$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?
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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
- 9yOzzy SmithPro MemberSpecialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes
I 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
- Investor · Portsmouth, VA · Member since 2016 · 289 posts · 107 votes9y
It is definitely possible. Look up Lisa Phillip's sub30K mastermind group on facebook. You will find a group of investors who buy in that range and it seems to be working fine. Sure you have your issues but what investor doesn't? Its all about what you feel comfortable with and what you are willing to deal with. The only issue I have with these properties is resell....but I don't foresee selling anytime soon.
- 9yKristopher HanksPro MemberRental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
@Tiago Martins It has probably already been stated, these lower end homes have to be long term investments to make money off of them. There is a lot of up front cost. The hours required to manage them is more than most buy and hold investors want to invest. Just my humble opinion. I have some of these and they are a headache for sure. The potential profitability is there if you are a long term investor, let's say 20 year hold. The rents from that hold period can offset some of the non-sense you will put up with over the course of holding and managing these homes. You just need to know going in that you are committing to a years long strategy in order to make your initial investment back plus the profit that all of us want to see.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ozzy Smith good post and very accurate. you remind me of a client of mine in the SF bay area I sold him a big ranch back in 1990...
he had 165 doors in Alameda CA. He had been collecting them for 40 years and they were all FREE AND CLEAR .. if you drove around town his properties you could pick out in a heart beat they were the most beat up... and he collected the rent in person twice a month tenants put the check or money order in an envelope and pinned it to the door.. I accompanied him one day and the holes in the front doors were numerous and quite warn..
Now of course being Alameda that portfolio was worth a lot back then probably 100k a door and today probably 200k a door LOL.. he was a cranky old bird.. and the ranch I sold him I really wanted that one... it was really cool.
but the take away is if you take this on as a JOB like your doing any of this stuff will work.
were the danger comes is those that think they can do it from afar or they just don't have the stones to deal with the people and the issues. and not all C class's are alike tenant bases are quite different in different parts of the country.. I know that first hand.
- Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes9y
God, I love all of you guys... wish I would have seen this yesterday.
On a short note, here are some guidelines that I typically give my clients in Indy.
- Buy homes that have retail activity. If there hasn't been at least 6+ retail sales in the last 6 months... look elsewhere unless you want to get stuck.
- Buy homes that rent for at least the market rental median. In Indy it's about $800/mo. Some more recent numbers actually may put it up above $850/mo. Not everything about investing is percentages... many are typical costs. A 10 square roof with an average pitch is going to cost the same for a $600/mo rental as it will for a $1000/mo rental. Painting a 1000 sq ft house is also going to be similar cost.
By pricing above the median, you eliminate a variety of liabilities.
Now for the caveat. I have an awesome client who successfully violates these rules. He doesn't care about retail exit. He purchases with cash for cash flow. He is very liquid and does a great job of creating very nice and desirable homes, even in the tougher places in town.
- Real Estate Investor · Arlington, VA · Member since 2012 · 302 posts · 277 votes9y
@Ross Denman and @Ozzy Smith Um, coming on a platform that gets 1000s of views a day and telling everyone you have great low cost properties can tap out your market. I've seen it happen. But maybe you want more investors and have all the homes you can take.
I think you are all correct, as it really depends on 1.) How comfortable are you in these neighborhoods and 2.) Regardless of the price, and more so in this segment, if you try to do it without knowing anything about rental properties you can get in trouble, sure.
As mentioned, my mastermind group is killing it, houses flipped to rental daily in the sub30k range. BP, for many reasons, are used to investors who have the money to not have to deal with this subclass out of necessity like some investors do to get their start.
- Investor · Memphis, TN · Member since 2016 · 215 posts · 128 votes9yI personally prefer c class neighborhoods. My theory is almost identical to yours; 25% + returns, even if vacant for 3+ months per year are still much more profitable than an 8-10% return in a b class neighborhood that's tenanted all year. All of my rentals are in areas where I have paid 10k-35k per home and all rent anywhere from $500-$650 per month. Yes, these homes produce slightly more of a headache to manage, but think the key is a solid property management company handling these investments for you. Get the right team to handle them and you'll be stress free!
- Augusta, GA · Member since 2015 · 17 posts · 7 votes9yGreat advice Ozzy Smith Thanks.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yOzzy Smith Sounds like you have a good system but I don't think buying for $5K and doing a gut is what people are talking about. Your strategy (at least from reading) prevents "death from 1,000 cuts" because you're buying/building rather than inheriting a $30K property. In your case you know how "deep" that cut is going to be. I think the challenge with a lot of new $30K buyers is they don't how deep those cuts will be, don't have the money/time to do an initial gut, and don't necessarily have the "hold for 30 years mindset". They see it as "easy cash-flow" and "low risk" (because of the cash-flow) when it's not. And for what it's worth, I do think there's a lot of rationalization of what is a C vs. a D area. I'd be willing to guess if you *think* it's a C- neighborhood it's probably a D! It's in a "green" area of a Trulia heatmap but the other side of the street is deep red! The one thing about $30K properties that I just can't get past is that there's always plenty of them. In good times, plenty. In bad times, plenty.
- Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes9y
Originally posted by @Ozzy Smith:
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
Ozzy, thanks for sharing with us how you make it make sense. Yes, if you are getting them for under $10k, and gut and replace with all new, it will last 20 years vs buying one for $30k that will need all that in the next 10 years and you not allocating for the repairs is where BP has brought up its not worth it. Your plan makes it worth it, though to do a full gut for $20-25k is impressive. Can I ask how you can make that work & do it all for such a low price?
- 9yOzzy SmithPro MemberSpecialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes
That's just what the going rate is here for work that needs done. Just like houses cost less so is our labor costs because the cost of living is lower. Material costs are set so that's easy to figure out. As a contractor (my previous life) if material can be purchased at 12K and I can pay 8K to my help and that leaves me 5-10K profit in 1 month I'm a happy camper. That means I'm making 50-80K per year which is a decent job here.
Example my window guy charges me $200/window installed. That's him buying all the material and everything. Roof costs about 4-5K installed including materials. Rental grade kitchen and bath about about 2K each. Plumming, electrical, HVAC is cheap and they love me because it's all open work so they give me really good prices. All that's left is drywall, carpet, and paint. Again it's basically new construction type work to the contractor at this point and if done in the right order they can fly through it because they not worried about messing up the floors or have to "patch" things in.
These are proven contractors that I use (and many of us local pros) so we have great relationships with them. We don't have to baby sit them and they always get paid so we get special treatment.
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
@Jay Hinrichs I appreciate the shout out! The key is to find a great team! Ideally you would find a company that has everything under one roof. Acquisitions team, renovation crews (fully licensed and insured), Property Management, and a Real Estate Investment Brokerage in case you ever decide to sell.
By teaming up with a solid firm you can mitigate your risk and have some "boots on the ground" that have your best interest in mind.
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
The best advice I have received from my mentors pertaining to my Class C investments is:
1. There is strength in numbers.
Some of my clients have 100+ C Class properties in Memphis. These investors do very well! However, I've spoken to several investors who have 5-10 properties in town and when they have a couple of vacancies... they are miserable.
The moral to this story, is to have a strategy to eventually "Go big or go home!" and until you get to 20+ properties... expect it to be an uphill battle.
2. Do a A Class renovations on your C Class properties.
One of the most successful TurnKey companies in town only renovates Class C properties. However, he installs new 30 year architectural shingles, Stainless appliances, hardwood and tile floors, newly painted interior and exteriors, and more.
If you are going to own a property on a street of mostly rental homes, I'd suggest that you stand out from the crowd. By having the nicest home on the block you can be pickier about who rents your home, and in most cases your tenant will stay longer!
- 9yOzzy SmithPro MemberSpecialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes
I agree with @James Wachob for the most part. You have to do lots of these to make any real money but it's apples to apples. It's the same philosophy as why investors buy multi unit buildings. If you have a vacancy on a 100K SFR you lose 100% of your income. If you have a vacancy in one of your 25K houses (that are all on the same street) you still have 75% of your income. Either scenario you still spent 100K so it's not like having a bunch is an issue. Nobody dreams of owning 1 or 2 rentals and calling it quits. Let's say they did... they spent 200K and got 2 houses. That seems risky to me (all your eggs in 2 baskets and liquidity is basically all or nothing) or buy 8 25K houses that will generate more rental income than the 2 "nicer" houses.
Typical Example In my area
100K house 3/2 in C neighborhood rents for about 1000/m. Total rent = 2K/m
or
Same house plan in D neighborhood worth 25K rents for 650/m x 8 = 5200/m and diversity
Even if you assume that your repairs are going to be higher (I would argue they are similar because I'm not using high end materials due to less picky tenants) most property managers will give discounts for having more units under management so my expenses actually get lower the more I buy. If I need quick cash I now have multiple properties that I can offer to a turnkey provider or hedge fund buyer that wants the "pig" and they will do it because there is no Cap X in the near future because of how I just did a complete rehab in the last 5 years or so.
Doing this type of strategy does a couple of things.
1. Even if the market as a whole doesn't have much appreciation I probably forced a little value add simply by rehabbing an entire street which raised my rents and community value.
