forecast the future return! 

[V.G Jason]

Is this the anti-thesis of that other thread?