D Class Neighborhood Investing

Wholesaler · Lancaster, PA · Member since 2023 · 10 posts · 2 votes

Does anyone have experience/advice owning a rental property in a D class neighborhood? Came across a great opportunity for a duplex that would cash flow $700+ a month, house in good shape with established tenants, only issue is it's in a really rough part of town. Worth noting that I'd be purchasing the home roughly $30k below market value.

Thoughts and advice would be appreciated!!

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Janice Carter

Real Estate Broker · Atlanta · Member since 2024 · 1k+ posts · 607 votes

8mo

Blake, D class can cash flow well on paper but the risk profile is materially higher with crime, turnover, rent collections, deferred maintenance and management intensity. Underwriting needs to be conservative. Assume higher vacancy, higher repairs and tighter tenant screening. If you are not local, strong boots on the ground management is critical. While $700 per month and $30K below market is attractive, just make sure that spread adequately compensates you for the operational volatility.

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
8mo
What is projects for cash flow and reality on class d are two different things. Your turnover will be much higher with also much higher turnover costs . They look good on paper but have zero appreciation and little cash flow
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- Kevin Sobilo
  Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
  8mo
  Quote from @Chris Seveney:
  What is projects for cash flow and reality on class d are two different things. Your turnover will be much higher with also much higher turnover costs . They look good on paper but have zero appreciation and little cash flow
  
  The neighborhoods he is likely talking went up in value 300+% in the last 5-6 years! If you think that is close to zero appreciation, let us know where you are investing! LOL
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- Chris SeveneyBusiness Member
  Moderator
  Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
  8mo
  Quote from @Kevin Sobilo:
  
  Quote from @Chris Seveney:
  What is projects for cash flow and reality on class d are two different things. Your turnover will be much higher with also much higher turnover costs . They look good on paper but have zero appreciation and little cash flow
  
  The neighborhoods he is likely talking went up in value 300+% in the last 5-6 years! If you think that is close to zero appreciation, let us know where you are investing! LOL
  
  That is the past which was due to COVID, what did class D neighborhoods do for the prior 30 years prior and do we think they are going to be increasing by that amount in the future? This person has yet to invest. Do you really think class D are going to go up by that amount again? Last time I checked those living in poverty are not increasing their income by 500%.
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- Kevin Sobilo
  Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
  8mo
  Quote from @Chris Seveney:
  
  Quote from @Kevin Sobilo:
  
  Quote from @Chris Seveney:
  What is projects for cash flow and reality on class d are two different things. Your turnover will be much higher with also much higher turnover costs . They look good on paper but have zero appreciation and little cash flow
  
  The neighborhoods he is likely talking went up in value 300+% in the last 5-6 years! If you think that is close to zero appreciation, let us know where you are investing! LOL
  
  That is the past which was due to COVID, what did class D neighborhoods do for the prior 30 years prior and do we think they are going to be increasing by that amount in the future? This person has yet to invest. Do you really think class D are going to go up by that amount again? Last time I checked those living in poverty are not increasing their income by 500%.
  
  A savy investor will learn from history. If it happened before, it will happen again somewhere in one way shape or form.
  
  I suggest you google the term "gentrification". That is a concept that every investor should learn about.
  
  Today's class D neighborhood might be a class B/C neighborhood in 10 years depending on what is going on in that market. Some might call it "investing in the path of progress".
  
  So, YES with GENTRIFICATION the income of the tenants in what was a class D area often do go up substantially which is partly why it may gentrify into a class B/C area.
  
  You also failed to mention the RISK of investing in a B class neighborhood!!! Every investor should learn someday that nobody builds brand new D class housing. All housing starts off as a higher class, but some neighborhoods deteriorate to class D depending on what goes on in that market.
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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
8mo
@Blake Andrews, a few thoughts:
1. Your profile says Lancaster, but the post says Wilkes-Barre/Scranton. Which area is the property in?
2. If its in the Wilkes-Barre/Scranton area, there are less stigmatized class D areas than there were 10 years ago. So many people from outside the area have come in to areas that were once stigmatized and bought property that those areas are thought of a little differently now. Areas I would have called class D 10 years ago are basically C class areas for the most part.
3. Are you familiar with the municipality itself, their rental ordinance, any utilities provided by the municipality that you may want/need to include in the rent?
Its easy to forget things like sewer which is often provided by the a government entity and where unpaid becomes a lien. In most cases utilities provided by the government are best included in rent (or billed back to tenants if based on usage).
4. Established tenants are good if they are good tenants. That is hard to tell as a buyer. How long have these tenants been in place? An obvious concern are recently places tenants especially if the rent prices seem too strong for the market.
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Janice Carter
Real Estate Broker · Atlanta · Member since 2024 · 1k+ posts · 607 votes
8mo
Blake, D class can cash flow well on paper but the risk profile is materially higher with crime, turnover, rent collections, deferred maintenance and management intensity. Underwriting needs to be conservative. Assume higher vacancy, higher repairs and tighter tenant screening. If you are not local, strong boots on the ground management is critical. While $700 per month and $30K below market is attractive, just make sure that spread adequately compensates you for the operational volatility.

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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
8mo
Quote from @Blake Andrews:

Does anyone have experience/advice owning a rental property in a D class neighborhood? Came across a great opportunity for a duplex that would cash flow $700+ a month, house in good shape with established tenants, only issue is it's in a really rough part of town. Worth noting that I'd be purchasing the home roughly $30k below market value.

Thoughts and advice would be appreciated!!

There's a reason Class D rentals are cheap!
VERY difficult to find paying tenants.
Most pay a few months on-time, then you have to chase them for partial payments until their balance exceeds your limits - and then you evict and they often trash the place.
If you have little to no experience managing rentals, advise you to stay away from Class D rentals. Start with Class B before even going to Class C.
What vacancy and tenant nonperformance metrics would you use to evaluate a Class D rental?
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
8mo
I have a C class 4 unit I did a BRRR on out in chicago suburbs, its pretty awful but has appreciated almost 2x. I would not touch anything with under $1000 rents, I highly doubt that will be profitable after capex and turnovers. I got sec 8 tenants in and 2 good market rate tenants that were very hard to find and now it runs good but most of the market people are awful and almost better sitting vacant. Market tenants will pay for a few months and then cause more damage in turnover costs then they paid and any good tenant will not want to live in a C class area. I will probably flip this place eventually for a nice equity play.
The stuff these low class people do will blow your mind. Broken back and front doors, broken windows, broken mirrors. If you do not have cheap workers you will get wrecked on turnover costs. I am a professional realtor and probably way better at picking tenants then most people and I still got screwed twice on tenants I picked in that place. Will get dozens and dozens of junk apps for every 1 maybe decent person.
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Matthew Paul
Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
8mo
They are selling the place for a reason . You just have to figure out why
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Mark Cruse
Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
8mo
It takes experience to do class D. You also need to have some understanding of the what's going on in the community and understanding the culture. You really have to understand and if it were 30k below asking, I'd do some serious assessment as to why. I have seen, and had experience with Class ds that are nearly unrentable.
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