Your experience investing muti-family in class-C areas

9 Replies

I have been trying to invest in multi-family for a while now. I have run analysis on various properties for the last 3-4 months. Every time I found something interesting in a class-A or class-B type areas, it is either overpriced or there are so many bidders jacking up the price ... it is just ridiculous.

Recently, I have started taking class -C properties more seriously. Running the numbers more closely. Doing a more detailed crime-rate analysis,  driving in the areas during the day and at night. Sometimes, even stopping and engaging in conversation with folks who live there just to get a better feel ... etc.

In understand there are plenty of challenges in such areas. But I believe, with the right approach, the right strategy and appropriate implementation and follow through one can make it worthwhile. 

To the more savvy investors out there, based on your personal experience, If you were to list 3 key things that helped your investment thrive in a class-C area, what would those 3 things be? Would you invest there again?

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@Henri Meli

I invest in C class areas. I own 2 4-plex properties. There certainly are challenges. My thought though is that these are the only places where I can get the cash flow that I desire. Like you said, there is a ton of competition for A/B class properties in good areas that are a decent price. 

The key is in the management. Most of the headaches come from bad tenants, and they are far more common in C class properties. That doesn't necessarily mean you have to self manage, as there are a lot of very bad landlords who self manage.

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@Henri Meli I invest in a class C/D area.  The cash flow for me isnt actually that great as it is very close to downtown Boston, so the cap rates you have in that area are really low.  Also the property I have was built in 1870, so it has considerably higher repair costs than my other properties.  Im not too sure that I would invest there again. If I did I would only invest in a brick building most likely that has some aesthetic appeal, to better increase my chances of appreciation. 

My properties that are in class A/B areas may not have great cash flow, but the quality of tenant is such that there is less management involved in addition to the properties being newer so less repairs.

Medium logo lf re cire box white bboxRussell Brazil, Associate Broker w/ Long & Foster | [email protected] | (301) 893‑4635 | http://www.RussellBrazil.com | MD Agent # 648402, DC Agent # SP98375353, VA Agent # 0225219736, MA Agent # 9052346 | Podcast Guest on Show #192

Bad areas have their challenges but there are ways to invest properly and and you can even improve the property and the tenants in the property if operated properly.

Management is the number one factor. Typically, especially in my market, managers that work low income properties or properties in challenged areas will not give much attention to your asset. They're in it strictly for the fees. It's imperative that you manage the property management company and make sure your using a firm that's experienced with the type of tenants in the property.

Most properties in these areas have Section 8 tenants. This can be good and bad. There's a rumor that you can't evict a Section 8, that's not true. And when you fill the unit with a new lease you scrutinize the tenant with a credit and background check just as you would with a market rent property. AGAIN this is dependent on the property management company you hire.

You have to be very careful to look at the financials closely. If you have a HUD contract attached to the debt on the property and it's rent restricted, then you have no control over rent increases and in the long term as expenses increase you will be stuck with a negative cash flow situation. Allot of investors combat this situation by getting low income tax credits, but they are very difficult to get.

My experience is that when a lease expires they typically renew because the government is paying for most of their rent. If you have a vacancy it's because you had to evict someone and they do not leave quietly. Your make ready expenses will be through the roof repairing the units when you have to turn one. The solution is screen your tenants properly.

I like properties that have low income tenants in them now and have no HUD contract or previous tax credits attached to the debt. This allows me to acquire the property at a lower price point and either do a complete reposition, if the area will support it, or just improve the units sightly to get a better quality tenant and increase the cash flow with rent increases and lower the expenses with lower maintenance costs.

David Monroe

Henri I have done about 800 apartments in class C and make millions doing it here in chicago. Here is how to do it in any market 

1) block must I repeat must be desirable for the area (one or two vacant buildings and no bad elements)

2) good property management (treat your tenants like hotel guests)

3) buy well high yield for higher risk

4) solid construction with lots of upgrades keeps tenants long term. I have granite, hardwood floors, upgraded kitchens / baths which creates waiting lists 

5) if available rent section 8 only tenants with jobs. You get more rent If the voucher holder is employed and they take better care of your property 

That's all you need to do to make money in C markets. Hope this helps!

@Henri Meli , great advice here already. The only thing I can add is that if you're looking at a new area check with the police to see how bad the area and the subject property are. I once went to the heavily barricaded (Clearly post-Terminator I https://youtu.be/kYt2HmAxHL4 ) police department for a property I was doing due diligence on and they were happy to tell me that the subject property 'only' averaged 20 calls a month!

Good hunting,

Giovanni

Thanks a lot for all the input so far. This has been great feedback and giving me plenty of things to work on.

@Justin Ericsson . The properties in question look neglected by the current owners. No external lawn maintenance. The buildings haven't been power washed in forever. The properties were built in the 1970s and are brick. If I were to own this place, one of my very first goals would be to improve the external appearance of the place. The same street has plenty of apartment complexes. I would like for this one to stand out against the competition.

@David Monroe . I don't know yet who the tenants are and where they draw their income from. I have requested the actual numbers from the seller. He hasn't returned my request yet.

@Russell Brazil . I have multiple SFR in class A/B. I have no experience in class C. I'm also a little worried about the repair costs. But the one property I'm very interested in has recently had the roof changed and multiple units have had their hvac units upgraded. Those are two expensive items right there.

@Anthony Gayden . I'm not planning to self manage. The current owner is self managing. I'm planning to hire a PM company, but I'm looking to have very tight control around who they bring in as tenants. I would like credit check. Proof of employment, rental history, ... etc...

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I'm glad I did it and I would do it again.  I do wish we had diversified, not having all our properties in the same neighborhood class.  There is value in specializing and getting really good at one tenant type, but it is absolutely exhausting.

Regardless if who is going to do the day to day management, it needs to be more hands on.  More drive bys, more visits, more inspections, more maintenance visits, more screening... more time and energy.

A change in focus is important too.  Low income people have different values; don't expect them to appreciate the same things, behave the same way, or take care of things the way you would.  You can't make the unit the way you would want it, you need to focus on cheap and durable.  You can't make assumptions about what your tenants understand or what they are going to do, it is completely unpredictable.  You also need to get over things being fair.  Swallow your pride and be willing to play nice with an unreasonable tenant or pay cash for keys to get them out.  The most important thing is getting possession of the property back in the best possible shape, not "winning".

You may want to check out my podcast episode and my BP member blog.

@Henri Meli Your spot on with bidders jacking up prices on property. The demand is so high right now for multifamily. I currently own a C property in Columbus, OH. I did everything you mentioned, drive by the property at night and day, get out of the car and ask the tenants what could be better, and be more diligent. 

You can do very well in C properties, its about safety and giving the tenants a comfortable place to live.

3 Keys:

Safety

Comfortable living

Keeping property clean (landscaping, parking lot, and units)

Medium screen shot 2015 08 11 at 5.23.17 pmJohn Cohen, JC Property Group Inc | 5162683500 | http://www.jcpropertygroupinc.com

I agree. I have a duplex in South Linden in Columbus.

Originally posted by @John Cohen :

@Henri Meli Your spot on with bidders jacking up prices on property. The demand is so high right now for multifamily. I currently own a C property in Columbus, OH. I did everything you mentioned, drive by the property at night and day, get out of the car and ask the tenants what could be better, and be more diligent. 

You can do very well in C properties, its about safety and giving the tenants a comfortable place to live.

3 Keys:

Safety

Comfortable living

Keeping property clean (landscaping, parking lot, and units)