Investing in a C- area

20 Replies

Many of the properties in my home market that appear to be good deals tend to be in an area I would consider "C-".  Far from inner-city but in the rougher area of town.  

My question for the experienced investors, what would be the downside to investing in these areas if I'm using a property manager?  I've heard investors recommend staying away from these types of properties, but if there is a property manager involved to use as a buffer from tenant issues, why not?  I understand my appreciation would be less than other areas, but if the numbers work to make it cash flow, appreciation isn't my focus.  I would be using a management company that does not charge for filling vacancies so turnover isn't a concern.  

The properties I've been keeping my eye on are staying available much longer than similar properties elsewhere so it appears other investors are staying away.  I'm afraid there must be something else I'm missing.

Thanks for your input.

Thanks for posting @Seth Lind , as there are some outlying areas around Indianapolis I would be interested in, but due to the rough nature of those neighborhoods, would want to use a PM as well.  Following so I can get an answer as well!

For me, the lower rental dollars combined with a higher turnover rate, and the amount of damage done to the units in that amount of time is a deterrent.   Low income + high repair costs + increased frequency of repairs = no thank you.

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Hi guys,

In my opinion, these are the concerns that is working at C- area.

- There's more crime in the C- area. You are risking your property at risk.

- The insurance will be more reluctant to give coverage, even if they do, the insurance will be higher premium.

- You have to be careful who you put in your property, if you got people that is doing bad stuff (selling drugs, etc) you can get your property held up by the authority for investigation (just what happened to my neighbor a couple of weeks ago and the property is in B area).

- Yes, you can get a property management that will not charge for filling vacancies (even though it will be hard), be careful that they will not just put any tenant just to fill in the gaps. And you can (and most likely) get lower rent since they will not use real estate agent to market the property (believe me the free ones will not screen the tenant properly)

- Your property can also be empty for longer than other area because of the condition of the area.

- When you want to cash out, it will be more difficult to find buyers. Good investors always think about exit strategy.

- You can get more damages and maintenance cost to repair the properties from the unqualified tenants.

- The rent can either late or not paid in full. Yes, you can evict them, now eviction cost money and the tenant can just damage your property when they get evicted.

There are other factors that prevent investors to invest in those areas unless they know that the area will be better area in the future. Even then, they will be very careful in choosing the street, area, houses, etc.

Hopefully that can help.

It's tough in bad neighborhoods and many property managers will not care too much about your property and whether it ever actually gets rented or repaired.  They will let it sit vacant for months until it becomes vandalized while they wait for someone to pay an application fee before they even decide to show it.  You will want a PM that can advertise effectively along every possible avenue.  It helps if they have their own maintenance staff because just about every contractor in the phone book wants to get rich off of Joe homeowner.

@Seth Lind I'm a PM, and I won't manage in C- areas.  If I won't do it, I imagine there are others who also have a threshold on what types of homes they will and won't take on.  Be sure that you can find someone who is willing to do the management before you buy anything.  And, of course, be sure that PM is reputable.  

It all depends. I manage a couple of properties in what I would consider C- areas. I have great tenants in both rentals who always pay their rent on time. Other than the occasional repair issue, I have no problems at all.

Your dreaming if you think PM's will manage crap holes in dangerous areas for the average PM rate of 10%.

The PM's giving special rates such as 8% are typically for A areas where they do not have to do much.

C areas have lot's of turnover and many times have damage and multiple attempts at collecting rents.

There are special PM companies that deal with the slum areas and are good at that kind of stuff but I have seen them charge 12 to 14% to deal with it. A regular PM company taking that on will get eaten alive dealing with that type of area and tenants.  The low income you have almost zero appreciation and it is a cash flow only play typically so you better make sure you buy it very well. One bad tenant can wipe out years of expected cash flow and then you wish you bought in the better areas.

Anyone can buy the junker properties in rougher areas as they are cheap for a reason. You want to buy an undervalued property in the best area you can (ugliest house on the street) and turn that coal into the other diamonds around it. That is how you create value. Be patient and don't buy trash in bad areas. I have seen over many years on this site people lose tens of thousands thinking they (can't lose) buying this crap because it is so cheap. 

@Seth Lind

A couple quick points about this topic. 

