$20-30k cash for c-class properties. Worth the headache?
Augusta, GA · Member since 2015 · 17 posts · 7 votes
$20-30k cash for c-class properties. Worth the headache?
Most Popular Reply
Ozzy SmithPro Member
Specialist · Dayton, OH · Member since 2014 · 352 posts · 265 votesI love this debate! I personally buy these all day and twice on Sunday for the exact reasons that @Jeffery Waicak pointed out. Just because the neighborhood isn't in a good school district doesn't mean that good people don't live there. Nobody ever sees themselves as lower than the next guy. The tenants that I have in these neighborhoods live there because they want to live there or that's simply all they can afford. They are trying to hustle to get a better life and do take care of things (to their standard of living) or they are "comfortable" and the same for them holds true. Either way as long as I can identify my tenant as 1 of these 2 groups then I'm good. My biggest problem I have with them is I have to drive to pick up their rent because they don't have a bank account and pay cash. I've recently established that as a good thing because that's when I discover the issues that I have. They invite me in each and every month so I can do an unofficial inspection of the property which is good because most times they don't call me for repairs because they are afraid I won't re rent them the property for being a headache. I don't fix things nice but my properties are nicer than they are accustomed to. I know also that a lot of cap x issues can be managed if you address them up front. If everything is new it's quite a while till you need to replace it. Drywall and paint is cheap and I never use carpet. If my roof, furnace, electric, and plumbing is new it will last for about 20 years. I buy houses for 5-10K gut them to the studs and rebuild basically a new house. I can do this at about 20-25K every single time and rent for 650 - 700/m. Lets do the math
vacancy 10%
repairs 10%
Cap X 10%
Taxes/INS 25%
Prop MGR 10%
Setting aside $130/m for 20 years = $31,200... I can COMPLETELY rebuild that house again if I have to!! That is still using a property manager and factoring 10% for vacancy (which I'm nowhere near). That leaves me $225/m profit for 20 years = $54,000. Even if I have to sell it then for $20,000 I can do it easy for a total profit of $74,000 in 20 years on a $30K investment which after factoring depreciation and all of the other tax benefits is well over 10% ROI (not counting appreciation of the property) which is my worst case scenario. These are the numbers on one of my SFR in my portfolio currently. I can get close to 20% ROI on my duplex and even higher on 3 and 4 units.
The other thing I saw in this post was referring to a C neighborhood as "The Hood". This makes me laugh. I define my neighborhoods as
A - best school where everyone wants to live
B - Upper middle class where most of us live (mostly homeowners or working pros that rent)
C - Lower middle class (about a 50/50 mix of owners and renters maybe 40/60)
D - Low income (mostly sec 8 rentals but not afraid of getting shot usually)
F - Don't go there unless you are packing heat
Just because I don't want to live in a C or D neighborhood doesn't mean I won't invest there or feel unsafe. For some that is where they were born and raised and where they will die because it is home. That's where my workers live... that's why they are workers and not the business owner. If they are good enough to work for us are they not good enough to rent from us? - JUST A THOUGHT
41 Replies
- Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes9y
There's a ton of posts here on these types of homes - they're generally referred to as "$35,000 Pigs".
The ideal situation is if you can buy one for $20 - $30k, put another $20k into it, and have an ARV of $75,000+ and be able to rent it for $725+ per month.
It's a risky proposition and I'll explain why.....On paper they look great because you're dealing with percentages. At this price point, you need to throw percentages out the window and calculate based on hard cash. I have one I bought four blocks from a University thinking it would be a good location. I paid $7k, put another $7k into it. I need to put a roof on it this summer - about another $5k. It rents for $600/month to Section 8 tenants - a young husband and wife with two toddlers. So far, they've been really good (I have an excellent property manager looking after it). Capex is a big concern with these homes. Think about it this way - at $600/month for rent, that leaves about $300/month cash flow net of reserves. If they move out after one year -
$600/month * 10% for capex reserve = $720
$600/month * 10% for repairs = $720 (if there haven't been any repairs - which there will have been)
Cash flow of $300/month * 12 months = $3,600.
When you go to turn the unit, you are more than likely going to have to repaint it....which wipes out your cash flow. There will be minor capex items from normal wear and tear that will need updating which may completely wipe out your capex reserve. Forget about the repair reserve....you will be using that every 2-3 months. That's with a good tenant.
