Invest in B class or C class?

Question

I keep going back and forth on pros and cons for each but I’m looking for everyone else’s advice as well as I tend to over complicate some things.

Should I keep saving and invest in a B class neighborhood? Local market is very close to the 1% rule. Most deals I see cash flow $200-300/month and usually duplexes.

Should I invest in C class neighborhoods? Can get in a lot easier/cheaper cash flow ranges a lot more but would generally cash flow about $500-1000/month and are triplexes or quads.

Looking for other people experiences and suggestions. My main thoughts are that B class is going to be better/long term tenants that won’t cause too much of a headache, where C class may lead to more evictions and high cost of turnover. But, C class would have higher cash flow and be easier for me to get into the market, money wise. Should I just hire a PM and go for C class and keep lofty criteria?

Thank you all!

Anthony Wick · Answer

@Thomas Richardson

That’s really only something you can answer. Maybe you should schedule showings at each type of properties and then write down the pros and cons of each. Are you self managing? Have the time and intestinal fortitude to deal with lower class tenants?

I thought I wanted to buy for only cash flow. Turns out, I didn’t like the idea of dealing with trouble tenants more often than not.

I simply disagree with other poster than said “tenants are tenants”. No no no. Higher class properties and higher rents absolutely get you better tenants.

Matt Engle · Answer

@Thomas Richardson we invest in B and C class properties. In our experience, the ideal scenario is to find a C class property in a B class area and similarly with B class in A class areas. This gives us the opportunity to add value to the property in addition to the stabilized cash flow.

Edward Liu · Answer

I used to do more C areas to chase the returns, now I prefer to invest in better areas with better schools and better tenants.  Better areas do have better tenants and much less issues, no matter what city/region you invest in.

Over long term, better area has better returns (less tenant turn over, rents on time, less management fees, less turn cost, better rent increase rate, etc.).  In addition, better area tend to have higher appreciation %.

CJ M. · Answer

@Thomas Richardson

Invest in both. That said, just because it's a B neighborhood doesn't mean the tenant(s) won't be a PIA. The nicer the area, the more demanding a tenant can be. For example, A/B properties may have better fixtures and materials. When they need replaced, they cost more. Also, tenants in those neighborhoods oftentimes expect things to be perfect since they usually pay more in rent. This could mean a lot more maintenance calls...especially if there is deferred maintenance on the property. And don't even get me started on property taxes lol

Anthony Wick · Answer

@Jacob Sampson

I love starting my analysis with the 1% rule. It lets me either decide to delve into the real numbers or not waste my time if somebody is asking $200k and the market is $1,600 rents. You obviously still need to know the area, but it’s a starting point.

Danny Randazzo · Answer

@Thomas Richardson good plan and good luck with your pursuit

Art Perkitny · Answer

@Thomas Richardson

As others have stated, employing a repositioning strategy can yield very desirable results. This is assuming you can locate properties of lower class in higher rank areas.

As to weather B or C area is better, the way I look at it is the following factors:

Yield: What are my investment return goals, naturally higher risk, C areas will produce better yield.

Hassle Factor: Am I looking for a truly passive investment or am I good with dealing with some headaches. Riskier areas will create more hassles and hinder the property from being truly passive.

Reserves: Can I handle negative cash flow occasionally. For example vacancies can be higher in lower rank areas and can I go one or two months without any income while also servicing the properties carry costs.

Experience:  Do I have the expertise to take on a higher risk property in this market. The higher risk areas demand more attention and intuition for them to work well.

Tj Hines · Answer

@Thomas Richardson I think B and C class are two profitable asset classes. If you can attract a C class in a A area, then you may attract a B class or A class tenant. Or B class property in an A area. Repositioning up is always good. If you're buying a C property in a C area, then yes you will attract C class demographic.

Thomas Richardson · Answer

@Danny Randazzo would like to be in it for the long game, hoping to be able to grow so I can support my self from the cash flow but don’t need hundreds of properties.

Danny Randazzo · Answer

@Thomas Richardson do you want to go after the long game or short game? You might be able to start short and then grow into a long game.

Invest in B class or C class?

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