Investing in Bad (D+) Neighborhoods?

Member since 2019 · 21 posts · 9 votes

I have a deal where the numbers are good (11-12% cash on cash) but it is in a rough neighborhood of Philly. I am confident in my screening abilities, but still concerned about the tenants and neighborhoods of this area. Does anyone have advice for investing in rough areas? Should I stay away?

To add, I have been looking all year for properties in better neighborhoods, but with the rates and prices, the numbers don't work in my area.

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Andrew FreedBusiness Member

Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes

@Brian Caulfield - Proceed with caution. Properties in bad areas always look sexier from a return standpoint but you will be making up the additional return with your time managing the property. Properties in D class areas have tenant bases with more personal issues such as jail, not being able to keep jobs, bad credit, and evictions. Yes, on paper the returns look better but I guarentee you are undershooting vacancy, repairs and capex as a result of this rougher tenant base. I personally would rather own in a nicer area, have more reliable and consistent tenants, and take a 2-3% lower cash on cash return.

One of my best deals from a price per unit was in a bad area.... this one property takes more time than most of my portfolio to manage hence following the numbers without looking at the property holistically was a mistake on my part.

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Andrew FreedBusiness Member
Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
2y
@Brian Caulfield - Proceed with caution. Properties in bad areas always look sexier from a return standpoint but you will be making up the additional return with your time managing the property. Properties in D class areas have tenant bases with more personal issues such as jail, not being able to keep jobs, bad credit, and evictions. Yes, on paper the returns look better but I guarentee you are undershooting vacancy, repairs and capex as a result of this rougher tenant base. I personally would rather own in a nicer area, have more reliable and consistent tenants, and take a 2-3% lower cash on cash return.
One of my best deals from a price per unit was in a bad area.... this one property takes more time than most of my portfolio to manage hence following the numbers without looking at the property holistically was a mistake on my part.
[email protected]781-964-3200 Podcast Guest on Show 69 Doors from ONE Real Estate Deal Using Other People’s Money
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Brian Caulfield
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Member since 2019 · 21 posts · 9 votes
2y
Quote from @Andrew Freed:

@Brian Caulfield - Proceed with caution. Properties in bad areas always look sexier from a return standpoint but you will be making up the additional return with your time managing the property. Properties in D class areas have tenant bases with more personal issues such as jail, not being able to keep jobs, bad credit, and evictions. Yes, on paper the returns look better but I guarentee you are undershooting vacancy, repairs and capex as a result of this rougher tenant base. I personally would rather own in a nicer area, have more reliable and consistent tenants, and take a 2-3% lower cash on cash return.
One of my best deals from a price per unit was in a bad area.... this one property takes more time than most of my portfolio to manage hence following the numbers without looking at the property holistically was a mistake on my part.

This was very insightful, thank you for your input.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
2y
Your buying yourself a full time job you won't like and the returns you think you are projecting will get eaten by capex and tenant turns with damage.
In commercial real estate now but 20 years in real estate. Good luck.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
2y
Numbers always look better in 'bad' areas until reality hits and you see what the real numbers look like. They are harder to manage, you will have more turnover and more expensive turnovers. I'd avoid them.
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
2y
Yes, be very careful here and typically not a great idea unless you are fully experienced and scaled for this specifically (i.e. dedicated team/strategy for D+). Similar to seeing a dividend yielding stock at over 20% - its 99% of the time a "trap" and you wont see those returns
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David F.
Member since 2018 · 113 posts · 135 votes
2y
Read this thread before you move forward. You both posted the same day. You might be successful with this investment, but it’s good to look at both sides of the coin.
https://www.biggerpockets.com/forums/52/topics/1150633-the-b...

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Jack Schwartz
Member since 2023 · 111 posts · 35 votes
2y
Great advice Andrew! Thank you
are there any attractive rental deals still available in the city? Specifically, I am interested in options that do not involve extensive renovations or repairs,

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Andrew FreedBusiness Member
Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
2y
@Jack Schwartz - Of course. What city are you referring to? My market?
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Jack Schwartz
Member since 2023 · 111 posts · 35 votes
2y
Hi Andrew,
Thanks for reaching out! I'll be free later today or tomorrow morning. I'm really interested in hearing about finding affordable turnkey rentals, or fix-to-rent in Philadelphia. You're in MA, Is there any good there?
I'll get back to you soon, and I'm excited to discuss this further!
Best,

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James Wise
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
2y
Quote from @Brian Caulfield:

I have a deal where the numbers are good (11-12% cash on cash) but it is in a rough neighborhood of Philly. I am confident in my screening abilities, but still concerned about the tenants and neighborhoods of this area. Does anyone have advice for investing in rough areas? Should I stay away?
To add, I have been looking all year for properties in better neighborhoods, but with the rates and prices, the numbers don't work in my area.