Get a bad tenant in there and it could cost you $6,000 - $8,000 to turn that unit...and you're going to lose money.
Some folks make it work (it's working for me so far - no loan on the property)...most folks aren't successful doing it which is why there are so many of these on the market.
My Capex reserve = 100% of my monthly depreciation cost. My repair reserve is 10% of rents. My property tax reserve is based on prior year values. I have a property manager charging 10% of rents that has a crew that stays on top of the place - I reserve for repairs, but they are generally paid out every couple of months. I also reserve about 5% for nopay/legal issues and an additional vacancy reserve dependent on rates from the area (found on realtor.com). In April I cash flowed $134 - like I said, no mortgage or loan on the property.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes9y
@Tiago Martins, do you know the area/s? And importantly, do you have a trusted Property Manager that you can ask these questions to? What do THEY say?
[You NEED such a person, FIRST! A good Property Manager is KEY to beating the odds of failure].
The common consensus around BP is that most markets have a pricing "sweet spot", below which cap ex and other expenses tend to wipe out your cash flow over time, and above which your cash returns as a percentage of your outlay start diminishing exponentially.
Hence the invention of phrases like the "1% Rule" (rather than the "2% Rule"), and the many threads that will try to tell you why 12% gross rent per year will be better than investing in 24% gross per year (which looks wrong on paper). This debate shows no signs of ever going away. My own theory is: if you have say $150k cash but don't want to leverage it, you may be better off over time finding TWO well priced properties in the $75k range (that already SHOULD be worth $100k+) and that easily rent out for say $950/m, rather than buying FIVE properties in the $30k range that each rent out for say $550/m. So yes, I think you would do well to seek out better than 1%/m, but not at the expense of going too far down the neighborhood grading. (Is "C" really "D"?)
But, once you DO decide to leverage that $150k into say SIX $75k properties (@ worth $100k+)...*
* [You can research/write your own ending to that last sentence].
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
can work if you DIY all things... and live close to monitor homes basically daily weekly.
do not think for a minute section 8 tenants do not violate their terms trash houses.. get kicked out of the program for various reasons.
that said the only way I would do this is if you live there and you have a plan to scale up to 100 or so.. selling or refinancing them can be almost impossible..
but if your young handy and you think you want this job.. then there ya go its just a job really and a tough one at that.
you could buy a subway sandwhich shop and do as well.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes9y
@Tiago Martins I have a clients here in CT who ask me all the time about properties like this. I always advise them to talk to people who are doing what they aspire to do. Talk to someone who is dealing with these homes on a day in and day out basis. Is it worth it for them?
What you will see is there is a very big difference in paper returns vs actual real life returns the lower class of property you invest in. Also, the exit strategy is very difficult unless you price it at a fire sale price like you one you are buying it for.
If you have time (a lot of it) and the ability to fix things like @Jay Hinrichs said they may be something to consider, but when I see people who have this grand plan to buy low income properties and have other people manage them I cringe. The PMs you get in the bad areas are worse than the tenants in some cases.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Michael Noto true Dat Pm's of high quality usually will not work the hood.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yTiago Martins Let's just look at this from a very high level looking at the forums here. How many self-identified newbies are looking at $30K homes? A good sized amount, it's an entry point, banks don't won't handle a mortgage that small, etc. but I digress. What I very rarely see if someone talking about a portfolio of 50 proprieties they bought for $30K that's on the lookout for property 51. I know they have to be out there but I don't see them popping up much. So you have to ask yourself what do those experienced investors know that the self-identified new ones don't? Collected rents are lower than expected, maintenance costs are higher than expected, and if it's a $35K property odds are cap-ex is needed now or in the near future. All of that said, I 100% believe it can be done. I 100% believe that you can mitigate some risk through diligence. I 100% believe that you could even get lucky with your first few. I 100% believe that if you want to treat it like a large distributed portfolio you could even start to get some contractor discounts, etc. I'm also 100% certain that I have no interest in doing it. Maybe I'm just lazy :)
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Andrew Johnson I can answer that question Andrew...
