Starting out with Class C/D MFR rental - would you do it ?

48 Replies

Hi BP colleagues

I am new to MFR and I am hesitant to venture in Class C/D neighborhouds and buildings for investment. As I have limited capital I have no choice but to look at Class C/D types for investment. I am not experienced in dealing with issues arising with such an investment.

What are your thoughts ? have you done it and conqured this challenge , if so how do you deal with renters who fall in this bucket and potentially troublesome.

Appreciate your advice and inputs.

Thank you

Nathan

Hey @Nathan Ku ! I'm new to the MFR space as well!

As I have limited capital I have no choice but to look at Class C/D types for investment.

Have you thought at all about partnerships? This may give you the opportunity of greater purchasing power and potentially different property classes. Of course, it comes down to comfortability with your business partner; however, like we always hear, "50% of one deal is better than 100% of no deals." Just some food for thought.

I feel that every property class is going to have its own set of challenges and hills to get over, and your decision on where to invest comes down to what you feel that you will be able to deal with.

Best of luck!

@Nathan Ku   Which class c/d neighborhoods specifically?  That would help people with direct knowledge in those towns to give advice.

Typically these neighborhoods are going to present more challenges with tenants and vacancy of course but it all depends on the market forces and economic direction of that area.  Today's class d could be tomorrows class b or a.  

I always like reading posts from @John Hickey on this topic.  He has a lot of experience in managing rentals in tough areas, he's made it his specialty.  I would read through some of his contributions.   

I wouldn't do D class and especially as a new investor. I'm sure there are ways to make money there without being a slum lord but I don't know of them. I have invested in C/C- areas and the challenges there are enough already for me. The area and class of tenants you get are much more work and they put your property through the ringer. Make sure you underwrite for higher vacancies and higher expenses as you will get a lot of skips, evictions, and property turnover.

Having a D class property doesn't make the owner a slumlord! GTFOH! An absentee management strategy, and assuming poor people are worthless and don't deserve decent living conditions is what makes someone a slumlord!

@Nathan Ku , if you start with C/D properties, you will learn A LOT! And your next property will be much easier to deal with. I would not suggest doing C/D investments in another city. C/D properties usually get C/D PM companies to manage them, and C/D results. You will need to be hands on with this class of properties.

Originally posted by @Ray Harrell :

Having a D class property doesn't make the owner a slumlord! GTFOH! An absentee management strategy, and assuming poor people are worthless and don't deserve decent living conditions is what makes someone a slumlord!

I didn't say having a D class property makes the owner a slum lord. I just said I don't know how someone can really make money owning a D class property. Chasing down delinquencies, costs of evictions, higher costs of property management, much higher expenses for capex and repairs because the tenant base is much more transient, susceptible to changes in the economy, etc . It's hard to make money unless you just don't do some of those things. I have an apartment in Fort Worth where the median household income is $30k. So I know the troubles of dealing with some of that. I can't imagine buying in a D class area where the income is $15-20k. Do you own in a D class area now? Please share your strategies.

"I wouldn't do D class and especially as a new investor. I'm sure there are ways to make money there without being a slum lord but I don't know of them."

Pretty clear to me what you meant. Yes, I own a C/D property, and you're right, it is challenging.

@Ray Harrell - good point. I was looking out of state as bay area is out of reach for me. Thank you !

@Michael Le Thank you for the inputs.

@Alex Bekeza I was looking at Sacramento, CA. I will take your advice and read up some of Johns threads. I am also starting to look into Seattle just recently. Thank you !

@Noah Scott I agree with your thoughts on 50% of deal is better than 100% of no deal. However Finding a partner and getting comfortable is another one to overcome.

Originally posted by @Ray Harrell :

"I wouldn't do D class and especially as a new investor. I'm sure there are ways to make money there without being a slum lord but I don't know of them."

Pretty clear to me what you meant. Yes, I own a C/D property, and you're right, it is challenging.

Then perhaps you can share some strategies.

It's going to be different for every person. One strategy is to not do it if you're not going to be local and somewhat hands on. Do not entrust your C/D property to a PM company. Do random drop bys to check out what's going on in the yard, Find things to do in the common areas do you can see who is coming and going at different times during the day. That carries a lot of weight when they know you are present.

