The upside of D class neighborhoods ?????
Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes
The upside of D class neighborhoods ?????
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Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
9yD area? Why not?
- 1. Worst the neighborhood, better the cash flow. Here, around Minneapolis, house in D neighborhood can be purchased, fixed and rented for under 100k. Same house in A would be 400k. In D, I'd get $1300 and in A $2200. Rent increase in going from D to A doesn't justify a price increase.
- 2. The only way you have to go is up
- 3. Appreciation: Pick a neighborhood up with the chance of gentrifying. Or work just outside a little better neighborhood. If you get it right and if you stay long enough, benefits can be huge.
- 4. Inspect a property you are purchasing for the bullet holes. Don't worry about BB holes, some people ignore .22s. Personal rule - house with the bullet hole(s) is nothing i want to hold long term. Thats a joke with the hint of truth btw.
- 5. Resilience. 4 100k properties will do way better in case of crash / correction then 400k property
- In the crash, people who can't afford their homes rent. People who can't afford rent - move to lower tier. Low tiers are safe as there is always a demand. At times landlords resort to incentives to fill expansive appartments, but there is always a section 8 waiting list.
- 6. You will learn quick
- Not for everybody. They will scare you with "professional" tenants. They got nothing on professional landlords :)
It is all about finding your comfort zone ... Some people are outside of the comfort zone the second they leave Manhattan :) Good luck.
92 Replies
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes9y
Only one really that I can think of, more cash flow but you really have to work hard for the extra and not worth it in my book. Limited to zero appreciation, high tenant turnover, high repair costs, highly intensive management needed.
- Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes9y
@Will Barnard That's true but what's the good thing about it ? Can this be a great learning experience, can I learn a lot about REI dealing with D class neighborhoods, would it help in any way ? I love to see the positive side of things.
- Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes9y
If you are just beginning your real estate investing career then no you should not go there. The best thing to do is start with C class neighborhoods first. You'll get the best prices and good rates of returns. It'll be bumpy but works well if you have a solid team in place.
With D neighborhoods you need to call the local government officials and see what or if they have any plans for the area (ie developments, businesses coming, etc.). You also need a REALLY good team in place to embrace the problems your going to be facing from time to time.
I hope this helps. Feel free to PM me if you have any further questions!
- Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes9y
@Steve Kontos Thank you and you've made a very valid point. I think having a solid team in place is crucial. I also understand the appreciation aspect is limited. I see with very low purchase prices the ROI can be really high. I think with a great system in place for the tenants to follow how can you lose ? I also think it will be a great learning tool because as I hear, you will deal with almost every problem real estate has too offer. How would I know it's not for me to handle if I don't try. Idk just curious.
- Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes9y
I wish it was that easy. Creating a system in place does not stop people from taking advantage and breaking the law; especially in areas where it's rundown. You mention that "I see with very low purchase prices the ROI can be really high". You are assuming that every single variable goes exactly as planned. If that doesn't even happen in C neighborhoods, you can imagine what happens in D.
I understand where your coming from but just keep in mind that there's a lot to consider.
- Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes9y
The upside is all dependent on your system. A good system will work anywhere. I know plenty of successful investors in D-like areas that have great management, maintenance, and good relationships with the assistance programs in those areas which is critical to keeping your vacancy rates down. With that said, those investors have usually been there for a while to build those systems. At that point, they usually have a good feel on the pulse of the area and can tell when the appreciation is on its way.
If that's your interest, I would suggest going to local REA and find that expert in that area..
Best wishes!
- Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes9y
Just notices all the system talk! Agreed there... D areas have a lot more variables where experience is key. But if you're interested, walk the area, and feel that you're in your comfort zone, then find someone who made all the mistakes already, stayed there, and knows what to do..
- Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes9yBeing able to deduct a bullet proof vest as an operating expense strikes me as the most obvious benefit. That good feeing you get from duping another investor into buying your property when you cant take anymore? (just share those awesome pro form numbers, not actuals of course)
- Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes9y
I thank you guys for the feedback. I appreciate it. I think it's just a different approach to think about for me moving forward.
