Starting out with Class C/D MFR rental - would you do it ?
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Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
8yHaving 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!
48 Replies
- Investor · Linden, NJ · Member since 2016 · 190 posts · 116 votes8y
1.) Put up camera system and internet connection so you can monitor remotely.
2.) Put bright external dusk till dawn lighting that the residents cannot control
3.) Do not collect rent personally. Have it deposited, electronically transferred or mailed to PO box (no personal checks)
4.) put durable material (i prefer LVP instead of carpeting)
5.) screen hard.
- Investor · San Antonio, TX · Member since 2016 · 90 posts · 28 votes8y
This class of properties is VERY management intensive. The tenants typically don't have any credit, and don't care about their credit, therefore you have very little leverage to get them to comply with what you want. I definitely would not recommend tackling this class of property unless you are local to the property or hire a management company experienced in dealing with this class of property.
I am speaking from experience. We own 10 doors in 3 properties in a C class neighborhood, and we are 9 hours away. I just signed closing docs on one four plex, and trying to sell the other 4 plex also. They would be great if we could be there to manage them, but we made the mistake of not allowing for property management. We have family members as our boots on the ground, but it's not good enough.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
I would buy C class or better for you first few investments. Instead of buying cheap, just because that is what you can afford, find ways to afford more. Partnering, seller financing or starting out smaller are ways to be able to get into a C/B class property vs D class.
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes8y
Upper C? Yes. Lower D? No. Anything in between? It would depend on the numbers. I'd have to be making good money to put up with the issues that tend to come with anything close to D.
- Property Manager · NJ · Member since 2017 · 786 posts · 396 votes8y
@Nathan Ku heres my $.02
1) You could wait a bit until you save up some additional capital and invest in an area where you feel more comfortable. The path to financial freedom is often a long one, if your comfort level is with a different class I would wait until you're ready for that specific investment. You can also JV your way into a different area too
2) If you're uncertain about the tenants in a certain area make sure that you're reserves support a longer vacancy period and look for a vacant property, once you acquire the vacant property create a stringent screening process for your tenants to help mitigate risk (you may want to partner with a property manager or another REI in the area for best practices) A stringent screening process is a great way to decrease your chances of tenant issues in the future (also partner with a lawyer to make sure that your lease is explicit in detailing the standards for your property)
- Naperville, IL · Member since 2018 · 330 posts · 357 votes8y
Originally posted by @Ray Reed:
1.) Put up camera system and internet connection so you can monitor remotely.
2.) Put bright external dusk till dawn lighting that the residents cannot control
3.) Do not collect rent personally. Have it deposited, electronically transferred or mailed to PO box (no personal checks)
4.) put durable material (i prefer LVP instead of carpeting)
5.) screen hard.
I assume you mean EXTERNAL monitoring? I don't know of any state where it's legal to spy on folks. MAYBE the yard and outside. Maybe. Or maybe they agree to that?
Your other factors I agree with. I agree with (mostly women) saying everyone wants a decent safe clean home. Provide that and you can make money. But personally we are on the other end of the scale. We own in an affluent area and tenants have very high expectations.
- Investor · Linden, NJ · Member since 2016 · 190 posts · 116 votes8y
@Nancy P. that is correct, external monitoring. In D class neighborhoods one of the things you have to prevent is people loitering in front of your house/building. You also have to address the tenants that are the causes of that. It also helps you to see any occupants/extended guests that are not on the lease.
- Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes8y
Originally posted by @Michael Le:
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.
Here are some strategies:
1. Decline to meet the requirements for Section 8 .
2. Decline to meet the requirements for any state, county or city "program".
3. Decline to rent to anyone who has a "sound system" in their vehicle.
4. Decline to rent to anyone who emits the odor of an alcoholic beverage during the interview.
5. Decline to rent to anyone whose clothing reeks of weed.
6. Decline to rent to anyone whose verbal diction is hurried, abrupt and without pause during the interview.
7. Decline to rent to anyone who uses profane or bad language during the interview.
8. Decline to rent to anyone who needs an apartment immediately.
9. Decline to rent to anyone with a dog.
10. Decline to rent to anyone who is not nice during the interview.
Give preferential placement consideration to:
1. Anyone who is referred by a trusted existing tenant.
2. Anyone who keeps a close eye on their children during the interview.
3. Anyone who is moving to be closer to their job.
4. Anyone who is moving to be closer to a relative for babysitting to make it more convenient to get to their job.
5. Anyone who The Trinity tells you that you need to rent to.
If you find that you have zero applicants when adhering to the above, then you need to repair your apartments or you need to repair your reputation.
DL
- SE Texas · Member since 2018 · 3 posts · 2 votes8y
I personally started in D neighborhoods. Beaumont Tx, My section 8 tenants are great. Yes there are some challenges you will face with homes 40 plus years old but I actually target these "D class" houses. My vacancy rates and turnover are low.