There's plenty of ways to make money in C/D properties without being a slumlord. A slumlord can exist in A class rentals as well as D. It's all about how well you take care of the property. @Michael Le perhaps you didn't mean to make a generalization, but us "proper" landlords in C/D areas take offense to statements like that. 

I invest in deep East Oakland, which is C-/D, depending on which street you're on. I used to focus on working class tenants, who make good money but don't have great credit. We averaged $300-400/door in cash flow with these types of tenants, but with the current political climate, did not feel comfortable expanding on that strategy. 

Recently we switched to Section 8 - and our cash flow has exploded, averaging $500-700/door per month in cash flow. You have to keep the property in good condition - habitable, no pests, water leaks, mold, cracks, holes, etc. But does it need a ceiling fan? No. A garbage disposal? No. Just the basics. Give your tenants a safe, clean, habitable apartment, Section 8 it, and you will no longer have collection issues. We get 100% of our rent (27 doors) by the 3rd of the month. 

Originally posted by @Ray Harrell :

It's going to be different for every person. One strategy is to not do it if you're not going to be local and somewhat hands on. Do not entrust your C/D property to a PM company. Do random drop bys to check out what's going on in the yard, Find things to do in the common areas do you can see who is coming and going at different times during the day. That carries a lot of weight when they know you are present.

You also have to adjust your standards, which was hard for me. For example, when I had C class properties, I rented with stains in the carpet. It had been steam cleaned, so it was sanitary, but visually not perfect. I also purchase used appliances. I stuck to paint touch up only. If I did repaint, it was just one wall as needed. I also found a hands on approach to managing was required. I found myself saying, "pay the rent or get out" more often than I do now with my B class properties. Lower standards of appearance doesn't mean sub standard living conditions. I always kept the plumbing and heat in good working order. No leaky roofs, no loose railings, etc. 

The most difficult part of these properties was seeing tenants destroy my property. I gave up on screen doors after the fifth one flew off in the wind due to not being closed. To collect rent, I usually did payday collection, so instead of saving up for all the rent, I collected some every two weeks. My rules were simple. Pay rent or leave. Commit a crime at the property and you must leave.

C and D class properties provide housing for poor people in America. There is no shame in owning and operating housing like this because you are helping people that most landlords turn their noses up at. It is a tough business, but a great way to start if you can handle it. The reward for the hassle is higher cash flow, so I used it as a way to upgrade to nicer properties over time.

Originally posted by @Saj S. :

There's plenty of ways to make money in C/D properties without being a slumlord. A slumlord can exist in A class rentals as well as D. It's all about how well you take care of the property. @Michael Le perhaps you didn't mean to make a generalization, but us "proper" landlords in C/D areas take offense to statements like that. 

I invest in deep East Oakland, which is C-/D, depending on which street you're on. I used to focus on working class tenants, who make good money but don't have great credit. We averaged $300-400/door in cash flow with these types of tenants, but with the current political climate, did not feel comfortable expanding on that strategy. 

Recently we switched to Section 8 - and our cash flow has exploded, averaging $500-700/door per month in cash flow. You have to keep the property in good condition - habitable, no pests, water leaks, mold, cracks, holes, etc. But does it need a ceiling fan? No. A garbage disposal? No. Just the basics. Give your tenants a safe, clean, habitable apartment, Section 8 it, and you will no longer have collection issues. We get 100% of our rent (27 doors) by the 3rd of the month. 

Perhaps we have different definition of D class properties. And perhaps it's because I'm in Texas and you're in CA. But there is no way to get $500-700 cash flow here or even $300-400 when the units in those areas are renting for $400-500. And my expenses here aren't any cheaper than yours. Thus while buying a used replacement refrigerator for one of your units in Okaland might only account for small percentage of monthly rent, it will be at least half the rent (or 5% of yearly income) in expenses on just that one item.