  • the same reason you don't want to deal with it day to day is why a good property manager wouldn't want to deal with a property in a low income area. It is a serious time drain. You can expect to pay a good PM a flat rate to manage a property like this. A PM without experience will offer the 8-10% fee, but what kind of PM will you be getting at that price? Probably not a good one. 
  • Learn the business. Don't just think hiring a property manager is a magic elixir. 
  • Class C- properties are like buying a job.  Some people do well with them but they are very management intensive. You will still have to pay for all of the maintenance calls, repairs, etc. 
  • Talk to anyone who has been doing this for a while and more times than not they will tell you these properties are a complete waste of time. 

Our PM manages our crap holes for a rate of 6%. We think we’re better off self managing though. PM’s may be a buffer, but they may not be as timely dealing with issues and you still have to be concerned with the drama. Finding the right PM is key if you go that route.

We have issues with gang graffiti and break-ins to carport storage units, but crime is not the big concern. Tenants who can’t pay the rent and how fast you can get possession back is the concern. Cash from keys is very effective in this tenant class. Getting insurance is not a concern/issue, resale value is. Our units don’t sit empty long, it is a revolving door of available applicants. Higher maintenance costs because tenants don’t understand what not to flush or when to contact us is a reality. Frequent inspections and partnering with the police help mitigate risks.

It’s a good return for those who know the ropes, but it is tiring and may reduce your faith in humanity.

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i debated it for a while...still do, but i have a guiding principle that drives my business - I will not buy a home i would not be willing to live in myself - mostly because i may have to one day!

The other reason i will not is because i want the equity over the cash flow right now.  I buy properties that give me plenty of rehab room and will appraise at a very good increase after 6 months or a year.  I use this as my leverage to buy the next property and it is a solid strategy for my business.  The minimal cash flow is adding up, and i am well above water in all my investments.  I can afford to sell any of them tomorrow for a profit whether they are rented or not even in perfect shape.

It all depends on your goals, and I'm really focusing not on the monthly income as much as the long term advantages.  

That said, if it makes you money, then do what works for you.

Keep us posted and blessings to you!

If you have a PM that manages C to D areas for 6% then they are working for next to nothing in return.

Cash flow is nice but equity growth through new development and or buying at the right time in various asset class cycles  with value add or stabilized is where the big money gains are at.

If you invest and put 100,000 down for instance on  a multifamily for  a 15 unit for 1,000,000 and say the cash flow is a 9 cap at 90,000. You buy at the bottom of the recovery and now you can sell for a 6 cap.

Cash flow over 2 years before debt service might be around 186,000.

Rents have gone up in the 2 years you have held so current NOI is roughly 96,000.

A 6 cap is now 1,600,000

Take away about 10% for commissions and closing costs total (unless you are the broker owner... : )  ) and you have about 600k - 160,000 = 440,000 equity gain through cap rate compression. This would not include principal pay down or using value add techniques. 

This shows the equity gains can be many multiples over cash flow only type plays in an equal period of time.  

Seth,

I've been in the business for many years and here is my take regarding C properties. I currently own a handful and I do not have any of the problems mentioned above.

Here is my take...

1. The C properties I buy are on decent streets. No vacant houses, drug houses on the block, graffiti, etc... We buy houses where neighbors take care of their house.

2. I get double deposits so the likelihood of the tenant trashing the place is minimal b/c they will not get their deposit back.

3. We do a great job with our rehabs and we are very selective in choosing tenants.

4. We treat all tenants with the utmost respect and professionalism. They know the rules and we do not play regarding to late fees or bs repairs.

5. We have a great lease so everything is crystal clear.

We manage our own rentals. Managing C properties is not for everyone. At the end of the day, everyone wants a nice place to live and pay reasonable rent. We are very selective and we buy right. C properties are cash cows and I would buy them all day.

@Seth Lind Harrisonburg is only about 40,000 people, right? There's a huge difference between a C area in a major metropolitan area (where most investors tend to do their thinking), a C area in a smaller city, and a C area in a rural area. 

If it's your home market, I'd weigh your own opinion of the area over someone who's not from there. Better yet - find a local landlord who is friendly and buy them lunch so you can pick their brain. (Pick an address you know is a multi-family, then look up the owner's address on the county website doing a tax search. Then give them a call or send them a letter.)

But if you're afraid to manage a property there, you're probably looking in the wrong area. Personally, there isn't a single street, neighborhood or area in my home market that I would be afraid to own or manage a property in - they all come with unique challenges. 