I inspect myself as I have the background for it. I look closely at home mechanical systems. Furnace, water heater, electrical. Pay VERY close attention to foundation and roof. Here in SETexas most of these homes are pier and beam and have some issues this late in their life.
Buy for 4walls and a roof. Run the numbers and if it works great.
Buy and hold is my life.
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes8y
Originally posted by @Jill F.:
@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.
I am a big fan of where your heart comes from.
I like the thought that if you treat people with respect, they will do the same to your apartments. We try and do something similar with our rentals.
We also try to be kind but firm. Ie reasonable and accommodating, to a point, but at the same time our tenants know we wont be pushed around.
We dont mess around with letting things go, AC units, hot water heaters etc. All fixed immediately.
- Investor · Linden, NJ · Member since 2016 · 190 posts · 116 votes8y
Originally posted by @DL Martin:
Originally posted by @Michael Le:
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.
Here are some strategies:
1. Decline to meet the requirements for Section 8 .
2. Decline to meet the requirements for any state, county or city "program".
3. Decline to rent to anyone who has a "sound system" in their vehicle.
4. Decline to rent to anyone who emits the odor of an alcoholic beverage during the interview.
5. Decline to rent to anyone whose clothing reeks of weed.
6. Decline to rent to anyone whose verbal diction is hurried, abrupt and without pause during the interview.
7. Decline to rent to anyone who uses profane or bad language during the interview.
8. Decline to rent to anyone who needs an apartment immediately.
9. Decline to rent to anyone with a dog.
10. Decline to rent to anyone who is not nice during the interview.
Give preferential placement consideration to:
1. Anyone who is referred by a trusted existing tenant.
2. Anyone who keeps a close eye on their children during the interview.
3. Anyone who is moving to be closer to their job.
4. Anyone who is moving to be closer to a relative for babysitting to make it more convenient to get to their job.
5. Anyone who The Trinity tells you that you need to rent to.
If you find that you have zero applicants when adhering to the above, then you need to repair your apartments or you need to repair your reputation.
DL
@DL Martin I am curious as to why you would not take section 8 in C/D houses. Especially in the D class, they are probably your most stable tenants since their rent is subsidized based off of income. The only time I am opposed to it is if they are non working section 8. I do not want tenants in any of my housing to be home all day if i can avoid it. More wear and tear and higher water/sewer bills.
it may be just me but i avoid putting friends and relatives in the same small multifamily (2-4 units) no matter how highly recommended they come from another trusted resident. If one has a problem with another resident, they both have a problem with another resident and can make that residents' life hell. Same goes if one has a problem with their landlord. I like my residents with no affiliation with one another.
- Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes8y
As for Section 8 being 100% rent, don't fall for the hype. Tenants who feel entitled will often make things happen out of spite because they know rent will be abated, or their first line of defense will be to call the city. I would never do Section 8 rentals again. I rather have tenants who work and appreciate what they spend their money on.
- All Over, USA · Member since 2017 · 689 posts · 756 votes8y
Lots of nopes.
When I suggested looking into Class C-ish multi-family my PM team told me to kick rocks, haha.
- 8yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
I think there is a big difference between C and D. C I have no problem with at all these are average income people, mixture of white and blue collar. When I think of D that’s another group altogether-don’t want them in my buildings they will scare away my good tenants and my darling PM.
- Long Beach, CA · Member since 2017 · 107 posts · 82 votes8y
I agree that there is a big difference between C and D. I tend to look for bars on the windows and check out what kind of cars are on the street etc. Generally a C neighborhood I feel safe in , would live in myself, would park my car on the street, would take a walk in the evening etc. D I would not feel safe doing at least one of those things. C- even might take out one of those, C+ would make those things even more solid.
I have a townhome in LA that is section 8. I feel good about it because she has to pay a small portion of her rent, but more importantly, there is a shortage of section 8 housing in LA, she knows that if she were to get kicked out she probably would have no place to go. She is also generally a good tenant.
- Real Estate Investor · South San Francisco, CA · Member since 2016 · 51 posts · 29 votes8y
Just heard a horror story from a Sac PM about a SF investor who bought a fourplex after an agent made a bunch of optimistic claims. PM said they could manage it, but when they sent an agent to one of the units, he got chased away by a couple of guys with knifes... needless to say PM is no longer comfortable managing it, and one of the tenants is not paying rent. I would say, if you can find a PM that is a) specializes in those neighborhoods, and b) PM guarantees that they would be comfortable managing that specific property.
- Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes8yUnless you have the right property management company to manage that type of property I would stay away from it. One bad apple can ruin the whole bunch!