I've made millions investing in rough areas. Several different markets in Ohio. Cleveland, Akron, Toledo, Columbus and some others. It's all about the same so I imagine it's the same in Philly.
You've got to prepare yourself for battle everyday. A lot of these people are savages who will wreck and destroy everything for seemingly no go reason. They will work 10x harder trying to game the system than they will doing actual work to just pay their bills in an honest way lol.
In these kinds of neighborhoods Section 8 is the way to go. Having the guaranteed rent goes a long way in reducing your evictions and things of that nature, but again, these folks are not easy to deal with.
4 Reply
Prashant P.
Real Estate Investor · Philadelphia, PA · Member since 2010 · 283 posts · 81 votes
2y
In my opinion, it really depends on you and what you can tolerate. If you buy a property in this type of area you have to realize the property will get trashed, it will most likely not be maintained and you will get calls for dumb things.
Saying that, you will learn to toughen your property to withstand tenants.
As someone else mentioned, you can also go Section 8. As long as you are comfortable talking to people of all walks of life and know how to deal with the housing authority you will not have any issues.
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Alan AsriantsBusiness Member
Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
2y
Bigger risk - bigger returns
Everyone wants to invest 100k and make 1000 a month in cash flow.
Consider these items:
- Finding a good tenant is extremely difficult (your candidates are not going to be perfect) Expect to take people with 500 credit score as a "good" option
- You'll spend a lot of time on arguments for late rents
- Angry tenants can lead to non payment of rent and damage to property
- When people have less to lose - don't care about credit rating, cleanliness, landlord referrals, they won't care about your property
- Driving to an unsafe neighborhood for repairs, maintenance, checking in on property - is it really worth your safety?
- in those areas most are row homes. They are connected to other houses that are dilapidated, affecting yours.
I have experience managing these properties. The amount of return you get here ends up getting wiped out by the headache, repairs, and non payment that youre usually better off just buying in B-A area and making 100 a month lol
I also represented a client who offloaded 4 of these properties. If he didnt rent them out, he would have collected 5 figure returns on each property.
Through all the BS, non payment, and damage over 6 years he was left with a 10k profit over 6 years on 5 properties.
my 2 cents - get less returns in a better area. You'll thank yourself in 10 years.
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Aly W.
Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
2y
We owned 2 SFRs in Trenton, NJ for 10 years. The first few years were rough, with the kinds of tenants and issues mentioned previously. We were extremely fortunate to have a good handyman and electrician/plumber/exterminator that were from that area and still lived nearby and were willing to go there to show the properties, make good repairs, etc.
I screened tenants vigilantly, but you're still dealing with a population that is living there because they can't live anywhere else. Basically, you're choosing the least worst. We had several evictions, moderate damage (including having the copper pipes stolen when criminals pretending to be tenants came and cased the house), and a lot of anxiety about vacancies. One tenant heard gunshots on a regular basis, and even saved a neighbor that had been shot in the middle of the night and lay bleeding in the street until police came.
That said, the last 5 years we owned the houses, we had good tenants in both properties that stayed those 5 years, and we did well.
We bought them in 2008, the market dropped a little further, and we were underwater for a few years, but got good rents. As soon as the market rebounded, both tenants had life changes and moved out within 2 months of each other. We immediately sold the houses. Covid arrived 6 months later, and I can't imagine what that would have done.
You're buying yourself a very stressful job. Those were our first properties and we learned a lot and made money, just understand what you're going into.
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Aly W.
Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
2y
Quote from @James Wise:

Quote from @Brian Caulfield:

I have a deal where the numbers are good (11-12% cash on cash) but it is in a rough neighborhood of Philly. I am confident in my screening abilities, but still concerned about the tenants and neighborhoods of this area. Does anyone have advice for investing in rough areas? Should I stay away?
To add, I have been looking all year for properties in better neighborhoods, but with the rates and prices, the numbers don't work in my area.

