Landlording in Class C Neighborhoods

26 Replies

I am starting to invest in Class C neighborhoods for the first time. (Previously stayed in Class B and above)

What are some recommendations for screening tenants and rent collection?

(Bigger deposit? Background Checks?) 

Open to suggestions!

Originally posted by @Garrett Hawk :

I am starting to invest in Class C neighborhoods for the first time. (Previously stayed in Class B and above)

What are some recommendations for screening tenants and rent collection?

(Bigger deposit? Background Checks?) 

Open to suggestions!

 Definitely do background checks. You should be doing those in your B Class properties as well. Credit, Criminal & Eviction search. Your tenant base will be lower quality but you should still disqualify those with less an income less than 3x rent, violent felonies or previous evictions.

Also a good idea to check into this thread TENANTS FROM HELL #1 Deplorable living conditions. PICS INCLUDED! This is not exactly the norm as most tenants do not do this but you will run into this type of stuff on a regular basis. It's not unheard of when it comes to C class & lower.

Get used to denying applications. Most all of my rentals are in class C areas. For every great application, I deny 10 bad ones.

Applicants will tell you they dont have any evictions, run their credit and they have 5.

Applicants will try and "negotiate" the rental rate with you. 

For some reason when C class tenants move out they leave way more stuff that needs to be cleaned out then B/A tenants. 

I know some LLs do an in-home inspection of their applicant's current residence, knowing that their rental will look and smell like their current residence in 4 months time.  Some LLs come up with an excuse to stop by to have a form signed or something, just to get a peek at the yard and inside the house as they stand on the front steps.  Some LLs are very up front and just tell applicants that there will be a quick inspection.  Things do not have to be white glove clean, but you should feel comfortable eating a sandwich prepared in their kitchen.  This is also a way to find out if they lied about being non-smokers, forgot to tell you about their 10 kids, or their pit bulls.

If you plan on doing Section 8, you should check out the responsiveness/ reputation of the Housing Authority.  I have heard that some are horrible to work with, others are OK.

@James Wise and @Keith Jourdan - what criteria do you use to define whether a house is located in a B or C neighborhood?  What would be a defining factor that would definitely put an area in a C for example.  I am looking at getting into the lower graded neighborhoods and interested to see what your perspective is. 

Originally posted by @Spenser Harding :

@James Wise and @Keith Jourdan - what criteria do you use to define whether a house is located in a B or C neighborhood?  What would be a defining factor that would definitely put an area in a C for example.  I am looking at getting into the lower graded neighborhoods and interested to see what your perspective is. 

Class A. The neighborhood you take your significant other to dinner for your anniversary that costs $200+ for 2. Awesome schools. Hardly any rentals at all.

Class B. Area with desirable school district, 90% owner occupied, mid tier restaurants are in these areas, Apple bees, Fridays etc. A place most people would be proud to live.

Class C. Working class area with not so great schools, pretty safe, 50-70% owner occupied. No vacant/ burned out homes.

As @Keith Jourdan said,....get used to saying no.  It usually takes me 15-30 days of saying no, before I say yes.  Also, learn to ask key questions over the phone, and let them do most of the talking.  

One question I always ask is simply "why are you looking to move".  I've saved a ton of time from showing the apartment to unqualified tenants with this one.  The last answer I got was " Because my landlord is accusing me of dealing drugs and letting my dog pee all over the carpet. "........That's pretty much all I needed to know haha.

Good luck!

solid work history , adequate income, no evictions

@Spenser Harding it’s worth noting that class areas will vary by where you are. C class in Detroit is different than Cleveland is different than L.A.

I only have one C class rental but I would say you can expect the tenants to be different than other classes. My C class tenants always mail their rent, not always on time mind you (but they always pay) and they don’t have voicemail or email. The only way to get a hold of them really is text.

@Keith Jourdan This is a fantastic method of categorizing neighborhoods. Never heard of this philosophy. Very interesting.

Originally posted by @Ian Kurela :

@Keith Jourdan This is a fantastic method of categorizing neighborhoods. Never heard of this philosophy. Very interesting.

Let the big retail/restaurant corporations classify the neighborhoods for you. They spend millions a year on research.

@Garrett Hawk ,

Check your state laws, but if you can offer rent at a discount if paid by the first, it's been WONDERFUL for us!  90% of our tenants pay by the first, so it's so much less stress, and those that pay later, it's their choice to pay more!   We offer $25-$75 off/mo,  completely dependent on the size/desirability of the house.   We do everything through cozy.co, for screening and rent collection. 

You 100% absolutely must put on your detective had, listen to their story, check their story, and make sure it makes sense.    "Why are you moving?" is my favorite question, and will tell you quickly if it's issues with their landlord (likely evicting!) , or if they say they don't fix anything-- it hints to you that it's an eviction.    They want to move ASAP-- likely because they were/are evicted.. or if they are in motels, that's a straight up eviction.      A huge red flag goes up if they say "I have the cash now" -- -that means they don't want you to check them because they know they have bad stuff on their record and you won't accept them.  

