Has anyone had good experiences investing in C-Class Neighborhoods?
To put some context around it, these are $60,000 a door multifamily units in Providence, RI, where a B-Class would go for $100,000 and A-Class $150,000. The C-Class unit rents for $900 a month with tenants paying utilities, and for these prices the demand is pretty good so physical occupancy isn't too much of an issue. On paper, this is a good deal. You hit a 1.5% rent rule, and cap rate of 10%+.
BUT, economic occupancy and its related costs are a killer. Most tenants in our C-Class units are either directly or close to living month-to-month which directly impacts their ability to pay. Cash flow stops, legal fees get involved, constable fees and varying degrees of tenant turnover later, on a $900 a month unit, your whole year's margin is gone.
1. Outside of the tenant screening basics like credit score, no evictions, references and 3x salary to rent, do people who own C-Class properties have other things they've learned?
2. Once a tenant becomes late, how quickly do you push to go to court (expense), vs giving them a month to get current?
@Fan Bi All great questions
Yes I have had great luck with Class C properties
1. Job stability of 2 years plus is also a positive. Screening tenants goes a long way to finding long term tenants. I have a very low turnover.
2. Its important to either get a larger deposit than one month or get 1st, last & deposit. It gives you longer to time in the black when a problem develops. Best policy is to file for eviction by mid month when late. When someone contacts me and tells me there is an issue and tells me when they will be depositing rent then I work with them. As long as they keep there word I will be flexible. Once they do no keep their promises, file the eviction ASAP and let them know that if they catch up you will cancel eviction. Sometime this is necessary to train new tenants that you will be fair but firm. They then either straighten up or you cut your losses and get someone that will pay on time every month.
I have one more than one occasion been too lenient and it has usually cost me, It is tough to toss someone out when they fall on hard times especially when you self manage. The more you run it like a business the better off you will be.
Also inspections once or twice a year are a good thing.
I think this varies by area but my C class rental tenant has a 700 plus credit score.
I would keep them on a short leash. If they are late, File to evict. If possible try to keep credit scores above 600
In a class C property, you should be able to get tenants with a credit score of 625+. That should help out immensely.
If you price too high, all you get is poor quality tenants.
Fan, during the application process, I do check credit, background, etc. However, I take those with a grain of salt. I have tenants with previous evictions, bankruptcy, etc. I look at the overall application and I set a few hoops for them to jump through if they want the unit. I don't make it as easy as fill out an application. I make it a selection process.
So, my background is as a firefighter. You can't just walk in off the street, apply, and get the job. They will post an application period. You need to submit your completed application, along with supporting documentation by X date, and then the process progresses from there. I do the same thing with my applications. They need to jump through a few hoops. I need to see that they are willing to put the effort in and will appreciate the building and the service that they get once they have moved in. Ive sold off several properties recently, but I have had ZERO evictions in over a decade owning and operating unit counts in the hundreds. I have NEVER had an outstanding rent payment proceed beyond the 15th of the month unless there was a defined date that a balance would be reconciled for non habitually late tenants. I have NEVER had the need to evict a tenant, and I have NEVER had any unit vacant beyond 30 days unless we were renovating it substantially.
It all comes down to 4 things whether it is a class A neighborhood, class C neighborhood, or even vacation rentals. It is all about screening, efficient service, communication, and prompt enforcement. Those are more valuable skills to develop as opposed to knowing a .2% deflection in job growth this month. At the end of the day, real estate is not the business of real estate, metrics, or statistics though those do play a factor. It is a business of people, and the better you can understand your customers, partners, and tenants, the better you will be. Then, you create molds for different situations as they relate to everyday people, and then you are able to preemptively circumvent issues or very quickly and efficiently mitigate them when they do arise regardless of the neighborhood or property class.
So in addition to the basic tenant screening methods that you mentioned, I also get references for past landlords. Not just their "current" landlord, but the landlords before that. They have no incentive to lie about the tenant's character, payment timeliness, and property upkeep. You'll also want to verify that the name & number of the landlord reference is accurate. Many prospective tenants will give you a friend or family member's name & number claiming that it's their past landlord. To verify this, look up the property address in public records, collect information on owners. How much they paid for the property? Are they the sole owners? Do they have a Mortgage on the property? etc. etc. Then when you call the number, ask your list of questions about the tenant, then ask them if they're the sole owners, how much they paid for the property etc. Most people that will pose as a "past landlord" will not know this information.
As for how quickly I'd file for eviction... In the State of Connecticut, I can only charge a late fee after the 10th of the month. So I charge a $100 late fee on the 11th, then $10 a day every day after that until rent is paid in full. I explain to my tenants during lease signing that I understand that life happens. So when rent is late, I'm not going to call them, text them, email them or come knocking on the door looking for my money. I'll just charge them the late fees (and I never waive late fees) then on the 1st of the following month, I start the eviction process. No questions asked. Connecticut is a very tenant friendly state, so although I want to start the eviction process sooner, I've found that it's best to let them get at least a full month behind before I start the process.
Thank you very much @Dennis M.
There are many C class properties we manage in Bridgeport CT. We mitigate the higher turnover by charging 2 months deposit + 1st month rent up front and ensuring that they pay their own utilities.
As many have said, the move in / out and during inspections are key to ensuring you can deduct for damages.
Do not wait to evict, by the 15th you should have your first notice served if they are late. You can always withdraw if they pay up rent + fees.