I've made millions investing in rough areas. Several different markets in Ohio. Cleveland, Akron, Toledo, Columbus and some others. It's all about the same so I imagine it's the same in Philly.
You've got to prepare yourself for battle everyday. A lot of these people are savages who will wreck and destroy everything for seemingly no go reason. They will work 10x harder trying to game the system than they will doing actual work to just pay their bills in an honest way lol.
In these kinds of neighborhoods Section 8 is the way to go. Having the guaranteed rent goes a long way in reducing your evictions and things of that nature, but again, these folks are not easy to deal with.
Section 8 just means evictions are nearly (at least in NJ) impossible, because the easiest eviction is nonpayment, and S8 almost always pays. Unless your property doesn't pass the annual inspection, and then your rent is withheld until it does. And in many areas here, the S8 inspectors only do inspections one or two days a month, and if you miss that date, or you fail, you'll be waiting another month for the inspection. You'll eventually get all your back rent, but you need to be prepared to survive until then. We couldn't evict our first (and last) Section 8 tenant when she allowed other people to live in the property, when she was running an illegal laundry service out of the basement, when the neighbors said she was selling drugs, and when she got a pit bull. The burden of proof was on us. So when her lease expired, we declined to renew. Rough crowd, indeed!
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Linda S.
Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes
2y
@Brian Caulfield,
If you're going to invest in a D+ area, you need to go into it fully knowing what you're going against. I have properties from B+ through D- (just sold the D- ones!!) and let me say, it's just different. It's different from a C type of area too, when you're in the a warzone, it's almost like a different world where there are legit different rules.
My advice is to go on the offense. If it has HVAC, plan for it to be stolen and switch to baseboard heat. If you're remodeling, only buy used or cheapest stuff, because it's going to be trashed and with each turnover, good chance you'll be doing a full remodel. You'd be amazed at how EVERYTHING in a house can be trashed. Even stupid little things like outlet covers, can be broken.
Do the absolute minimum with renovation, because again-- it's going to be trashed afterward, and PS. I guarantee they will skip out on the last month of rent, so you'll use your deposit, and now it's all just costing YOU. Buy bars for the windows, to hopefully prevent them from being broken. Put the minimal amount in, because like I said-- you should PLAN on it being a full remodel each and every time there's turnover, and it'll happen more often than you think. I have C properties of tenants going on 8 years, 0 turnover, but my D- Properties-- people moved every single year, one guy got put in jail for attempted murder, and the next one spent time in jail for assaulting a police officer.. yup, that's what you should expect.
You're going to make more money on paper, but as others have advised, you'll pay for it in stress/damages.
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James Wise
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
2y
Quote from @Aly W.:

Quote from @James Wise:

Quote from @Brian Caulfield:

I have a deal where the numbers are good (11-12% cash on cash) but it is in a rough neighborhood of Philly. I am confident in my screening abilities, but still concerned about the tenants and neighborhoods of this area. Does anyone have advice for investing in rough areas? Should I stay away?
To add, I have been looking all year for properties in better neighborhoods, but with the rates and prices, the numbers don't work in my area.

I've made millions investing in rough areas. Several different markets in Ohio. Cleveland, Akron, Toledo, Columbus and some others. It's all about the same so I imagine it's the same in Philly.
You've got to prepare yourself for battle everyday. A lot of these people are savages who will wreck and destroy everything for seemingly no go reason. They will work 10x harder trying to game the system than they will doing actual work to just pay their bills in an honest way lol.
In these kinds of neighborhoods Section 8 is the way to go. Having the guaranteed rent goes a long way in reducing your evictions and things of that nature, but again, these folks are not easy to deal with.
Section 8 just means evictions are nearly (at least in NJ) impossible, because the easiest eviction is nonpayment, and S8 almost always pays. Unless your property doesn't pass the annual inspection, and then your rent is withheld until it does. And in many areas here, the S8 inspectors only do inspections one or two days a month, and if you miss that date, or you fail, you'll be waiting another month for the inspection. You'll eventually get all your back rent, but you need to be prepared to survive until then. We couldn't evict our first (and last) Section 8 tenant when she allowed other people to live in the property, when she was running an illegal laundry service out of the basement, when the neighbors said she was selling drugs, and when she got a pit bull. The burden of proof was on us. So when her lease expired, we declined to renew. Rough crowd, indeed!