Check your local district court website, and see if you can do a quick scan on the person based on name, it's free and quickly tells me if I want to even show the place to someone.  

Screen class C as you would any applicants. Some believe they must accept lower credit scores than in Class B however this is not necessarily the case. There are responsible working class tenants in class C areas. To get the best tenants you would be wise to avoid S8 as they usually carry with them a attitude of entitlement that working class does not.

Make it a requirement to inspect their present home. This will give you a clear picture of their living habbits as well as their pets.

Originally posted by @Spenser Harding :

@James Wise and @Keith Jourdan - what criteria do you use to define whether a house is located in a B or C neighborhood?  What would be a defining factor that would definitely put an area in a C for example.  I am looking at getting into the lower graded neighborhoods and interested to see what your perspective is. 

 Great question. For perspective check out The Ultimate Guide to Grading Cleveland Neighborhoods.

C class properties have made the most cash flow money for me and my clients.  People should not be afraid of these. I get so many people looking for A and B neighborhoods in SoCal until they realize that there is no cash flow in areas where over 95% of the homes are overpriced and owner-occupied.  Owner-occupants will pay way more for their dream home in the A class area in their city than they would for a C class rental property, and this over-inflation in nicer mostly owner-occupied areas causes these areas to be way too expensive.

As far as screening, this is where property management pays for itself and FAR MORE.  I have a busy day job.  I'm not going to do an extensive prior rental history check, background check, and credit check for 30 applicants.  I'll gladly pay the minuscule $100 or so my management company charges (seriously, that's like $10 an hour, that's NOTHING!) as a "tenant screening fee" to screen for and find the single best tenant in the stack of applications.  Meanwhile, I sit back and collect checks every month.  The key is to have a good management company to do the three major things I said: check their prior rental history by contacting their prior landlords, and do the standard background criminal check and credit checks that most management companies do.  Not all of them go as far as to call ALL prior landlords, the one I do does.

I have found my c class single family homes have had better performing tenants than my c class apartment building.  The sfr rentals with good fico say 680 and higher have paid on time always. Sfr with solid income yet 580 fico have been late a couple times a year. But only a week or so and pay the late fee. They also lived in prior house for 12 yrs prior to new owner buying and wanting to move in.  Apartment building slower paying tenants more often.

Wow, there is so much great information here. Thanks for all the contributions! The definition of what each class of neighborhood is something I realized but couldn't put to words!

@Garrett Hawk Honestly, I don't think your screening process should vary based on the neighbourhood class.

Remember, the screening process should work for any class and replicable in any market. 

Hope this helps, Garrett. Goodluck. Thanks! - Ola

Originally posted by @Ola Dantis :

@Garrett Hawk Honestly, I don't think your screening process should vary based on the neighbourhood class.

Remember, the screening process should work for any class and replicable in any market. 

Hope this helps, Garrett. Goodluck. Thanks! - Ola

 That's just not practical. To expect the people who will live in a neighborhood with $40,000 houses to have the same background as those who want to live in a neighborhood of $180,000 houses would never work in practice. Neighborhoods are going to be the biggest determining factor in the type of tenant you get. Anyone telling you otherwise doesn't have enough experience in the business to offer up real world advice on the topic.

Originally posted by @James Wise :
Originally posted by @Ola Dantis:

@Garrett Hawk Honestly, I don't think your screening process should vary based on the neighbourhood class.

Remember, the screening process should work for any class and replicable in any market. 

Hope this helps, Garrett. Goodluck. Thanks! - Ola

 That's just not practical. To expect the people who will live in a neighborhood with $40,000 houses to have the same background as those who want to live in a neighborhood of $180,000 houses would never work in practice. Neighborhoods are going to be the biggest determining factor in the type of tenant you get. Anyone telling you otherwise doesn't have enough experience in the business to offer up real world advice on the topic.

Jim  no kidding... I think that is the biggest thing I see most on BP starting their landlording journey have the hardest time understanding... they just don't understand how 40k houses the tenant base erodes exponentially as you go down in asset value.. although to us who work it every day its like landlording 101.. I think the investors starting out many times live where they live they simply have no clue.. unless of course they were born and raised in a certain market then they pretty much know.

but if your born and raised in Cupertino for instance you have no clue as to how people live their lives in 40k neighborhoods of pretty much any larger MSA in East of the Ole Mississip.. Now I am talking larger MSAs here not some little 30k population mid west town.. were median price range maybe under 100k.  

I rent to people with 500-599 Credit often in class C.

It is more about why their score is low. If they have unpaid medical/student loan bills it will lower their score, and I dont mind.

If they owe the cable/electric/credit card company and this is why their score is low is a big NO for me.