I agree with much of what has been previously shared. In my experience, owning in C/D areas is more management intensive--more time, $, and energy in the cost of collections, property maintenance, etc. You should be OK with that going into it and understand it might be a stepping stone into something bigger/better in the future. Definitely a good way to learn the intricacies of the rental business, and it will teach you strategies for dealing with problem tenants. My personal preference is save more or find partners to invest with to buy better properties in better areas. I like to be hands on with my investments, and therefore want to own nice buildings in nice areas that I personally want to spend time in, and deal with tenants I like. Again, I think it all boils down to personal preference and comfort. There's obviously a risk vs. reward equation at play--C/D properties are riskier and some people say they tend to offer higher cash flow (higher reward) as a result, although not always. Even though your current cash flow might be higher in these types of investments, well-located, A/B properties usually have higher other long-term benefits like appreciation, ease of management, and market demand if you do decide to sell.

@Joe Splitrock , at my property, I wouldn't even consider living there unless it was a dire emergency. But for my tenants, it's the best place they ever lived in their lives! Lights? Window blinds? A working toilet? HEAVEN! It's all about perspective. Showing up at random times helps a lot. DO NOT accept cash for rent. Make them carry the cash to get a money order and make sure they fill it out because you won't be responsible for lost money orders. NO CHECKS! NO EXCUSES. When you go to collect rent on the 5th if they don't have it, sign your 5-day which you always carry with you, and hand it to them, or slide it under their door. Tell them you're filing for the eviction the next day (unless they are long term tenants with a good payment history), 

Originally posted by @Ray Harrell :

@Joe Splitrock, at my property, I wouldn't even consider living there unless it was a dire emergency. But for my tenants, it's the best place they ever lived in their lives! Lights? Window blinds? A working toilet? HEAVEN! It's all about perspective. Showing up at random times helps a lot. DO NOT accept cash for rent. Make them carry the cash to get a money order and make sure they fill it out because you won't be responsible for lost money orders. NO CHECKS! NO EXCUSES. When you go to collect rent on the 5th if they don't have it, sign your 5-day which you always carry with you, and hand it to them, or slide it under their door. Tell them you're filing for the eviction the next day (unless they are long term tenants with a good payment history), 

Perspective is right. Most D class property in the US are better than 90% of the housing in most countries in the world such as in Central America. 

@Noah Scott my theory is "100% of a small deal is better than 50% of a larger deal". Even if that means moving down to C class properties. A good partner can be helpful, but a bad partner is guaranteed to be trouble. I would rather leave partners out of it so I retain control. Some people partner with friends or relatives because they can trust them, but that ends up being worse when things go wrong. 

I am curious how do you ensure success when selecting a partner for deals? Maybe I just have trust issues, haha.

@Joe Splitrock haha fair play on the quote reversal! A good partnership is based on complementary skill sets, shared values/goals, and communication. If you can establish those pieces you are at least starting on the right foot. OH, and having absolutely EVERYTHING in writing!!

I have owned only one business with a partnership, and it was with one of my best friends, so my experience is limited; however, I will say we made sure everything went smoothly because we did our absolute best to keep things transparent...meaning ALL of the good and ALL of the bad. 

I have no opposition to going it alone, just the same way that I know a good partnership can help me excel in areas where I lack. 

Either side of the partnership coin can work! It comes down to what we believe will work for us in the end. If you go into a partnership dwelling on the loss of control, the shared profits, and the potential headaches it may foreshadow what you experience. Just like the flipside can be true for going it alone.

Originally posted by :

@Noah Scott I agree with your thoughts on 50% of deal is better than 100% of no deal. However Finding a partner and getting comfortable is another one to overcome.

 Most definitely! Finding someone who has complementary skill sets, shares your values/goals, and is willing to communicate openly are (in my opinion) the cornerstone of a functional partnership in any area of life. You don't want to go into an investment with someone you can't trust, and you shouldn't go into an investment if you are uncomfortable with who you're investing with.

Originally posted by @Michael Le :
Originally posted by @Saj S.:

There's plenty of ways to make money in C/D properties without being a slumlord. A slumlord can exist in A class rentals as well as D. It's all about how well you take care of the property. @Michael Le perhaps you didn't mean to make a generalization, but us "proper" landlords in C/D areas take offense to statements like that. 

