Class C/D neighborhoods the most profitable?

39 Replies

In doing my research it seems that multifamily class C/D tends to have the best cap rate and cash on cash returns any way you look at it. From an investment standpoint it seems like a no brainer.  However a lot of the people I talk to say "ew I would never touch anything in that part of town" (including agents).  I'm not living there myself...and I have a property manager to handle evictions...so why not?  What's the down side, if my returns are better than the class A/B neighborhoods?

@Reese W. , it's not quite 'great any way you look at it' for cash flow.  The cap rate and c/o/c look great on paper.  But from years of experience, I can tell you that when you factor in repairs, lost rent, evictions and generally higher crime activity in 'D' areas, you'll end up with the same or lower c/o/c as a B neighborhood.

There are good and not-so-good people in all socio-economic classes; but when it comes to renting low c to d properties, you might want to re-think the 'no brainer' aspect of your calculations.

Good luck.

@Reese W. I think it depends on your objectives and the timeline; how you measure 'profit'. Having a great PM helps but if they are hit with extra work you will be hit with extra charges. Nothing is free. You have to measure the whole thing. Ya I have made money on yearly cash flow but I have made a ton more on appreciation-a ton. C and D don't appreciate but they can cash flow. All the best!

I personally would never rent that low.  I spend too much time on these forums reading all of the nightmares people have to deal with.  If you have a high threshold for pain and aggravation it may be worth it.  Yes you can handle a PM and that might insulate you a little.  Good luck!

Originally posted by @Marc Winter :

@Reese W., it's not quite 'great any way you look at it' for cash flow.  The cap rate and c/o/c look great on paper.  But from years of experience, I can tell you that when you factor in repairs, lost rent, evictions and generally higher crime activity in 'D' areas, you'll end up with the same or lower c/o/c as a B neighborhood.

There are good and not-so-good people in all socio-economic classes; but when it comes to renting low c to d properties, you might want to re-think the 'no brainer' aspect of your calculations.

Good luck.

Aren't vacancies, repairs, and cost of evictions all factored into cap rate though?  I'm examining the I&E and everything's in there.  So if a class D property is 9% cap after PM fees, lost rents, etc, it's still way better cash flow than my 4% cap single family class A? I just need to factor in extra headache.

I should also add that the property I'm considering currently has all HUD-VASH tenants (VA housing assistance pays the landlord directly)

Originally posted by @Reese W. :

In doing my research it seems that multifamily class C/D tends to have the best cap rate and cash on cash returns any way you look at it. From an investment standpoint it seems like a no brainer.  However a lot of the people I talk to say "ew I would never touch anything in that part of town" (including agents).  I'm not living there myself...and I have a property manager to handle evictions...so why not?  What's the down side, if my returns are better than the class A/B neighborhoods?

Yeah, Reese, go for it. You've done your research, after all. What could possibly go wrong?

 

@Reese W.

It sounds like you don't have a full understanding of cap rates, they are a measure of risk, not of return.

All they tell you is how much people are willing to pay for a property's cash flows. The lower the cap rate the more money someone is willing to pay for that particular cash flow.

It stands to reason that if people in the market aren't willing to pay a lot of money for C and D class asset's cash flows either 1) they are all morons or 2) that those assets have more risk.

Also, the vacancy, repairs, ect are all based off of historical data. Just like you don't drive a car looking through  the rear view mirror, investing only off past data can be dangerous to your wallet. 

Originally posted by @Bill F. :

@Reese W.

It sounds like you don't have a full understanding of cap rates, they are a measure of risk, not of return.

All they tell you is how much people are willing to pay for a property's cash flows. The lower the cap rate the more money someone is willing to pay for that particular cash flow.

It stands to reason that if people in the market aren't willing to pay a lot of money for C and D class asset's cash flows either 1) they are all morons or 2) that those assets have more risk.

Also, the vacancy, repairs, ect are all based off of historical data. Just like you don't drive a car looking through  the rear view mirror, investing only off past data can be dangerous to your wallet.

rental real estate as much if not more than other investments prices it self for risk/reward.. everything being equal.

those that i have seen that were not pro's at running D class in many instances lost substantial amounts of money thinking these things would work as proforma's indicated. 

 

There is no such thing as best or worst, good or bad with cap rates. Cap rates are a reflection of the risk in the asset and market. Cap rates on c/d are higher because the risks are higher. 

