Best Class for Rentals - A, B, C, or D

Best Class for Rentals - A, B, C, or D

New York City, NY · Member since 2013 · 136 posts · 76 votes

I was listening to Brie's podcast this morning and I started thinking about which class, over the long run, is the best for rental income (and headaches) : A, B, C, or D. I don't want to quibble about definitions, so in your response you can just explain what you mean by the class that you prefer to invest in., and what class you would consider that in your area.

I currently own B-/C+ properties, which are largely blue collar rural neighborhoods, the buildings are about 40 years old, are duplexes, suitable size, but certainly not where I would live given the choice. One of the things I am noticing is that repairs are generally required each month, at least for the first 3 months. Though I don't expect it to persist, I suspect that they will certainly exceed that of a Class A fresh rehab or new construction. It would seem to me that the caliber of renter is slightly lower than what I'd like or what Brie is seeing in Chicago, but the numbers, at least on paper are very good, approximately 30% CoC in KCMO, depending on variables. Also, I am certain there is an eviction somewhere on the horizon if I keep up with the class, not sure when.

I know that real estate is local, and that this is going to vary greatly from market to market, but I'd like to hear your opinions.

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Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
12y

B-C. 

D is a hassle

A is to expensive

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  • Real Estate Investor · CA · Member since 2011 · 47 posts · 14 votes
    12y

    @DavidChung

    I think the data shows mostly the relationship between easy credit and house prices. Palo Alto is the least dependent on easy credit for buyers.  Many buyers in PA are cash, and those that arent are probably high income invdividuals with good credit history.  On the opposite, Oakland was pumped up on easy credit, no doc loans, etc. When that tightened owner occupant purchases just died.  While the Oakland Hills are nice, few people with good credit and high income wish to live in the remaining parts of Oakland.  San Jose is in the middle of the two.  West San Jose with Cupertino schools behaves more like PA.  East San Jose moves more like Oakland.  Data by zip would make it more apparent.

    Of course jobs and buyer sentiment are part of also.  But the 2004-2008 bubble in low end housign was caused at its core by easy credit.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @William P. 

      Got to luv Cupertino ... I grew up there.. My grandfather from Milwaukee Wis.. used to always make fun of the name... When I was a kid Hey 9 and Stevens Creek were still gravel roads.. Now is all Apple...

    There is no turning back for the peninsula its like any prime area of Europe or any other highly sought after location in the world.. Those that can buy there are blessed with one great investment that will weather the test of time.. And even in an Earth quake it will bounce back. I lived through loma Preita and it put a 24 month damper on things but did not destroy the region like some pundits on BP think will happen.

  • Real Estate Investor · CA · Member since 2011 · 47 posts · 14 votes
    12y

    @Jay Hinrichs -  I hope you are right about a Earthquake.  Loma Prieta didnt really do that much damage on the peninsula.  

    I live about 1 mile from the San Andreas Fault.   Amazing that I can buy earthquake insurance at all.  I wonder if the people who complain about how much earthquake insurance costs / how high the deductibles are ever stop to think why that is.  Its because there's a decent chance it will have to pay out a very large claim.

    But until then, I'll just enjoy.  Great weather.  Incredible economic opportunity.  Lot of very smart people here.  Of course, when I see how much more house I could have in other nice areas, I do get a little jealous.  We are in 2200 square feet here, which isnt punishingly small, but I would like a bonus room that I dont have.

    I have colleague who live in 2x the house at 1/2 the price in nice suburbs in research triangle NC.  Its bit painful to see their houses.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @William P. 

      But its humid there  in NC  one thing I am not sure people understand is PA has the very best weather In the entire WORLD... I had many neighbors when I lived at Silverado that were Airline pilots that flew all over the world and the BA was the place for them. even with CA taxs and all the other issues. 

  • Investor · Fort Lauderdale, FL · Member since 2012 · 1k+ posts · 465 votes
    12y

    I have always wanted to buy class A properties in class A neighborhoods at class D prices, rent to class A tenants at class A rent rates.  So far no such luck, but I keep my eyes open.

  • Rental Property Investor · Lockport, NY · Member since 2014 · 119 posts · 109 votes
    12y

    Once you get past say 30 year old properties condition of the property has less to do with the age and more to do with the previous owner. I have a 150 yr old mansion that was converted to 15 units in 1937. It is a beautiful building that was owned by the mayor of my town 150 yrs ago. It doesn't require any more maintenance than my other properties.

    So I tend to agree with those that say the neighborhood is where the A-D rating should be used.

  • Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes
    12y

    @Mark Del Grosso I personally have found that the condition of the building can easily fit into one of 4 categories, but the neighborhood is a much grayer area... so I used A/B/C/D to rate the building's condition, design, and features. I use 1-10 to describe the neighborhood as I mentioned earlier ITT. The 1 - 10 comes from some factual research (ie crime stats, school quality, transportation, etc) but it is also largely, heavily influenced by how I feel when I walk or drive through the area at daytime and in the evening.

    When I am really conflicted about a particular rating I sometimes add a + or - modifier to the letter, or use a decimal for the number. So on rare occasions I have noted a property as like a B+7.5.

  • Rental Property Investor · Lockport, NY · Member since 2014 · 119 posts · 109 votes
    12y

    @Corey Demuth It sounds like a good system to me.

    Rock on!

  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @William P.:

    @DavidChung

    I think the data shows mostly the relationship between easy credit and house prices. Palo Alto is the least dependent on easy credit for buyers.  Many buyers in PA are cash, and those that arent are probably high income invdividuals with good credit history.  On the opposite, Oakland was pumped up on easy credit, no doc loans, etc. When that tightened owner occupant purchases just died.  While the Oakland Hills are nice, few people with good credit and high income wish to live in the remaining parts of Oakland.  San Jose is in the middle of the two.  West San Jose with Cupertino schools behaves more like PA.  East San Jose moves more like Oakland.  Data by zip would make it more apparent.

    Of course jobs and buyer sentiment are part of also.  But the 2004-2008 bubble in low end housign was caused at its core by easy credit.

    Here here William P! You are spot on. Loose financing has SO Much to do with the prices in these areas. When it's loose, they sky-rocket, and the difference in prices between these and the prime properties decreases. When things get really bad an no one can qualify, the bottoms fall out of a lot of these markets. That's why I like to buy them still when there is lots of room to move. And with good cash flow margin on 30yr fixed rates, I'm not as concerned with the price, as just collecting my cash, and they'll be paid off, and paying my retirement later..

    I would add Lake Merritt to your "Oakland Hills" where people with good credit and high income wish to live, along with Grand Lake, Piedmont, and for some now... West Oakland (but W Oakland is much more rare to find these types still..)

    However, the "rental quality" stuff I'm seeing in East Oakland and other parts are mostly justified by ROI, w/ some overage for ability to live, rising rents, people wanting RE exposure locally, etc.. I think most my properties are still 50-70% of peak value, but rents are 20%+ higher than they were back in 2005..

    My basis on appreciation for the lower-quality stuff mostly has to do with rent increases and spillover from other areas, in addition to just general inflation around 2%...

    Areas like Lake Merritt, Grand Lake, Hills, should be desirable for a long time.. I think West Oakland is going to blow all those out of the water talking about % increases over a long time, but that's purely speculative on my part..

  • Birmingham, AL · Member since 2012 · 108 posts · 10 votes
    11y

    Class c and d all day for me. It's not investing but a job. And is special niche which means less competition

  • Investor · Duluth, GA · Member since 2015 · 36 posts · 21 votes
    11y

    When I started buying and holding for myself and clients.. It was all about low cost of entry and high return. Did we make the returns that we thought we would? NO.. But neither did the guy that bought a so call A- or B+ house but I paid half the price he did all in for mine. It's all about the numbers. 

  • Pompton Lakes, NJ · Member since 2015 · 13 posts · 0 votes
    11y

    It all depends how you screen your tenant and how open minded are you. Remember "There is always money where there is problems."

  • Real Estate Investor · San Antonio, TX · Member since 2014 · 785 posts · 190 votes
    11y

    I love my C properties in my city but I would never do rentals again. No landlording for this guy :)

  • Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    11y

    I don't know about you guys, but I have some great moneymakers in bad neighborhoods. Tenants are great, pay on time and I've had very few problems.

    The one thing that I've seen that works well is to actually visit the neighbors, talk to them, and get a understanding of the local area. You can be in a bad neighborhood but be among decent neighbors who can help you boost your bottom line.

    Last year I had a 3.8% vacancy rate, and the vacancies weren't on my C-D rentals, they were on my Bs. 

  • Jersey City, NJ · Member since 2015 · 280 posts · 98 votes
    11y
    Originally posted by @Brandon Schlichter:

    I don't know about you guys, but I have some great moneymakers in bad neighborhoods. Tenants are great, pay on time and I've had very few problems.

    The one thing that I've seen that works well is to actually visit the neighbors, talk to them, and get a understanding of the local area. You can be in a bad neighborhood but be among decent neighbors who can help you boost your bottom line.

    Last year I had a 3.8% vacancy rate, and the vacancies weren't on my C-D rentals, they were on my Bs. 

     Yeah, Agree with you Brandon.  Sometimes especially in the lower class neighborhoods, once you get a good tenant, they will pretty much stay there forever.  Class A/B are more tenants-by-choice, so they have more freedom to move.

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