lol, well yea those are all good points. I gotta say, I've been doing this too long. Sometimes I forget that there are tenants out there who don't have Pit Bulls and a random assortment of people moving in and out lol.
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
2y
Numbers are often "good" in rough neighborhoods, but they're only good on paper. The property's usually cost more to operate than you'll get in rent. I would only recommend investing in such areas if you have expertise doing so.
I wrote a piece a while back making this case in detail which you might find helpful: https://www.biggerpockets.com/blog/2016-01-26-vast-majority-...
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Travis Biziorek
Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes
2y
If these are truly D Class areas those are poor CoC returns. I can do that in C Class areas in Detroit.
Now on to the meat of the question...
I know a guy in Detroit that owns 100+ doors in D Class areas. He lives in the suburbs but drives 45 min to "work" each day.
This work involves putting out fires, shaking down tenants for late rent, an eviction here and there, forced entry and fist fights here and there, getting sued once every other years (either for the fights or something frivolous), etc. etc.
To be honest, the guy loves the drama and lives for it. He's the type that cheated on his wife and shacked up with the new chick, got a divorce. Won't marry the new one but has been with her for years and loves to complain about her, how he wishes he could leave her, etc.
The guy is miserable and I truly believes enjoys being miserable. Hence the reason he's chosen to be a D Class area landlord.
If that sounds like you and it sounds like fun, go for it!
I don't say that in jest.
D Class investing is a lifestyle choice. And it's not one I'd want... especially for the returns you're stating.

P.S. Classifying your areas as D+ tells me you're already trying to justify this path to yourself. D class is D class. There are no +'s or -'s.
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
2y
An article that might interest you:
https://theclose.com/realtor-safety/
Good Luck!
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Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
2y
Almost impossible to manage Class D remotely, you have to be local.
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David Dey
Investor · Lakeland, FL · Member since 2015 · 344 posts · 606 votes
2y
There is no wrong answers here.
Buying in rougher neighborhoods can be very lucrative.
Landlords are there for a reason.
However, you must count the costs of doing business in these areas and determine if this is the right venue for you.
If you do decide to go this route, consider section 8 housing.
The beautiful thing about this type of rental is that the money comes in like clockwork and will be on the higher spectrum of the rent scale.
Further, you should still do your own screening but you have the benefit of knowing that the municipality screened them as well regarding criminal and such as well.
If the tenant breaks the rules of your lease, they stand not only to be kicked out of your place, but may also get kicked out of the program as well.
So if you have good strong management skills and understand that there will be issues that will be specific to this property class, you can make an informed decision.
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
2y
Quote from @Michael Smythe:

Almost impossible to manage Class D remotely, you have to be local.

Indeed, it's incredibly challenging to manage them even when you are local
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Mario Morales
Member since 2020 · 239 posts · 104 votes
2y
@Brian Caulfield
I bought my first building in an area like this, and it came with headaches evictions . It took me a year to straighten everything out.
I have decent tenants now, but you will become their bank . During certain months, they will pay rent late because they want to use that money for family party or to pay down bills or someone went to jail.
I was able to use the equity to expand my portfolio in better neighborhoods. I can tell you that I will not invest in another D class neighborhood. I want to be able to be comfortable parking on the street when I need to go make a small repair or show the building .
Buy the best building that you can
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Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
2y
Example of Class C & D tenant mentality:
We took over management of a SFR with a tenant in it during summer.
Around November, tenant emails us that he was just laid off and he can only make partial payments. Don't worry, he stated, this happens every year because my job is seasonal. We go back to work in February and then I make double rent payments to get caught up in 2-3 months.
What do you think happened when we asked why he couldn't make his double rent payments BEFORE he got laid off, so he didn't fall behind and be forced to pay all sorts of late fees?
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
2y
@James Wise "They will work 10x harder trying to game the system than they will doing actual work to just pay their bills" - I experienced this doing PM and handyman repairs for another investor. They had tenants that couldn't change light bulbs or mow the grass. I made $60/hr mowing grass... haha

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