I have 3 clients that I have helped each have over 50 and one has 200 or so.
the reason you do not see them on BP is its a JOB running these and they have NO spare time to play on BP... LOL simple as that.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Jay Hinrichs Honest question here: Do/Could they use a PM? Are the properties so high-maintainance that the owner and PM have to be extremely active? Or do the economics of those properties over the long-term prevent a property management fee from penciling out?
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Andrew Johnson they self manage.. its a JOB big time and all consuming.. you cannot make a go of it out sourcing management and repairs you will bleed to death. Thousand cuts.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Jay Hinrichs So what's the exit play? I can't imagine they will want to self-manage at 65 years old. Just tossing out the most popular retirement age. Do they unload them all at 64 and live on the cash? Turn them over to the kids to run? Find a more passive income investment at that point? I can't imagine you would acquire 50+ properties without a defined exit.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Andrew Johnson my teams I help do this for are all under 40 and some 35 ish. its their lifes work.
selling is very tough... even for those that have nicer stuff..
and one thing that folks that stack up rentals really won't know until they try to exit.
so think about it you have 200 rentals all SFR's in one town individually they may be worth 50 to 70k each... so say 10 million .
Well who are your buyers for 10 million.
syndicator
new crop of hedge funds ( and there are many out there smaller like 30 to 50 million size)
1031 investor
so any of those are going to really look at this more as a cap rate type purchase and they will want a deal... plus financing could be very tough so its cash..
so in real life a portfolio like this gets massively discounted to move all at once.
Succession plan to children is alive and well in this model.
- Rental Property Investor · Spartanburg, SC · Member since 2013 · 253 posts · 56 votes9y
This is the same issue I am dealing with: seeing if these lower income homes are a better way to break into buy and hold or just waiting it out a little longer and getting more in the 60-100k range with potentially alot better tenants. As alot of these experienced guys have noted, there's somewhat a surplus of these homes for a reason. Decisions, decisions.
- Rental Property Investor · Evans, GA · Member since 2014 · 74 posts · 65 votes9y
@Tiago Martins I have a LOT of experience in these homes in the Augusta, GA market. The trick is to buy the houses for $20-30k that are worth $60-80k after repairs, not the "pigs" that are only $25-45k ARV in HEAVY rental areas.
I've had good luck with C class neighborhoods on the south side that are still ~50% owner occupant that are fairly easy to liquidate to a retail buyer. I usually rent out at the Section 8 rates: $745 for a 3 bedroom and $850 for a 4 bedroom. This is a very street/neighborhood specific strategy with a steep learning curve of the market. I've made the mistake of buying some "pigs" in the crappier areas like Harrisburg and it's always been a poor business decision unless you can immediately wholesale to another investor.
Buying 5 low income properties, without experience in area, sounds idiotic to me :) Start with 1, see if you like it, and if so, buy another... they aren't for everyone, and as others have pointed out--yes, it's a lot more work than a $150K house.
One common misconception I think a lot of people have, is that they are getting a deal-- "wow, $30K house"...... reality will soon kick in.. you aren't getting a deal, the seller knows it will take $20K-$40K probably to get it nice again, and doesn't want to pay it, so they are selling it... low income properties aren't for everyone, but if you want cash flow IMO it's a great option. Just know the logistics.
Whatever Jay says. One dude described these as vampires. They will suck your blood and soul to manage. There are exceptions but figure most homes going for 20k to 30k in 2017 are pretty much located in hoods that the wheels have fallen off as in poor schools, higher crime, vandalism, meth, bullet holes and stuff of that nature. There are much easy ways to make good cash flow with less investment, headaches and drama.
Here is one easier way https://www.biggerpockets.com/blogs/5937/61324-can-you-cash-flow-more-renting-out-a-car-than-renting-out-a-house
Good luck!
- Augusta, GA · Member since 2015 · 17 posts · 7 votes9yJay Hinrichs You said you have clients that do this type of investing. Are they making good money? Do they think their efforts are worth the reward? People talk about buying apartments in C class areas. I feel they would attract the same tenants as these types of houses. I know they are located on one property, which makes it easier to manage, but wouldn't it be the same headache? Why do people think it's a success when they buy a 50-100 unit apartment complex, with lower rent paying tenants, but then a SFR that caters to the same tenant is looked upon as a bad, time-consuming, money-bleeding investment? I haven't connected the dots.