- Investor · Miami, FL · Member since 2016 · 75 posts · 23 votes9y
If you invest in D-Class (the hood), then you must prepare yourself to hold on to your property for the long term. The war zones are the last to improve in areas. I own one property in Florida City, section 8. I will be selling soon. I am fortunate because I am in the Miami market and it's fast pace deals. Judge each deal subjectively (how does the property make you feel?) then objectively (run your numbers).
- Rental Property Investor · Grand Rapids, MI · Member since 2016 · 262 posts · 205 votes9yCheck out the book called "Tales of a White Trash Landlord" by Daniel Brouillette. He chronicles a lot of his own mistakes in managing low-income rentals. Good read!
- Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes9y
D area? Why not?
- 1. Worst the neighborhood, better the cash flow. Here, around Minneapolis, house in D neighborhood can be purchased, fixed and rented for under 100k. Same house in A would be 400k. In D, I'd get $1300 and in A $2200. Rent increase in going from D to A doesn't justify a price increase.
- 2. The only way you have to go is up
- 3. Appreciation: Pick a neighborhood up with the chance of gentrifying. Or work just outside a little better neighborhood. If you get it right and if you stay long enough, benefits can be huge.
- 4. Inspect a property you are purchasing for the bullet holes. Don't worry about BB holes, some people ignore .22s. Personal rule - house with the bullet hole(s) is nothing i want to hold long term. Thats a joke with the hint of truth btw.
- 5. Resilience. 4 100k properties will do way better in case of crash / correction then 400k property
- In the crash, people who can't afford their homes rent. People who can't afford rent - move to lower tier. Low tiers are safe as there is always a demand. At times landlords resort to incentives to fill expansive appartments, but there is always a section 8 waiting list.
- 6. You will learn quick
- Not for everybody. They will scare you with "professional" tenants. They got nothing on professional landlords :)
It is all about finding your comfort zone ... Some people are outside of the comfort zone the second they leave Manhattan :) Good luck.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dan Bryskin your full of you know what nothing you say is true correct or will happen.
we will all leave the D class for your expert management and investing style.
holly cow hope newbies don't bite on your delusional version of real estate investing.
- Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes9y
Thank you for putting forward a well thought, detailed and professional argument. It is always a pleasure to discuss real estate with the true professional. Again, I thank you very much for your valued opinion.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dan Bryskin you bet thought you would like that.. Any one advocating D class for anyone but hood experts is giving horrible advice .. So keep spouting your version of RE investing like anyone will listen.
- Investor · Springfield, OH · Member since 2016 · 22 posts · 13 votes9y
@Dan Bryskin - These are great points.
Let me tell you about my first rental - a duplex in inner-city Columbus. It's not the sort of area I'd like living in, but I figured if I could make it on 26th ave in South Linden - AKA the "murder capital", I could make it anywhere.
A few things I consider:Reputation - in general, the reputation an area has is not necessarily deserved. I've been in this area late at night, alone and felt completely safe.
Changes in urbanization - since the second World War, a trend has been in suburbanization from the city; however, I believe we've only begun to see the reversal of this trend, and hopefully, like many other cities, a revitalization will occur within the City proper.Tenant dynamics - There can be cultural considerations that many may not realize; which complicates essentially everything. To be completely honest, in the most respectful way possible, it's not dissimilar to a language barrier. I, a young college educated male in my 20s, am simply not able to communicate effectively with my tenants due to educational, racial and cultural barriers.
This can be off-putting for many: I've been chewed out, called names and disrespected far more than I care to admit, but quite simply, it comes with the territory. I realize what tools I have as a landlord and try to use them effectively. - Investor · Springfield, OH · Member since 2016 · 22 posts · 13 votes9y
I would consider what economic activity also exists in the surrounding areas. In Columbus, there are a number of small businesses which thrive in these areas without major chains. My theory is that these major retail stores do not see enough economic profit to invest in placing a store front, leaving the market to be captured by smaller players.
