Class C/D neighborhoods the most profitable?

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Class C/D neighborhoods the most profitable?

Reese W.
Member since 2019 路 6 posts 路 0 votes

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?

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Marc Winter
Real Estate Broker 路 Northeast PA 路 Member since 2017 路 2k+ posts 路 2k+ votes
6y

@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.

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  • Jill F.
    Investor 路 Akron, OH 路 Member since 2016 路 2k+ posts 路 4k+ votes
    6y

    @Dennis M. @Jim K.

    OMG bahahahaha. Don't ya'll have tenants that want to clean for cash? I

    always have a line of tenants that want to clean. I could not believe

    how many people were willing to clean up the apartment where the guy

    died. Usually I pay tenants to do a first pass and then have one girl

    that does "construction clean" or final spit and shine. I'm super squeamish. lol

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    6y
    Originally posted by @Dennis M.:

    @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鈥檛 worry about stains

    one of my indy vendors did this.. he would put in medium brown carpet to start and then he just died it darker as the tenants ruined it over time .. but even he quit putting carpet in..  like Jim wise says its savage  how these folks treat these units.

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    1Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    6y
    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 ?

    Sounds crass but Dennis is right, very common occurrence. As you can see here we actually got both blood and a used condom in the same location at the same time in one of our lower end properties. This photo is super special as both are super common, but not often common together.

    0Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    6y
    Originally posted by @Jill F.:

    @Dennis M. @Jim K.

    OMG bahahahaha. Don't ya'll have tenants that want to clean for cash? I

    always have a line of tenants that want to clean. I could not believe

    how many people were willing to clean up the apartment where the guy

    died. Usually I pay tenants to do a first pass and then have one girl

    that does "construction clean" or final spit and shine. I'm super squeamish. lol

     Do not hire your tenants who are looking to clean for cash. Typically junkies are not very reliable workers.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    6y
    Originally posted by @James Wise:
    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 ?

    Sounds crass but Dennis is right, very common occurrence. As you can see here we actually got both blood and a used condom in the same location at the same time in one of our lower end properties. This photo is super special as both are super common, but not often common together.

    well at least they are using protection !!!  

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    JLH Capital Partners51 Review
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    2Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    6y
    Originally posted by @Jay Hinrichs:
    Originally posted by @James Wise:
    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 ?

    Sounds crass but Dennis is right, very common occurrence. As you can see here we actually got both blood and a used condom in the same location at the same time in one of our lower end properties. This photo is super special as both are super common, but not often common together.

    well at least they are using protection !!!  

     You'd be surprised how often we find used condoms in the same properties that have used heroin needles lying all around. You'd think folks like that wouldn't care enough to use protection but believe it or not they do.

    0Reply
  • Jim K.
    Handyman 路 Pittsburgh, PA 路 Member since 2018 路 5k+ posts 路 13k+ votes
    6y
    Originally posted by @James Wise:
    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 ?

    Sounds crass but Dennis is right, very common occurrence. As you can see here we actually got both blood and a used condom in the same location at the same time in one of our lower end properties. This photo is super special as both are super common, but not often common together.

    8MM II

    0Reply
  • Brian Ploszay
    Investor 路 Chicago, IL 路 Member since 2009 路 1k+ posts 路 1k+ votes
    6y

    C/D areas are profitable, under certain circumstances.  If you are an experienced and savvy operator of these types of properties, there will be a superior rate of return.  Through their knowledge, they reduce the risk for these very risky properties.

    One of the best characteristic about these properties is that you can purchase distressed assets in these areas easily.  In other words, you want to buy these assets cheap.  Beware of turnkey operators who are charging full price for properties that are really in C/D areas.  

    The majority of the risk for these properties is in the tenant base.  There will be more defaults, damages, evictions and drama.  Successful operators know how to screen tenants for these types of properties.  Everyone will occasionally get burned.  Novice investors often wind up in trouble.

    Few more things:  Avoid the very worst areas.  I'll call them the "F" areas.  And if you're new, growth this business model slowly.  Try one and see how it goes.

    Some have said that these areas don't appreciate.  I think it depends.  Be careful investing in an area that is declining in value.  There are a couple of areas in my metro area that are going down in value as the neighborhood transitions from working class / middle class to poor.  Some C/D areas, however, have stabilized in their value, so that risk is gone.

    For newer investors, I'd recommend they stay in B/A areas, as it is a clearer path to wealth creation in the long run.

    2Reply
  • Brian Ploszay
    Investor 路 Chicago, IL 路 Member since 2009 路 1k+ posts 路 1k+ votes
    6y

    @Dennis M.    I transitioned out of carpeting for rentals.  Not just low end.  It simply does not hold up. 