The short answer is kids.... You are not gonna get 3 kids in a 1-2 bedroom c apartment.
- Investor · Massillon, OH · Member since 2015 · 266 posts · 156 votes9y
I am all for this type of investing. There are a few positive points to the side of class c sfr that are being left out right now
1 ease of entry. The first house I bought, after my initial crash and burn, was bought cash for 6500. I had just cleared bankruptcy, that took like 2 years due to some seller financing, had no credit, was scared of debt. I bought it, lived in it, a year and about 15,000 total in, I had a house in good repair. The plumbing furnace , kitchen, and bath were all new. I did all repairs myself except install the carpet. I have had good and bad tenants in there, i think right now, i have a solid long term tenant.
2 learning how to skills. As said I did all the repairs myself. This is in 2006. Before I knew how to search the internet. Some stuff went well, some not so much. Another plus is when you're in a lower rent area, people don't get upset if the grout lines aren't perfect. They aren't going to pass because it has no dishwasher or garbage disposal. If I have no dishwasher, what are my future repairs on it?
3 low negative cashflow. I have no mortgage, my taxes and insurance are low. When I have a tenant not pay, or move out my immediate cashflow goes slightly negative. If I had a mortgage on it, the payment would be due while I was turning the unit.
4 more stability of cashflow through averaging out. In my area, i can be all in 25,000 and pull $600 a month. I can do this consistently, doing the gc duties, but farming out the labor. I have been at it a while and have a decent circle of people. But the point is for $125,000 I have a $3000 rent roll,from 6 people. I usually run better than 90% collection of rents but i rarely take less than full rent so let's say 1 doesn't pay, i have $2400 received. I zillowed my personal house, it's zestimate is 163,000 as an investor, you could get it for say 130,000 and it's rent is 1200.
5 less picky tenants. Like I said, when I started, doing it on my own I did some work that wasn't perfect. Not bad or unsafe, but not perfect. My houses are the equivalent of a 1992 Honda 5 speed with crank Windows. Not a lot of bells and whistles, but inexpensive and mostly reliable, if it breaks not hard to fix, parts are cheap.
6 pull cash out. If i were leveraged in a house, 80% and i NEED CASH! I can't really get it, not an easy refi, hard to fsbo so an agent eats up your equity. I can use mine as collateral to a hml, or sell to an investor for cash. Yes It will suck, but I said need cash.
7 longer term tenants. I may be completely off base here, but since we are ingrained from birth in America the American dream is to own a home. If I have a solid fico and income, i can't see me staying as long as someone without those things. I may be completely wrong here, I'm sure there are exceptions to that rule even if I'm correct
8 better people. I again, may be way off base, but from personal experience, find that the biggest jerks would be in high end rentals. When I have delt with people that were actually wealthy, they were great. They didn't care in a good way, no beating up on price, polite, friendly. The wannabes, not so much. They needed to squeeze every penny out of everything so they could live that image. That's who I picture renting a $150,000 house here. My tenants are, as a general rule good people, they work, pay the bills they just make less.
There are definitely downsides to this investment style, they have been laid out all over the site. I won't buy a property I wouldn't live in when complete. The neighborhoods that i invest in, i consider safe with poor schools, and an income tax. If not for that, i would live there. Sorry so long, just my thoughts
- Rental Property Investor · Conover, OH · Member since 2016 · 55 posts · 48 votes9yI do this type of investing. All of the properties I bought have average to above average schools. My properties do very well. I have good workers I use to fix up the properties at very reasonable prices. I also have other properties that I paid double the price for. The renters in these properties still have issues and things still break.
- Augusta, GA · Member since 2015 · 17 posts · 7 votes9yJeffery Waicak thanks for the post. What you are doing are my thoughts exactly. Cheap to get in, cheaper to fix, less bells and whistles, not such a negative impact if someone moves out. I guess the only way to learn is to try it out. If it doesn't work, maybe I lose $20k, but that's something I feel I need to risk. There are plenty more risky things I can do with $20k. At least I'll have a house that's paid for. Like you said, you don't buy a house you wouldn't live in, when fixed. Thanks for the advice.
- Investor · Massillon, OH · Member since 2015 · 266 posts · 156 votes9y
@ Tiago Martins I agree your downside is low, realistically, worst case,you'll recoup all your money and be out the time and labor. Yes there are more risky ventures.