For me, it's much more important to see that a community is "functional", in having economic activity in SOME regard, rather than stagnant housing.
The main upside is since your rent will likely always be the lowest in the area (b/c it's a bad area, no one wants to live there), there will always be tenants who need a place to stay. Those are likely ones with evictions, criminal history, etc.. but they are people and might come with section 8!
You will likely need to buy the house in cash too (D areas have a weird "i don't give a crap" landlord/tenant relationship, the house suffers), so your return will be higher. D (IMO) investing is for the super wealthy, where they own hundreds, so if a couple bad apples happen-- not a big deal. If you own 1 bad apple, and that one sucks--100% of your portfolio is gone. My mentor does this, and makes a TON of money, but again-- it's a numbers game, and a bare minimum game from the landlords perspective.
Overall, I'm all for low income investing.. bringing great quality homes to low income is very rewarding! ... however unless you plan on buying the block, or know of a big development coming, I stay away from D-F. The amount of cash flow will quickly be eaten up be maintenance, (getting broken into, negligent tenants, or any tenants, move outs b/c of crime) so with that tied to again being the lowest rent, it just doesn't excite me. Also, the D neighborhood tenants likely hang around the same area, so you better believe they're inviting their friends to stay (prob subletting $$$).. one of the neighboring duplex, ( 2/1 ~650 sq ft) I swear has 6-8 people living it in. Granted these are all stereotypical statements, and not true of all people.. but I'm just saying, D neighborhood isn't for a newbie.. those tenants know the game and will beat you at it.
Find a C area, and make it beautiful!
- Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes9y
I'm sorry @Dan Bryskin, but I gotta agree with @Jay Hinrichs. I read each of your bullet points and nearly choked on my coffee. They are all, as a general matter, incorrect. (There are exceptions to everything, of course). In particular, the statement that "the only you have to go is up" strikes me as incredibly naive. There are many, many houses that will never go up in value and will in fact continue to decrease in value. Contrary to popular belief, there are many, many houses that one should not own even if you can obtain them for free.
- Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes9y
@Linda S. Thank you. I know exactly what you mean. Maybe I'm naive but these are the type of environment I come from personally. There's a somewhat difference between a war zone and a D class neighborhood. Growing up my family was on section 8, food stamps etc. That's all we had at the time and how we survived. I feel like this game can be a headache from each class. You make think you got a good tenant but they're bad general speaking. All people from D class neighborhoods aren't bad people. Too me it made be less of a risky because I come from that culture and I somewhat understand what's happening. I know how to distinguish and have a sense of the drug dealer and his crazy girlfriend compared too the mom and dad who goes to work and pay bills to make ends meet. This Game Is diversified and everybody has their way of doing things. I just hear a lot of negativity about this class. I just want learn the good side of things with bad from an experience investor and make decisions from there. Thanks again everyone, you are appreciated.
- Investor · Long Beach, CA · Member since 2016 · 237 posts · 56 votes9y
Hi @Isiah Ferguson,
Your question is sound and I can speak from experience to hopefully give you some insights.
I got my start in these areas because it was what I could afford at the time and also because at that time, I was of the belief that I wanted to operate at the base of the tenant pyramid because that gave me the most opportunity for potential tenants.
My business partner and I always bought properties that were in rough shape and needed major repairs and we always upgraded a notch or two above what the neighborhood looked like to keep vacancy low.
In practice, the returns are always going to be lower than whatever your spreadsheet tells you going in. You'll work your butt off chasing tenants and you'll spend a lot more on repairs and evictions or cash for keys than you expected.
That being said, investing in these areas was a great learning experience and because everything was at a lower price point, bad decisions aren't as impactful.
There are investors out there that specialize in this space/ section 8, etc. and love it so it's also personal preference.