- 8yShea SpinelliPro MemberRental Property Investor · Tyler, TX · Member since 2016 · 198 posts · 89 votes
@Nathan Ku My wife and I purchased a 12 unit MF complex in July of last year. Our units are C Class, but our tenants are great. They were well vetted prior to our ownership and we have added 3 additional units strictly from the profits of the business. The only money we have invested was the initial 10% down payment. The tenants we have added have been referrals from the other current tenants and we just finished our last addition and will have it rented by July 1st. The only thing that has been a downside is the prior owner deferred a lot of maintenance, so we have been trying to improve the quality of the infrastructure and make them more appealing. Obviously, it seems most of our tenants are content because they have lived here for an average of 5 years, with our longest tenant s at 20 years, 14 years and 12 years and our shortest term at 7 months. The others are roughly 2-3 years in. I would say that C Class is good due to our tenant quality, but I can see how it could go south real quick if we were just placing anyone in the open unit. There is a lot of inquiry about the availability, but 90% are not qualifying based on guidelines we have in place and have to remind ourselves to stick to for long-term success.
Hope things go well for you!
Shea
- Rental Property Investor · Flagstaff AZ · Member since 2016 · 64 posts · 49 votes8y
I agree with @Alex Bekeza. Higher vacancy rates and riskier tenants would be my primary concern. That is not a knock on anyone either. It is just a simple fact that low income tenants will have more variance in their lives. I have considered venturing into this space a couple of times when deals have presented themselves. Ultimately I have decided that the deals I had presented to me were not profitable enough for me to deal with the additional headaches I expected. If I do go down this road, I will look for higher cash flow per door than I achieve on my other units, and I will definitely bump up my occupancy budget.
I also could not agree more about the "heart" comments being made in this thread as well. Creating affordable housing options for good people is our mission. If we do our jobs right as landlords and investors, we should be improving lives and communities, not living up to the old stereotype.
- Aurora, CO · Member since 2018 · 180 posts · 166 votes8y
I'm a newbie when it comes to investing, but I worked as a property manager for a slumlord in N. Denver. We had about 60 "doors" that were a mixture of ancient 1930s - 40s motels that rented weekly, 1960 era trailer houses, etc. The owner gave us a $100 Home Depot gift card once a month for "maintenance". One unit, with two bedrooms, one bedroom was furnished with a stack of 4 box springs, the bottom of which literally had rat freeways chewed through it. You can imagine the bugs.
The tenants were a wide and varied assortment. The owner wanted no "screening" just occupants with cash, whereever it came from. I took over management from him.Repeatedly, I was told by the tenants, how wonderful it was to be spoken to as a human, rather than as dirt. I was well aware, that when I kicked someone out, they were homeless.
For maintenance, I haunted thrift stores, REstore, freecycle and craigslist. Freecycle provided me with an unpaid storage unit stacked with hundreds of yards of clean carpet. I picked up paint free at the recycle paint place. It wasn't always pretty, but it was fresh and clean. I found a 4 star hotel that was replacing all their bedding with new, and was thrilled to let me haul it away. We slowly, managed to make a small difference in the condition of the units, and when one was empty, I'd carpet and paint, and put in decent bedding, and then give it to a long term tenant.
Its not easy. It was a full time job, part manager, part social worker, part den mother, part bad ***. But there was money to be made there.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes8y
I don't touch C to D stuff. I guess I am accustomed to a lifestyle where you do not have to deal with all the BS of those type properties for the expected yield.
Some of my clients buy A class but really large stuff in the hundreds of units or larger. The cap rate is lower but rent growth over time is usually stronger. The C to D type areas those tenants are more constrained on income to push annual rent growth.
On the converse side class A can get overbuilt as it's about all developers are doing for ground up MF these days. That and the assisted living facilities. The reason is construction,labor, and land acquisition costs are up. There is larger demand for low income to moderate type housing because most of the population does not have a lot of money. The low income to moderate type stuff just does not pencil for new development for build costs to rent per door averages. Some with LIHTC tax credits and similar in the past made it worthwhile.
Now it is mainly re-position plays of existing older buildings for low income to moderate tenants. The cost of the building and rehab is generally much lower than a new build from the ground up costs.
You might want to REALLY bring in an experienced partner for the project local to the asset who understands the complexities of C to D type tenants,areas, and buildings. If you have never owned or ran that type of asset before it can eat you alive.
- Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes8y
I am nauseated by government programs such as Section 8. I was an inner city street cop for 25 years in a very large city and witnessed first hand the devastation wrought by government "help" programs on our people. THOUSANDS of times, I have walked through the front door of section 8 housing and seen first hand, THREE GENERATIONS OF PEOPLE UNDER ONE ROOF, whom have been convinced by government that they are so stupid, so lazy, and so devoid of potential, that they are unable to earn a living in the United States of America. It broke my spirit every time I saw it.
I provide a clean, safe, quiet living situation for those who are striving to help themselves.
I have a 39 unit, D Class complex. I have been at 100% occupancy since October of last year. In 2017 we had $0 legal expenses (evictions). Thus far in 2018 we have had $0 legal expenses (evictions).
I have an informal waiting list to get in.
Section 8 is for other landlords. It is not for me.
DL
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