My main thing is no prior evictions or vehicle repossessions. No judgements. Then if they pass those criteria, look at what past due balances they have on their report and from where.

The idea that your going to get a 700+ credit score tenant for a $50k house is rare and not very likely. Of course their are outliers and I have rented to a handful.

Property class varies widely by market and C class in one market can be a lot different than in another.  The biggest BS I regularly see on BP is from members who don't own C class and talk about how hands on and unprofitable it is.  Is that the case in many markets?  Sure.  Is that the case all markets?  Absolutely not.

There are so many BP members who make excellent returns with low touch C class rentals. I invest in both high and low GRM properties and both can be profitable. My-way-or-the-highway members are only discussing their limitations, not yours.

Hi @Garrett Hawk - I have a very easy recommendation for you. Don't do it! Stick to the 'B' neighborhoods and better.

Simple analogy- which stock will you make more money on- the one yielding 10% or the one yielding 5%? Historically- the one making 5% does better(considering payouts and appreciation of the stock price.) The 10% yield is really a signal of no confidence by the stock market in the stock- but there are those who don't listen to the wisdom of the masses and go ahead with the 10% yield anyway, which of course sometimes does work, but we're talking averages here.

I believe 'B' vs. 'C' neighborhoods are similar- the 'C' neighborhood has a higher theoretical yield, which is really a vote of no confidence from the masses. I've always been a yield hunter, but I've noticed through the years that my acquisitions with lower initial cash flow(yield) have performed better over the long run. Lower vacancies, tenants who are easier on the property, lower legal costs/fewer evictions, and of course they require less management, which frees up management and capital for upkeep and future acquisitions. Really, the A/B stuff requires so much less time, and as your career progresses, you'll value your time more and more. 

It's funny- if you look at my portfolio, 10-20% of the units require 80% of my time...it's like the market is screaming in my face...wait, I hear it, what's it saying? Ah yes- it's saying, "STOP BUYING 'C' CLASS PROPERTIES, YOU DAFT HALFWIT!" One day maybe I'll listen.

My two cents, hopefully it's worth at least twice that.

Michael

Originally posted by @Jay Hinrichs :
Originally posted by @James Wise:
Originally posted by @Ola Dantis:

@Garrett Hawk Honestly, I don't think your screening process should vary based on the neighbourhood class.

Remember, the screening process should work for any class and replicable in any market. 

Hope this helps, Garrett. Goodluck. Thanks! - Ola

 That's just not practical. To expect the people who will live in a neighborhood with $40,000 houses to have the same background as those who want to live in a neighborhood of $180,000 houses would never work in practice. Neighborhoods are going to be the biggest determining factor in the type of tenant you get. Anyone telling you otherwise doesn't have enough experience in the business to offer up real world advice on the topic.

Jim  no kidding... I think that is the biggest thing I see most on BP starting their landlording journey have the hardest time understanding... they just don't understand how 40k houses the tenant base erodes exponentially as you go down in asset value.. although to us who work it every day its like landlording 101.. I think the investors starting out many times live where they live they simply have no clue.. unless of course they were born and raised in a certain market then they pretty much know.

but if your born and raised in Cupertino for instance you have no clue as to how people live their lives in 40k neighborhoods of pretty much any larger MSA in East of the Ole Mississip.. Now I am talking larger MSAs here not some little 30k population mid west town.. were median price range maybe under 100k.  

 Case in point property management is straight savage. Anyone disputing that fact hasn't been in the game long enough. Anyone & I mean Anyone with enough experience will agree that it's savage. 

When prospective sellers walk into my office & see the girls collecting rents through a bullet proof window they are already ready to sign that listing agreement before I even sit down at the table with them. They know that I know the game & they are in the right place. This business is just so foreign to so many.

Originally posted by @Max Gradowitz :

C class properties have made the most cash flow money for me and my clients.  People should not be afraid of these. I get so many people looking for A and B neighborhoods in SoCal until they realize that there is no cash flow in areas where over 95% of the homes are overpriced and owner-occupied.  Owner-occupants will pay way more for their dream home in the A class area in their city than they would for a C class rental property, and this over-inflation in nicer mostly owner-occupied areas causes these areas to be way too expensive.

As far as screening, this is where property management pays for itself and FAR MORE.  I have a busy day job.  I'm not going to do an extensive prior rental history check, background check, and credit check for 30 applicants.  I'll gladly pay the minuscule $100 or so my management company charges (seriously, that's like $10 an hour, that's NOTHING!) as a "tenant screening fee" to screen for and find the single best tenant in the stack of applications.  Meanwhile, I sit back and collect checks every month.  The key is to have a good management company to do the three major things I said: check their prior rental history by contacting their prior landlords, and do the standard background criminal check and credit checks that most management companies do.  Not all of them go as far as to call ALL prior landlords, the one I do does.

 $100 is the lowest I have ever heard of a mangament comoany charging to find a tenant. 

How much is their monthly fee after that?

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