    1Reply
  • Son D.
    Rental Property Investor 路 boston, MA 路 Member since 2017 路 202 posts 路 222 votes
    6y

    Guys I think Reese is just new to REI and has no actual experience in owning properties to understand. You guys are mean on this thread. Funny...but mean :P

    @Reese W. It seems to me like you want to be a hands off kind of investor who wants to own the property while letting the property manager do all the work. So since C/D properties show greater returns and you have someone to deal with the problems when things go south, why not go with those properties with higher returns? The answer is simple. You only have ANY RETURN with a PAYING tenant. It only takes 1 bad tenant to screw up years of returns. 

    Here are the costs for that 1 bad tenant: Tenant stop paying rent (lost rent). You start to file eviction (Cost for evicting process). You have to get the home ready for next tenant (retouch or rehab). House sits empty (Vacancy + security). Cost to advertise and place a tenant (usually 1/2 to 1 month's rent). Take the sum of all that divided by the monthly cashflow to find out how many months of reserve you need for that turnover. That's assuming you paid cash therefore no mortgage and PM not charging you anything extra to do these things for you.

    A/B renters usually stay a lot longer. As long as they're happy with the way you're treating them, they will stay for years and have no reason to move unless it's a life event such as homeownership, or job change, or moving out of state, etc.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    6y
    Originally posted by @Son D.:

    Guys I think Reese is just new to REI and has no actual experience in owning properties to understand. You guys are mean on this thread. Funny...but mean :P

    @Reese W. It seems to me like you want to be a hands off kind of investor who wants to own the property while letting the property manager do all the work. So since C/D properties show greater returns and you have someone to deal with the problems when things go south, why not go with those properties with higher returns? The answer is simple. You only have ANY RETURN with a PAYING tenant. It only takes 1 bad tenant to screw up years of returns. 

    Here are the costs for that 1 bad tenant: Tenant stop paying rent (lost rent). You start to file eviction (Cost for evicting process). You have to get the home ready for next tenant (retouch or rehab). House sits empty (Vacancy + security). Cost to advertise and place a tenant (usually 1/2 to 1 month's rent). Take the sum of all that divided by the monthly cashflow to find out how many months of reserve you need for that turnover. That's assuming you paid cash therefore no mortgage and PM not charging you anything extra to do these things for you.

    A/B renters usually stay a lot longer. As long as they're happy with the way you're treating them, they will stay for years and have no reason to move unless it's a life event such as homeownership, or job change, or moving out of state, etc.

    Son  ,  this is a great point people by these low end assets and just ASSUME they will collect rent per proforma.. and hey what could go wrong why would a tenant not pay ?

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    0Reply
  • Gordon Starr
    Rental Property Investor 路 Dayton, OH 路 Member since 2015 路 312 posts 路 273 votes
    6y

    The biggest kind of crime you have to worry about is revenge crimes against you or your property. Happens alot when things aren't working out AND eviction is in process AND people are desperate. You need to watch these places somehow to make sure that combination isn't there at the same time.

    0Reply
  • Account Closed
    Rental Property Investor 路 Canton, OH 路 Member since 2017 路 1k+ posts 路 1k+ votes
    6y

    @Reese W.

    You may have more cash flow and returns, probably no appreciation though. As others have stated, C/D class tenants are a different type of breed than A/B tenants...especially if you don't screen right! That said, I haven't yet bought in to the BP naysayers who always say C properties are bad investments (Albeit, maybe I'll be eating crow in a few years for saying that 馃ぃ)

    I've added mostly C properties into my portfolio over the past 18 months that have done pretty well for me. What I've learned "thus far" is that to self manage them effectively, you need systems in place, adequate cash flow, and reserves to keep up with everything (maintenance, vacancies, evictions, etc.). For example, when a tenant has an issue, I text my repair guy and that's it. Or if I have a vacancy, I add a lockbox, text my cleaning gal, have my contractor do a walkthrough, all while having another guy list the property for rent and begin screening people. In other words, doing those things frees up a ton of my time. I have 22 doors (probably 4 B's, 3 D's, and 15 C's) and I probably average less than 5 hours per week on them.

    So just do your due diligence. Try adding 1 or 2 C's and then manage them for a while. If you like them, add more, if you do not like, focus on A and B properties.

    All that said, it's not easy managing properties, but once you have enough in your portfolio, you can start to pivot strategies. For example, my goal is to now start peppering in some more A's and B's into my portfolio. 

    Anyway, best of luck to you!

    2Reply
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