Why are we all misleading @Reese W. ? He did his research, lined up the numbers right in his spreadsheet, from his other post he already has at least one low-income rental and tenants. The jig is up, people. We can't keep the whole pie for ourselves, as hard as we try. This determined person knows where the big money is and won't be talked out of going straight at it.

Kudos, Reese. You've seen our flimflam game and outsmarted us at it. The ghetto is your oyster.

Originally posted by @Jay Hinrichs :
Originally posted by @Bill F.:

@Reese W.

It sounds like you don't have a full understanding of cap rates, they are a measure of risk, not of return.

All they tell you is how much people are willing to pay for a property's cash flows. The lower the cap rate the more money someone is willing to pay for that particular cash flow.

It stands to reason that if people in the market aren't willing to pay a lot of money for C and D class asset's cash flows either 1) they are all morons or 2) that those assets have more risk.

Also, the vacancy, repairs, ect are all based off of historical data. Just like you don't drive a car looking through  the rear view mirror, investing only off past data can be dangerous to your wallet.

rental real estate as much if not more than other investments prices it self for risk/reward.. everything being equal.

those that i have seen that were not pro's at running D class in many instances lost substantial amounts of money thinking these things would work as proforma's indicated. 

 

Yes Sir, the market is mostly efficient, which is amazing in and of its own right. 

What isn't talked about enough is people's circle of competency. Just because @Jim K. does well in the Pittsburgh market in the C Class arena and I read all his posts, doesn't mean if I hop on that train I'll get the same results. 

There is something about spreadsheets causes all critical thinking skills some people posses to vanish and be replaced with a blind belief in whatever number or percent they heard someone other successful person use without any attempt to understand the logic that drives those assumptions. 

 

Originally posted by @Bill F. :
Originally posted by @Jay Hinrichs:
Originally posted by @Bill F.:

@Reese W.

It sounds like you don't have a full understanding of cap rates, they are a measure of risk, not of return.

All they tell you is how much people are willing to pay for a property's cash flows. The lower the cap rate the more money someone is willing to pay for that particular cash flow.

It stands to reason that if people in the market aren't willing to pay a lot of money for C and D class asset's cash flows either 1) they are all morons or 2) that those assets have more risk.

Also, the vacancy, repairs, ect are all based off of historical data. Just like you don't drive a car looking through  the rear view mirror, investing only off past data can be dangerous to your wallet.

rental real estate as much if not more than other investments prices it self for risk/reward.. everything being equal.

those that i have seen that were not pro's at running D class in many instances lost substantial amounts of money thinking these things would work as proforma's indicated. 

 

Yes Sir, the market is mostly efficient, which is amazing in and of its own right. 

What isn't talked about enough is people's circle of competency. Just because @Jim K. does well in the Pittsburgh market in the C Class arena and I read all his posts, doesn't mean if I hop on that train I'll get the same results. 

There is something about spreadsheets causes all critical thinking skills some people posses to vanish and be replaced with a blind belief in whatever number or percent they heard someone other successful person use without any attempt to understand the logic that drives those assumptions. 

 

agreed.. its a niche that to do right is dominated by local hands on landlords.. 

 

@Reese W.

Don't listen to these people, Reese. You just gotta drive through this sort of smoke and mirrors. Have more faith in your property manager than a priest in Christ and you'll never go wrong. Let your spreadsheet be your treasure map. By the way, have you listened to some of the Morris Invest podcasts and videos? What an inspiration, nothing like these keyboard cowboys!

Choose a Strenuous Life

And if you have time, BEST READ EVER!!!

Originally posted by @Jim K. :

@Reese W.

Don't listen to these people, Reese. You just gotta drive through this sort of smoke and mirrors. Have more faith in your property manager than a priest in Christ and you'll never go wrong. Let your spreadsheet be your treasure map. By the way, have you listened to some of the Morris Invest podcasts and videos? What an inspiration, nothing like these keyboard cowboys!

Choose a Strenuous Life

And if you have time, BEST READ EVER!!!

 Touche'  now I know were keyboard cowboy came from  as he sits in Portugal.. I was waiting for him to say and my dream of living abroad like I am now .. !!

Originally posted by @Jay Hinrichs :


Touche'  now I know were keyboard cowboy came from  as he sits in Portugal.. I was waiting for him to say and my dream of living abroad like I am now .. !!

His wife calls us "dog-pilers" in her blog, Jay.

Originally posted by @Jim K. :
Originally posted by @Jay Hinrichs:

Touche'  now I know were keyboard cowboy came from  as he sits in Portugal.. I was waiting for him to say and my dream of living abroad like I am now .. !!

