The upside of D class neighborhoods ?????
Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes
The upside of D class neighborhoods ?????
Most Popular Reply
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
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
@Isiah Ferguson cash flow is the only upside, but only if you are willing to do nothing to the properties. Improving D properties is a waste of money because your tenants will destroy any improvement. The reason D class makes money is:
1. Low purchase price (nobody wants them)
2. High rents (tenants are low quality so will pay high rent for low quality housing)
3. No capital improvement expense (only do bare minimum meaning fix leaks)
This is why people who own D class properties are called slum lords. They rent to the least desirable people at higher than market prices and don't improve the properties. No judgement from me, they fill a market need, but also not for me.
Some people may argue that you can improve a property and raise rents, but that is different. That is changing a D class property to a C, B or A. That can only be done in certain locations or neighborhoods. Once you improve the property, it is no longer D class.
D neighborhoods are great for starting out. Many times you can buy a home that only really needs some cosmetic work and borrow against it 2-10 times what you paid for it. You can take that money and buy one in a C neighborhood and borrow 2-5 times what you paid. You will want to have some home repair experience however or know someone that has pretty fair prices. You will also want to screen carefully.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
Originally posted by @Jassem A.:
D neighborhoods are great for starting out. Many times you can buy a home that only really needs some cosmetic work and borrow against it 2-10 times what you paid for it. You can take that money and buy one in a C neighborhood and borrow 2-5 times what you paid. You will want to have some home repair experience however or know someone that has pretty fair prices. You will also want to screen carefully.
What do you mean by screen carefully? D properties rent to someone with cash in hand and a job. Good luck applying strict standards and finding anyone to rent a D property.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Joe Splitrock D class only changes when there is a big movement and usually in an inner city type setting does not happen in the burbs.
Most big cities these days have their little areas that were once the hood and are changing as renters are forced out and homeowners come in.. that's the only way these change.
Cash in hand and proof of income (at least 2x the rent) is a good start. I also check for recent rental judgments and attempt to call previous landlords or property managers and ask questions. Most will not want to pay an application fee but can be coerced to fill out a short questionairre. An informed gamble along with aggressive advertising is usually your best bet in avoiding long vacancies in these neighborhoods.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
Originally posted by @Jassem A.:
Cash in hand and proof of income (at least 2x the rent) is a good start. I also check for recent rental judgments and attempt to call previous landlords or property managers and ask questions. Most will not want to pay an application fee but can be coerced to fill out a short questionairre. An informed gamble along with aggressive advertising is usually your best bet in avoiding long vacancies in these neighborhoods.
That is reasonable. I guess what I meant is usually when people talk about screening carefully, they are talking about much higher standards than you and I are talking about. As long as anyone buying D properties understands to lower your tenant expectations as compared to A/B/C properties, they should be fine.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Joe Splitrock I know the average standards here in our Portland rental market would preclude 95% of tenants in D class.. ONE you MUST have a checking account... so there goes 50 to 70% right out of the gate :)
- Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes9y
"The only way you have to go is up" was not to imply every house you buy will appreciate. What I meant, is if you start in worst neighborhood in the city, anywhere else you go, you will end up in the better one.
Am I naive? Perhaps. @Jay Hinrichs thinks I am delusional :) One thing I am not is - "passive investor". I can't speak for the whole country, but I know my market. We do a lot of work in Jordan and Hawthorne, two most disadvantaged neighborhoods in Minneapolis. Everything we ever bought needed substantial amount of work. Being able to produce a quality work at reasonable price is my niche. About 50% of my projects are gut and rehab. For years it was buy, gut, rehab and rent. Economics of it? Rentals we acquired 4-6 years ago are on the books for free. By now tenants paid all 3, acquisition cost, price of the rehab and my holding costs. Tenants? - well, people are people, and it is a small world. There are good people in disadvantaged neighborhoods and there are morons in A class. I hate turnovers, they are a distraction. To avoid them I carefully select my tenants. I am always under market on rents and over the market in quality of my product. My tenants know they can't find comparable housing for the price. I look for people who are interested in some day owning a home they are renting. Couple of the flips we are working on have buyers. One is my present tenant and one is my former one. I bought homes before from relatives of my tenants. Houses decreasing in value? Not today, not in Minneapolis. They will during next crash / correction. But today we are selling paid for assets at at least 3x, closer to 4x of what we paid for them. My appreciation in B &C areas for the same period is about 2.7x to 3.5x. Was or is it easy? No. I work every day, and I had for years. To each their own I guess.
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes9y
I agree, even if noone else does ;-). See my starred inserts behind his points:
Originally posted by @Dan Bryskin:
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. ******************** The past 8 years I've bought all of my properties between 7.5k and 15K. Absolute cash cows.