I invest in deep East Oakland, which is C-/D, depending on which street you're on. I used to focus on working class tenants, who make good money but don't have great credit. We averaged $300-400/door in cash flow with these types of tenants, but with the current political climate, did not feel comfortable expanding on that strategy. 

Recently we switched to Section 8 - and our cash flow has exploded, averaging $500-700/door per month in cash flow. You have to keep the property in good condition - habitable, no pests, water leaks, mold, cracks, holes, etc. But does it need a ceiling fan? No. A garbage disposal? No. Just the basics. Give your tenants a safe, clean, habitable apartment, Section 8 it, and you will no longer have collection issues. We get 100% of our rent (27 doors) by the 3rd of the month. 

Perhaps we have different definition of D class properties. And perhaps it's because I'm in Texas and you're in CA. But there is no way to get $500-700 cash flow here or even $300-400 when the units in those areas are renting for $400-500. And my expenses here aren't any cheaper than yours. Thus while buying a used replacement refrigerator for one of your units in Okaland might only account for small percentage of monthly rent, it will be at least half the rent (or 5% of yearly income) in expenses on just that one item.

  Perhaps you should look into other markets. My C/D class 3bedrooms rent for $3,000/month. And don’t forget the 10-15% yearly appreciation.

I’ve done the OOS thing before. Very hard to make money on a $500/month rental. Expenses are just too high to cover maintenance. Even unleveraged it’s tough. 

Originally posted by @Saj S. :
Very hard to make money on a $500/month rental. Expenses are just too high to cover maintenance. Even unleveraged it’s tough. 

Haha. I think that's what I've been trying to say before I got jumped all over :)

I would not recommend starting with properties in D class areas. There is a lot of opportunity in the C Class area...especially if you can find an area that is moving from a C class area to a B class area. 

@Nathan Ku Yes! We did just that.

Our goal is to have the nicest properties available in every neighborhood where we compete. In our properties in the C-/D+ 'hood,  we ripped up old carpet and redid the original hardwood, painted the walls, refinished the cabinets with rustoleum cabinet transformations, installed backsplashes with "sale priced" glass tile. CLeANed CLEANED CLeANeD especially the windows. Re-roped, repaired and/or replaced (when needed) windows and screens, installed smoke and CO2 detectors, installed basic new or newish appliances, new "plush" carpet tiles in the bedrooms not the crappy indoor/outdoor stuff. We put up nicer 2" blinds instead of mini blinds. We made coat racks and towel hooks and shelves to add some convenient storage. We are all in for less than 20k/unit (with us doing much of the work). And 2 years in, our tenants are taking care of these units.

Do you want to know a secret? Then tenants in our nicer units are way pickier and less appreciative of our efforts than are our tenants in the worse areas with fewer amenities. The tenants in more expensive units EXPECT good service. The tenants in our worst neighborhoods are SHOCKED AND SURPRISED to get good service! We bought our first 8 units for 134k they now gross 3675/month. They are always full-- the only vacancy time we have is while we renovate (7 of 8 are done). The only amenities these apartments have are screens and window treatments. They do not have AC/garbage disposals/venthoods/ icemakers/ceiling fans/garages...nothing. They rent for an average of 460/month.

People living at every price point want the same thing...they want to be treated with respect and they want good value for their money. Because a person has the money to live in a more expensive neighborhood does not mean they are a better person.

I recently moved in a 19 year old (her first place) that wants to party but we're working with her. The neighbors are showing considerable forbearance and giving her a chance to improve; they have been very REASONABLE in this trying situation and in general in their expectations and demands.

HAVING SAID ALL THAT, YOU AS A LANDLORD MUST NOT MAKE UNREASONABLE DEMANDS either. People living that close to the bone will have emergencies and will not always be able to pay rent on time. You better have a late policy with heart and be willing to work with people that are trying to pay you. If someone calls me in advance and has a plan, I waive that fee if paid as agreed (I always want some money and don't let people get a whole month behind). I'll be happy to share my policy if you are interested.

If you have a heart and provide good value "affordable housing" can be very rewarding.

@Ray Harrell   Thank you for saying that!!! I couldn't agree more. Just because someone is poor doesn't mean does not mean they deserve less

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