His wife calls us "dog-pilers" in her blog, Jay.

that morris story is a sad story.. he could have been the Grant Cordone of the resale of low end rentals if he had just watched even a little bit what was going and the product they put out..  sad case for all involved.

 

The reason the OP would ask such a question is pretty obvious and highlights one of the main flaws on the BP forums. Not enough people want to admit the extent that market conditions have on your ROI as a REI, especially a new one. I know it's a big "rich dad" thing to want to assume an internal locus of control and not "blame" the market, but market realities don't go away just because you choose not to acknowledge them.

He probably found his way here via Brandon Turner, like I did, and he's learned enough about financial analysis where he can see how those simple SFR strategies touted by Turner aren't going to yield jack squat in quality areas in todays markets. So he's stretching for yield. I see the same crap with local (Detroit Metro Area) REI investors insisting that SFR in crap areas using high leverage are the holy grail. At this point, if you want to continue grinding out return in 2019 you are best served by having experience/knowledge in more advanced strategies (remodels or developments, for example)- basic BRRRR is well outlined, but who is honestly going to hand over their more advanced, working recipes, for free, on public forums in a competitive market in a competitive world? I would welcome that kind of generosity, but don't expect it.

So we are back to people feeling the urge to stretch for yield. It's not just going on in Real Estate, it's been going on in the financial markets for a good while too. One of Pimco's latest blogs is encouraging investors to take be more open to junk bonds as a way to get back to investment grade yields in todays low yielding markets. 

@Reese W. my recommendation, unless you are a gambler, don't buy junk. Not in bonds and not in real estate. 

Originally posted by @Dennis M. :

Reese have you ever picked up a used condom out of your front yard full of seaman ? Or cleaned feces and blood off of walls ?

TSP and a siding brush, Dennis. Smears a bit at first but it gets it off the walls eventually.

@Reese W. Don't worry man. The Tyvek coveralls don't ride up in the crotch too much. And they make organic vapor cartridges for respirators, you won't smell a thing! Besides, what am I talking about? Your property manager's going to be in like Flynn to wipe sh**stains off YOUR walls.

 

Originally posted by @Dennis M. :

Reese have you ever picked up a used condom out of your front yard full of seaman ? Or cleaned feces and blood off of walls ? 

Jeez you guys  !!!  you crack me up..  

 

Originally posted by @Jay Hinrichs :
Originally posted by @Dennis M.:

Reese have you ever picked up a used condom out of your front yard full of seaman ? Or cleaned feces and blood off of walls ? 

Jeez you guys  !!!  you crack me up..  

 

You either gotta laugh cleaning the built-up, caked period blood clots off the bottom of the toilet seat or you go bonkers.

 

The big hitch in c/d is the high maintenance and potentially high turnover. You need a way in C/D to tackle those. If you do it yourself and earn the respect of the neighborhood, it boosts your standing. Do it right and your returns are beyond what ANYONE could get in B class. I use a my-house-beats-anyone-on-the-block approach, and a long term 3-yr lease with a verbal rent to own agreement. If tenants want to buy the place, they will take better care of it. I also visit past due tenants and hang around quite awhile to work out past due agreements. Its a little scary for everyone concerned at that point. So, if you want to be hands off or just a big puss, don't even try. Its surprising how little lawyers or property managers can do for you when things go south. YOU have to right the ship sometimes or its gonna sink!

Originally posted by @Jim K. :
Originally posted by @Jay Hinrichs:
Originally posted by @Dennis M.:

Reese have you ever picked up a used condom out of your front yard full of seaman ? Or cleaned feces and blood off of walls ? 

Jeez you guys  !!!  you crack me up..  

 

You either gotta laugh cleaning the built-up, caked period blood clots off the bottom of the toilet seat or you go bonkers.

 

In our world we buy hoarder houses ..  so I understand many of them you simply cant understand how anyone is alive and well living in those conditions. I just bull doze them .. they are worse than what most tenants can do simply because they are owners and no one is on their butt to clean anything.   most of the lower end rentals that I see at turn over its just a lack of caring.. I mean how can anyone ruin a carpet in one year.. I mean you have to really try.  

 

@Jay Hinrichs

This why I buy only dark brown office carpeting for .68 cents a sq ft . Old Fido can crap on it year round and after you kick the tenant out you can just sprinkle some carpet fresh on it , vacuum it up , and post a for rent sign in the yard . If it looks like crap already then you needn’t worry about stains

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