- 2. The only way you have to go is up ****************That's where mine have been going. for example: duplex bought for 8700 in 09 just appraised at 125K (rents 795 each side) , duplex bought in 09 for 11700 just appraised at 130 (rents each side 825) . Duplex bought in 2015 for 15k just appraised at 150K (rent each side 995). Refinanced and using cash to buy more, in the same neighborhood.
- 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. ************************ have purposedly bought in a D neighborhood that is situated next to the Beltline, which is in the process of being developed. Values have been jumping, but we will see much more of that in the next couple of years.
- 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. ************ok, not going for those. But I did move out of a house in a transitional neighborhood once and when I moved my sofa I saw a bullet hole in the wall and found a bullet in the side of my sofa .....ooops.
- 5. Resilience. 4 100k properties will do way better in case of crash / correction then 400k property ***************************** I agree
- 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. *************************** while my area doesn't have the option of section 8, I usually don't have a problem having interested tenants.
- 6. You will learn quick ************** Oh, boy, the lesson's I've learned ;-)
- Not for everybody. They will scare you with "professional" tenants. They got nothing on professional landlords :) **************** Not for everyone, so, please all stay away from my neighborhood! I want them all for myself ;-)
It is all about finding your comfort zone ... Some people are outside of the comfort zone the second they leave Manhattan :) Good luck.
- Rental Property Investor · Louisville, KY · Member since 2016 · 48 posts · 55 votes9y
@Isiah Ferguson, you touched on the truth there - it is a different culture and you have to understand it. the fact that you came through it puts you in a great position to succeed there.
@Jay Hinrichs, your phrase "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.." tells me all I need to know about your understanding of the culture and the circumstances of poor folks in those neighborhoods. Obviously you will never be in a position to make it there - which is fine for you and fine for me, so competition is low.
Just out of curiosity, are you including in that rant all the real estate investors who don't pay any taxes? All the people in those neighborhoods whose grandparents couldn't use the same bathrooms let alone get the same jobs/opportunities as "regular americans"? All the Paris Hiltons out there that live on daddy's checkbook? All the veterans that live off benefits because they got mentally destroyed in another profit-mongering war? President Orange Cheeto?
There are definitely some things you have to do before you can get to the type of benefits that @Dan Bryskin mentions:
1. You have to understand that within a D neighborhood there are B blocks and F blocks
2. You have to actually have been to the neighborhood before
3. You have to try and give back something to the community, whether through employing local workers or eating at the local soul food restaurant (yum)
4. You have to stop being scared everytime you see a black person walking towards you
5. You have to not be a slumlord, create decent living environments that atract the best tenants in the neighborhood, which are much better than the worst tenants in A-B neighborhoods
6. You have to be street smart, be flexible and firm at the same time with regards to rules
7. You have to respect people, no matter how much money they have, what kind of schooling they have and what they look like. And be genuine about it!
8. Finally, for the folks that talk about how much extra work properties in this area are, get a property manager - it will cost you the same for twice the work as the ones for taking care of A neighborhood properties and you might even get a better deal if you use someone local
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Pedro Martins Of course you would get that impression you probably think I was handed everything I have ever gotten and never had a rough knock in my life :)
Social welfare long term simply is not sustainable..
out here in our area the west coast we have issues with Illegal Mexicans using our emergency rooms as their every day doctor.. they know they cant be refused. and they know they don't have to pay so they just sit in the emergency room until its their turn.
social welfare knows no color boundries its in all class's..
@Dan Bryskin the reason I have my strong opinions in this is I have owned hundreds of these types of homes... so I know the reality of it..
My comments are not for those that work it as a job.. I fund many that do this as their job like you do.
my comments are for those investors starting out who think they can buy one hood rat and make it work.. that simply is delusional thinking.. I foreclosed on over 250 investors personally who thought they could make it work.. so I ended up owning all this stuff :( was not fun or pretty... those are tough asset class's unless you are set up as a business have scale work it everyday.. and know what the heck your doing day in day out. I suspect you agree with me on this.
Originally posted by @Dan Bryskin:
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.
I stopped reading after the comment about the relationship between ghetto and cash flow, the worse the hood, the higher the cash flow. It's not that the hood is the variable that determines cash flow, it's the cost of the property. There are cash flow opportunities for non ghetto houses that are cheap, think Aberdeen, WA which is not exactly Beverly Hills but not a ghetto by say, Chicago or LA standards.
- Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes9y
@Isiah Ferguson I actually went from looking in an A/A+ area and made my first purchase in a C-/D neighborhood. I saw the high cash flow potential, and the long term potential in the city. My first 11 units were all commercial, over 4 properties in similar C-/D neighborhoods. They cash flow extremely well, and have been relatively hassle free once I got them streamlined. I am out of the country 3+ months out of the year for work/vacation, and do not have issues even managing remotely. I also have bought them all from long time owner occupants, who all were around 70 years old looking to retire. They took care of their property really well even given the locations, and now I've inherited properties where capex is not a major issue in the short term (5-10 years). I jumped right into this area without knowing anything, and I would not suggest it for everyone, but for the right people you can and will make a solid profit and more importantly for a newbie, learn a lot. I would suggest you to shadow an experienced investor in these locations first to better understand, that might be a better route than jumping all in initially if you are a bit reluctant right now. Once again, these areas are not for everyone...
It still does not make sense to me how someone can simply write off a whole area or city. There are gems everywhere, I think it's good to be open and consider options outside of your comfort zone.
I agree with most of what @Dan Bryskin has mentioned in his first post as well, kind of my mindset when I first started off too.
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes9y
@Pedro Martins hit the nail on the head with this:
"1. You have to understand that within a D neighborhood there are B blocks and F blocks"
In my neighborhood there are pockets where not so nice people hang out and I avoid buying around there. But then there are streets with owner-occupants that have been there for many, many years and who all know each other, because they all go to the same church on the next block.
it's those bad pockets that create the bad reputation and the stigma that people hear about. They don't hear about the quiet little streets with well-kept houses.
And another strategy is to buy as many houses on the same block as possible, even if you build a team with other investors. You can then change the whole block. Each renovated house pulls the others up and suddenly you'll have people that want to buy. And then you can fan out from there.
- Property Manager · Blaine · Member since 2015 · 209 posts · 276 votes9y
in Minneapolis they are considering measures to "make" you take/consider section 8 tenants due to lack of affordable housing. Government pays the rent on time every month, but.......... That being said every time I take a section 8 tenant it has ended up being a horrible experience. Maybe I've just had bad luck :(
- Rochester, NY · Member since 2016 · 1 post · 1 vote9y
I heard this called Ghetto Gold... I know a friend who made a great deal of money in these low income areas. He is black though so dealing in these areas is easier for him than outside investors. I would go for it.
- Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes9y
Great advise!
You have many good viewpoints here and see that your personality and reasons can really factor into where go. I personally started with section 8 but have steered away as it didn't fit the investment profile I was comfortable building. Hard to mix section 8 and non section 8 units. With that said, its all about your viewpoint and supporting team to execute with.
- Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes9y
I have acquired a house in September in an area that isn't even on the radar for the banks...seriously - a buddy of mine is a mortgage broker and he couldn't even find the county in the system. He referred me to a buddy of his that I'm currently talking to about funding (portfolio lender) and he is having the same trouble.
I have a property manager managing it - I approve the applications. This is a 680 sq ft house. First applicant was a couple with two three year olds. Father had been charged with robbery and theft as early as last October. I passed. The next applicant provided the hotel manager where they had been staying at for the past month as a reference. Their income would have been spent 80% on the rent. I passed. Third applicant was a recent grad from an east coast university working at the local meat packing plant as a manager. Great references, wrote a deposit check immediately and so far has been really good. That house passes the 2% test and the 50% test with flying colors.
I have a property that I bought out of state four blocks from a university. I thought it would be a hip area with younger kids and lots of money. I was incorrect when I drove out there to see it (bought sight unseen via foreclosure auction). I accepted a young (20 year old) couple with two children under the Section 8 program. Mom stays at home taking care of the kids. Dad works full time for $9/hour through job assistance offered via the section 8 program. This kid works hard - they've bad a few immature decisions but we all do. This house also passes the 2% test and 50% rule.
I didn't grow up in the highest class areas and while I did spend a lot of time in "ghetto" type areas growing up, I consider myself extremely fortunate in my upbringing. I grew up in the Los Angeles area - Santa Fe Springs, Whittier, West Covina, South San Gabriel, and Long Beach. I worked at Turner's Outdoorsman on Long Beach Blvd before we moved the store to Signal Hill. I helped open the Turner's Outdoorsman on Hawthorne and 164th. We spent nights in the store during the L.A. riots. While in Long Beach I lived in a mother-in-law house that I paid $85/month rent for off of 9th & Orange. At that time, it was less than Class D - but I still don't consider it ghetto. Sometimes folks need a little help - what they do with the help is up to them. I don't see Class D areas as being that bad - but then again, I feel comfortable in most areas. I do have a concealed weapons permit - have never had to exercise that right (most people are all talk - talk is cheap).