Don't do it man, it's always temping to do a deal because you want to do one, but it's better to wait for the right deal to come along than spend the next 10 years digging yourself out of a bad one.

H'town is a lot like Fredericksburg, hot-hot and getting hotter. There are deals there, you just have to keep digging. I've been all over that town looking for that deal that's just right, it's there, you just have to find it.

@Seth Lind   I own more than a handful of C class properties. Just to be clear C class does not necessarily mean war zone! While more work, these properties can be a cash cow.  Total invested $18k (all cash of course) and rents for $700 each month

@Jon Behlke My average turnover is about 24 months. @Kusmayadi Djunaidi my insurance costs are $276 with Foremost. I do agree that it is harder to cash out these properties. I will either have to sell to another investor or offer seller financing. There has not been any appreciation in the 8 years I've owned them (houses worth about $25k). 

I haven't ever had good results with a PM and self-manage everything.  I agree with @Sandra N. it all comes down to management!  

Offer a good product; clean, fresh paint, functional and bulletproof. I do not use carpet. Install FRP behind the stove. 

Be professional; sign leases, offer different payment methods, send statements each month to remind tenants that rent is due. 

Drive by occasionally to check on condition and act quickly to any issues.

Make repairs quickly. Most landlords in these areas do not repair anything.

Respond quickly to late rent. People in financial trouble tell fantastic stories. Just remember that anyone who lives paycheck to paycheck has a hard time catching up once they fall behind.

Treat people fairly and with respect.  People in these areas talk with each other. They will quickly find out if you are a good landlord or not...a pushover or not.  

Once your reputation gets around the quality tenants will find you. My last house rented in January before the last tenant moved out. She was there 2 years.  The only maintenance while she was there included replacing the hot water tank (leak), checking the furnace (gas meter outside froze) and replacing the shower valve cartridge. The house only required cleaning, small repairs and paint touched up before  the new tenant moved in. I will attach a picture used with the online ad. 

While these properties do require more work, I would gladly spend the 2-3 hours per month for that cash flow!

Originally posted by @Seth Lind :

Many of the properties in my home market that appear to be good deals tend to be in an area I would consider "C-".  Far from inner-city but in the rougher area of town.  

My question for the experienced investors, what would be the downside to investing in these areas if I'm using a property manager?  I've heard investors recommend staying away from these types of properties, but if there is a property manager involved to use as a buffer from tenant issues, why not?  I understand my appreciation would be less than other areas, but if the numbers work to make it cash flow, appreciation isn't my focus.  I would be using a management company that does not charge for filling vacancies so turnover isn't a concern.  

The properties I've been keeping my eye on are staying available much longer than similar properties elsewhere so it appears other investors are staying away.  I'm afraid there must be something else I'm missing.

Thanks for your input.

I will go with Joel below on the commercial side of things. In short SFR in class c or lower just not worth the headaches. You need to have a lot of these homes to make up for the losses. I did answer some one similar questions a bit back. So please look up my older comments. I am speaking from selling, and owning these type of assets. Just would not do it again.

Now on the multifamily which is the direction we are geared up for. I don't care what asset class. Actually looking for c or d so I can reposition the asset.

Alex

Originally posted by @Michael Noto :

@Seth Lind

A couple quick points about this topic. 

  • the same reason you don't want to deal with it day to day is why a good property manager wouldn't want to deal with a property in a low income area. It is a serious time drain. You can expect to pay a good PM a flat rate to manage a property like this. A PM without experience will offer the 8-10% fee, but what kind of PM will you be getting at that price? Probably not a good one. 
  • Learn the business. Don't just think hiring a property manager is a magic elixir. 
  • Class C- properties are like buying a job.  Some people do well with them but they are very management intensive. You will still have to pay for all of the maintenance calls, repairs, etc. 
  • Talk to anyone who has been doing this for a while and more times than not they will tell you these properties are a complete waste of time. 

Agree 100 % I sat with a local investor who husband and wife are buying in these areas( which I am 100 % against  but get it ). Yet they are still buying in these lower end in my town. I know the area better then most have been involved in over 100 plus deals in this 8 block area.  From wholesaling, to flipping , to buy and hold rentals. Good learning , and starting point but would never buy their again. To each his own, then again one mans junk is another mans treasure.

Alex

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