- Rental Property Investor · Evans, GA · Member since 2014 · 74 posts · 65 votes9y
I would be weary of the $6500 house in Augusta brother.. Just because it's cheap doesn't make it a good deal. Unless you just strip the seller's equity and get the deal of the century, what you can get for $6500 will be SCARY and NOT worth owning. We don't have those midwest numbers here.
I suggest getting a 3 or 4 bedroom brick slab built in the 70's or later in the 20k-30k range (it will need some work). These type deals are no longer the low-hanging fruit like they were a few years ago, but still possible to find if you're patient. A good idea is to look for these off-market because the investor competition is fierce off the MLS. "Driving for Dollars" in suitable B-C class neighborhoods is a good way to find deals and get a better knowledge of the streets.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Yes C and D apartments take down owners all the time. just look at the one's on the market its the latest owner that has got schooled and is bailing..
I have a colleague here in Oregon they followed me to ATL in 2012 and bought 50 plus homes I bought the same amount at court house steps.. all basically B's we bought doubled our money when we sold to hedge funds 2 years later.. ( we are not buy and hold we are buy and put money in our pocket. LOL)
anyway foreclosure were drying up then they got the idea of buy and hold low end apartments were the ticket.. Remember we are used to big profits not drip income.
So they find this C/D apartment in Memphis.... half empty grab it for 10k a door rents are 600 when its all full... its about 40 units... dump another 15k a door into reno and negative cash flow while they reposition... get it up to about 90 % but then the reality of the tenant base hits.. PM stealing money tenants pay 3 months then stop... One murder few other serious crimes... all the TI they did to the common ground ripped out or destroyed.. ( for some reason they thought putting up a brand new Bball hoop was a good idea and BBQ with benchs LOL those last a week or so)...
long story short bleeding like crazy have to fly from Oregon to Memphis each month to try to collect rent.. into it 1 mil sold it for 600k to the next guy who thinks they can manage those... and this is very common in the low end multi in tough areas..
If you want that asset class I would look up James Watcomb on this site.. He showed me a multi in a C/D neighborhood of Memphis and how they run it. and well frankly they run it like a mini prison.
fully fenced with barb wire tops full security system on site security.. and Men are not allowed.. the units are all rented to females and children and all on Memphis housing vouchers.. if they are not married no men can come in.. there is some law in Memphis about trespassing and if the men try to sneak in and shack up with the tenants the law is called and they can get arrested..
this is how you run those asset class's can it be done yes.. if done right and you earn the little extra in cash flow ....
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yTiago Martins One way to look at apartments (and I'm not say it's "standard" by any means) is how much it takes to get a unit rent-ready. I'm going to overgeneralize but people that are paying $900/month rent don't end up putting holes in walls. Sinks don't get up broken. Walls don't end up with mysterious water damage. You're probably doing touch-up paint, a heavy carpet cleaning for bedrooms, fixing a burner on a stock that doesn't work, changing the locks, etc. after a year or two. So maybe it costs you $450 for your handyman to get it rent ready (for my apartments it's less, but I think $450 is a more reasonable estimate). Basically, 50% of one months rent to get it ready for the next tenant. Juxtapose that with a $300/month tenant and you end up with people bolting (not paying rent), leaving a crock pot cooking, drywall with holes in it, darn close to a full repaint, screens for windows have vanished, the screen door has a whole in it, and inevitably some light fixture or ceiling fan is broken. Again, I'm over generalizing but if you just walk through a $300/month complex (or home) you'll probably get a sense for what I mean. You could, without breaking a sweat end up with $900 to do a low-quality turnover. So it's basically 1/2 months rent to get it rent ready vs. 3 months rent to get it rent ready. I don't know why that's the case, I wish it wasn't the case, but I spent enough of my youth (free child labor!) working on rentals in C areas to form an opinion. It's not that you don't get great $300 tenants occasionally or lousy $900 tenants but my (personal) experience has been there is a difference in tenant quality and turnover costs.
@Andrew Johnson Looks like you have had enough of the horror stories so I will just say.... NO don't do it or you will eventually regret it tremendously. They are NEVER what they appear and way to risky. I have lost a lot in my life rolling the dice on C class assets.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.