2. I got 5 years worth of depreciation on my taxes which nobody calculates as income
3. My pig paid for itself in that 5 yr time because of higher ROI which now gives me options
4. If I want to sell to my tenant on land contract for top dollar I can because he doesn't qualify for traditional financing where the guy paying 1000/m probably does
5. My rent is guaranteed through subsidy, inspections are easy, the other isn't
I can rattle more off but you get the idea. It's all relative. I don't believe anyone should be a slum lord but if you believe you spend the same amount for same quality you are asking to lose money and this is where most go wrong IMO. C class tenants DEMAND central air, garages, and landscaping. My tenants WANT window units, off street parking, and left alone. With the rising demand for low income housing because the majority of investors (evidence by threads on BP) are shying away from these types of houses I have tenants trying to convince me to choose them but you all are fighting to find that perfect tenant to choose you....please keep fighting over the "GOOD DEALS" - I'LL GLADLY TAKE WHAT YOU DON'T WANT
- Investor · Portsmouth, VA · Member since 2016 · 289 posts · 107 votes9y
Originally posted by @Ozzy Smith:
I agree with @James Wachob for the most part. You have to do lots of these to make any real money but it's apples to apples. It's the same philosophy as why investors buy multi unit buildings. If you have a vacancy on a 100K SFR you lose 100% of your income. If you have a vacancy in one of your 25K houses (that are all on the same street) you still have 75% of your income. Either scenario you still spent 100K so it's not like having a bunch is an issue. Nobody dreams of owning 1 or 2 rentals and calling it quits. Let's say they did... they spent 200K and got 2 houses. That seems risky to me (all your eggs in 2 baskets and liquidity is basically all or nothing) or buy 8 25K houses that will generate more rental income than the 2 "nicer" houses.
Typical Example In my area
100K house 3/2 in C neighborhood rents for about 1000/m. Total rent = 2K/m
or
Same house plan in D neighborhood worth 25K rents for 650/m x 8 = 5200/m and diversity
Even if you assume that your repairs are going to be higher (I would argue they are similar because I'm not using high end materials due to less picky tenants) most property managers will give discounts for having more units under management so my expenses actually get lower the more I buy. If I need quick cash I now have multiple properties that I can offer to a turnkey provider or hedge fund buyer that wants the "pig" and they will do it because there is no Cap X in the near future because of how I just did a complete rehab in the last 5 years or so.
Doing this type of strategy does a couple of things.
1. Even if the market as a whole doesn't have much appreciation I probably forced a little value add simply by rehabbing an entire street which raised my rents and community value.
2. I got 5 years worth of depreciation on my taxes which nobody calculates as income
3. My pig paid for itself in that 5 yr time because of higher ROI which now gives me options
4. If I want to sell to my tenant on land contract for top dollar I can because he doesn't qualify for traditional financing where the guy paying 1000/m probably does
5. My rent is guaranteed through subsidy, inspections are easy, the other isn't
I can rattle more off but you get the idea. It's all relative. I don't believe anyone should be a slum lord but if you believe you spend the same amount for same quality you are asking to lose money and this is where most go wrong IMO. C class tenants DEMAND central air, garages, and landscaping. My tenants WANT window units, off street parking, and left alone. With the rising demand for low income housing because the majority of investors (evidence by threads on BP) are shying away from these types of houses I have tenants trying to convince me to choose them but you all are fighting to find that perfect tenant to choose you....please keep fighting over the "GOOD DEALS" - I'LL GLADLY TAKE WHAT YOU DON'T WANT
Love this post! This is what I am doing! I get "side eyed" a lot but the numbers don't lie!
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes9y
Originally posted by @Tiago Martins:
I am thinking about buying single family homes in a C class area. I have found $20-30k homes, that I would pay cash for. These areas generally rent $500-800/month. I would be cash flowing 2% or greater. They aren't desirable school districts, but people still live there and raise families there. I know getting rent might be an issue, but I've heard of people offering cash for keys. Also have read books on section 8, where they say people don't want to lose their benefits, so they tend to follow the tenant rules better than non-section 8 tenants. My theory, although naive, is that if a $30k home brings in $600/month (2%), and the tenant decides to not pay rent for 6 months, it drops the 2% to 1%, which is better than a $150k home bringing in $1,200/month. I could take that $150k and buy 5, $30k properties renting at $500-800 a month. That means $2,500-$4,000 a month. That would give me room to risk a tenant that doesn't pay. Is that an idiotic thought process? I need some guidance.
With where we are in the market cycle today $20k-$30k properties are pretty rough assets. Couple years ago during the downturn you could pick up some decent inventory but not right now. I suggest sticking to properties that are at least $50k in C class areas or $75k+ in B class areas.
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