My advice would be to start small, stay engaged in your properties, build out your operations, and grow from there. I have changed my business model three times, each time for the better since I started investing in 2005 and through all the ups and downs we have always kept our investors whole. There's nothing wrong with starting with something you are comfortable with and changing over time.
As long as you buy right, you'll be in great shape.
Hope that helps.
Aaron
- Investor · Binghamton, NY · Member since 2014 · 118 posts · 66 votes9yIsiah Ferguson there is a lot... and I mean a lot of downside to the war zone. Gang bangers and drugs, high turnover rates, bedbugs, and greater amounts of maintenance. I wouldn't recommend it for your first or second rental because the learning curve will be steeper than with working class rentals. With this disclaimer, money can still be made here, for the right owner. **SECTION 8** this can be a good program to work with. In my area, There is a waiting list for this program. The applicants can't have any recent drug or criminal offenses (last 2 years I believe). If they do get busted, they get kicked out of the program. And the gvmt sends the check directly to you, not the tenant. Uncle Sam is very consistent about paying on time. So there is some incentive. One of the successful local investors I know has 180 units they rent in the hood- mostly section 8 tenants, and people on prison release programs. They rent to the people who are 1 step away from being homeless. Almost all their tenants get subsidies from charities or gvmt organizations. They run 5% vacancy, and they pay some of the lowest property tax rates around. Oh, and they also make a VERY good amount of money. 1-2 units, won't generate that profit. But if you are assertive and aggressive about property management, it can go a long way to keeping people paying. **LESS COMPETITION** this is MY Upside.. While the hoity- toity investors stick their nose up at the hood, you can buy a bunch of property with no money down. I've found it's easy to find absentee or burnt out older landlords in these areas. After 30 years, they don't want to do it anymore and are looking to sell. If you're the only buyer knocking on their door, you can ask for terms such as owner financing with 5k down. For reference, I recently bought a set of (C- ) property from an owner for 300k. Managed properly, it's going to be worth 480k. It's 21 units. The tenants are half DSS and Section 8, the other half work min wage. Since buying in January, we've evicted 2 tenants, 2 more moved on their own, and we've rented 5 units. My last 2 vacant units need rehabbed to be rented. Oh, and I only put 10k down... easy to negotiate when I'm the only buyer in sight. Next year, this property will be making 28k after mortgage and all expenses. For me- Section 8 programs and negotiating killer deals with no Money down because I'm the only buyer in sight are my upside. Still, I would start with blue collar neighborhoods for your first few rentals. Good luck
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Christopher Stanis done as a business that you scale to hundreds of units.. then I agree with this premise.. for the average investor trying to add a unit or two to their portfolio over time.. NO WAY they get killed before they get to the scale or inertia they need to be profitable.
and burnt out landlord is exactly what those folks are.. Section 8 or not..
its pretty amazing the amount of US citizens that we house as tax payers who simply will basically never work.. and just live off of those that work..
And then the investors that come in and profit on these situations....
Someone should write a white paper on this phenom... the people living in these areas and why they never change or will never do anything but this scenario you describe. its hard to have a sense of community when no one in the community owns any of the real estate and the real estate is all owned by for profit hoity toity investors like your sell taking advantage of this situation :) I say this in Jest obviously but it is pretty wild when you think about these neighborhoods ... and the disconnect from the actual people that live there and the owners of the properties that in many cases are scattered all over the world.
and with financing getting back to where it should have always been.. IE no hand outs and you need to actually qualify for a loan.... I don't see this stuff ever being worth more than what an investor will pay for a given cash flow and then a dose of RISK as well given the tenant base..
and for the record I finance a few folks that do exactly this.. they work in not really D class I would say more C class but its their life work to buy and own rentals that are rented substantially by section 8 tenants. So I get it .. have seen it ... work in it... I worked for 10 months in their office back in the crash of 08 09 when I ended up owning about 200 of these myself.. so I saw the tenants on a daily basis. EYE opener
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