I think what you'll find is there are a lot of blue collar, hard working folks out there that just want a clean and safe place to stay. They can't afford anything nicer (though they'd like to). If you take the time to clean up the house, make an effort to keep maintenance up to speed, and provide that clean and (mechanically) safe place to stay, you'll find that your tenants will take pride in their home.
I also spent time working as an Emergency Medical Technician at a local hospital her in Colorado in 2000 and 2001. I have to disagree with Jay's assessment. I am fluent in Spanish (grandmother migrated legally from Mexico) and I can recall many conversations initiated by ambulance crews where the patient was refusing care because they were illegal and didn't want to go to the hospital because of that. Our frequent flyers - they were all U.S. Citizens (and we knew them well).
- Investor · Birmingham, AL · Member since 2016 · 446 posts · 305 votes9y
If you were born & raised in a D neighborhood then it should not be difficult to maneuver in this type of market. I think I'm doing pretty well in it.
- Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes9y
Wow. I'm so overwhelmed with you guys responses. I'm happy I can spark conversation with you guys. All this information is definitely has help me moving forward. This REI game is very diverse and everyone has their own approach. I have a lot too consider as a newbie. Business is business and of course the numbers has to be right. I will take this and learn.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
The people I know with tons of money focus on EQUITY GROWTH with the least amount of headache.
While initially these depressed D areas might seem like they throw off great cash flow the investors buying in higher quality areas over time for TOTAL RETURN tend to end up much further ahead.
Example you have a D property that throws off say 250 a month after the mortgage and expenses. You buy for 40,000. 3 years later the property is still worth close to 40,000 and you have about 9,000 total cash flow from the property.
Instead you buy a class B area for 80,000 and after expenses you get 100 a month times 3 years with rent increase is about 5,000.
However the property in the B area is now worth 110,000. You have 30,000 in equity growth plus 5,000 cash flow.
Even if you double down on 2 D properties for 40,000 each you now have 18,000 off the 80,000 instead of 35,000 off of the B area property. Now appreciation might or might now happen so the return I gave as an example might not happen but long term the better areas make sense to invest in.
Why not find a D property in a B to A area?? Rehab and fix the property and the lease it out? Build in equity for yourself and have a better rent to total cost ratio going in for return.
( I didn't include possible mortgage interest write off, principal pay down if a mortgage, tax depreciation) as I am giving a basic example.
- Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes9yBad = heavy management, similar to dealing with scheming deceitful children. Willing to babysit and know their tricks? Not afraid of confrontation? Evictions? Rent court? then here is the good part... Good = high return, really high return...why? Low purchase price. Other good? Constant demand ( these people will rent forever ) minimal extras in house to maintain (think really nice cages)
- Property Manager · Blaine · Member since 2015 · 209 posts · 276 votes9y
I have a few D class properties that I bought before I figured out that I didn't want to rent in that area. I still have them, I hate them, but they have tripled in value and paid for the selves twice already.
I wouldn't consider north Minneapolis a transitioning community. I still won't go there after dark, but home values are appreciating faster there than 2 story houses in the suburbs.
I know that all markets are different, but appreciation happens in the hood too
- Investor · St. Louis, MO · Member since 2015 · 87 posts · 41 votes9y
Isiah it sounds like you've got your mind made up to invest in D class neighborhoods, since you grew up in one and you turned out to be "OK". However, as you know (or will find out), not everyone is as upstanding and dependable as you are. What other BPers are trying to do is steer you away from as many potential business and moral killing problems as possible while you are just getting started.
You will find out that investing in D neighborhoods just cost more money to maintain and keep rented. The people renting there obviously don't have a lot of money for rent, upkeep or cleanliness or even they wouldn't live there! There will be many first-timers who don't even have a clue of what it takes to rent an apartment, pay utilities, maintain it, respect other tenants or how to keep it clean. In many cases, their version of clean is going to be a lot different than yours anyway. A lot different!!
Also, many tenants renting in D areas may have severe mental or emotional challenges. Anger management issues, psychological problems, drug abuse, criminal behaviors, etc. are more prevalent in those areas. Many of them know the landlord laws better than you do and are "professional renters". They come into the application interview trying to find out how "soft" you are and if they can scam you! Everyone is "on the good foot" during the application process, but once they are on the lease the real person comes out! I'm not being judgmental or harsh. These are the type of tenants that I have rented to for the last 8 years!
I too wanted to make quality housing available in the D neighborhoods, but now I wish I knew about BP back then. I would have invested in better areas and saved myself a lot of time, money and headaches!
"Education is what you get by learning from others. Experience is what you get by not learning from others."
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes9y
IF you want to get some insight read the book "Evicted" Class D properties are best managed by people who live in that neighborhood. Theres a character in the book who makes a great living in D class properties but its not gonna be people like us.
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