I dont understand how you make the numbers work on Class A RE?

37 Replies

I currently have 12 units all of which are Class C. My ROI for most is around 12-14% and CoC way higher but how do I make my strategy work for Class A Properties? When I buy a property the following has been my strategy

1. Buy only duplex's and above

2. For duplex's make sure be all in for a max of 122K prefably 100k

3. After buying, rehabbing, and renting, REFINANCE

4. Duplex's appraise for 175k so I break even or profit on the deal while still owning

So with the above strategy, I am able to refi and still cashflow 600-800 per house (because the mortgage on 122k is $600.00) This strategy allows me to leverage so I can buy another and another and so on...However, my question is...

I want to diversify, and not just have Class C properties, but the more expensive the property, the higher the refi, and thus a higher payment.  Let say I buy a property and am all in for 300k its a duplex. (2) 2 bed units at 1300 each. So I gross $2600.00 with a $2200 mortgage payment (including insurance and taxes) In Class A neighborhoods the taxes may be higher then my estimate.  With putting repair 5% away and vacancy 5%, I end up in the red....

How do you make this work?? I would really like to diversify (Aside from getting it cheap enough to where I do not have to refi for 300k, and aside from choosing not to refi as that does not fit my strategy)e

Thanks friends, cant wait to hear what everyone has to say!

class A is usually not a day one investment many times its neutral to negative.. were properly located class A makes folks money is with real and consistent rent increases over time.. and ease of ( theoretically ) managing them.. better tenants less abuse less for maintenance etc.. 

And since this is a long game class A should have a real good shot at appreciation and that is where the big bucks are made..

@Douglas Gratz , depending on the part of the country, you CAN cashflow B/A properties with 20% down.  But it is getting much more difficult.

I am one who has 'subscribed' to the A/B property model.  At one point in time I owned as many as 10 properties.  I am now down to 6, having sold my 'dogs' when my business model was not as exact as it is today.  I also purchased in an 'up' market as I started my buying in AZ in 2010.  Talk about 'dumb luck'.  

Due to the fact that rental demand is high, I have been able to increase rents quite aggressively without losing tenants.

I have NEVER done an eviction & I can count my slow pays/lates on less than one hand. My average stay is 5+ years. It's about as close to 'push button' money as you can get. Maintenance is done via home warranty. I have averaged about a 'turn' per year and have gone a number of years without ANY 'turns'. As you know, vacancy is the real killer to the real estate business.

As @Jay Hinrichs , it is a long term play. But the rents will at least track inflation, perhaps exceeding inflation. The 'key', if there is one, is to put down enough money to make it cashflow a reasonable amount on day one.

Hope that helps.

@Jay Hinrichs So in your scenario, people I guess have other cash flowing properties that help the negative or neutral property along until your ready to sell .  Any tips on doing the correct research for properties you buy for their potential appreciation? Any good strategies?  

If anyone else comes along and reads this, if you have a working strategy for buying Class A and B please chime in ! I hope to see how others approach this.

@Alan Grobmeier in your experience with Class A, do you find yourself always take less money than the bank might be willing to give in order to keep a positive cash flow?  I ask because I want to see if I have to switch my point of view for this type of investment from my view now, where I want to get all of my money out.

@Douglas Gratz , I'm not sure what you mean by "do you find yourself always take less money than the bank might be willing to give in order to keep a positive cash flow?"  Could you explain?

The ppl I am competing with to buy are not investors, they are owner/occupants.  I, after refining my business model, buy my properties in the best school systems in the area.  My 'favorite' demographic is a married couple with little johnny & susan around 5-9 years old.  The ONLY reason I will lose them as tenants is due to them buying their own place or moving out of the area.

It truly is a long term play.  But if you are patient you can eventually cash out ALL of your own money out of the properties and be living off positive cash flow (if you want).  Here is one of my examples:

Bought 2012: 175k, 50k down (note that I am basically buying my cashflow)

Initial Rent:  $1075/month

Initial PITI: $825/month

----------------------------------------------------------------------------------------------

Today's value:  275k

Rent:  $1575/month

PITI: $825

NOW you have some choices. You can do a cashout refi. But due to new IRS rules you can only borrow a maximum of $175k, the initial buy. The new PITI would be about $950-$1050 a month, depending on who/how you cash out.

But now I have none of my own cash in the property and a $500 per month positive cash flow. And, most importantly, I'm not paying much in the way of tax on the positive cashflow. Income - (expenses+interest+depreciation) = not much. ;-)

Or you can just continue on with $750 positive cash flow and pay more in taxes.  :-(

This was over a 8 yr time period in an UP market.

My properties are all 3/2 single story.  I eventually put 100% ceramic tile through the whole house.  I'm in AZ, so this may not work for you.  As a result, I can increase my income by charging pet fees (not deposits) and a per month pet fee.  Never had a pet hurt my tile yet.  ;-)  ANYONE can rent one of my places.  Obviously I limit which breeds I accept, but that's about it.

I don't have a lot of CapEx as my places are under 30 years old, and hopefully under 15. Not a lot of moving parts to chase. I screen really hard as I have had as many as 20 parties apply for my places.

Hope my explanation helps.

  

Different level players for class A.

SFR as an example doctors with incomes of 600k to 1 million plus a year. Accountant says put the money to work in assets that are low headache and minimal maintenance. Class A over time rent markets tend to be stronger for overall growth and equity build up generally moves at a faster clip because of desirability of the area. People invest more in high quality and safety. It's a smaller investor pool out of necessity that buys the C to D stuff.

Multifamily class A

I have a client that is a family office. The office advisor has 3 families. 2 are mid 9 figure wealth and 1 is 10 figure wealth. They buy class A at 5 caps and put debt at 3's for long term Freddie and Fannie loans and then with rent growth hope to achieve a 7 cap in 5 to 7 years time. They put 20% down. Goal is to acquire about 1 billion in multifamily over the next decade.

These types of players do not really need today money. It's just more taxes for them to pay. They are looking at long term sheltering wealth strategies with equity growth on the back end. They watch what kind of existing tax environment currently is and what upcoming tax environment might be so they plan accordingly. 

 


Multifamily lot bigger loan sizes in the tens of millions of dollars for hundreds and hundreds of class A units. Debt competes more for the bigger loans.

Originally posted by @Alan Grobmeier :

@Joel Owens , it sounds like I’m doing it ‘wrong’.  My interest rates are in the 4’s.  How are your clients getting loans in the 3’s?

“Prime” markets and “prime” asset classes have different rates. It’s relatively easy to get a rate in the 3’s for NYC MF. You don’t even need to be in that high of a wealth bracket either. Obviously for the extremely wealthy, it’s even easier.

Also class A SFH aren't meant to be an investment class. They’re meant to be owner occupiers. 

Now Class A MF wealth is made from a mark to market business plan, rental growth, and tax advantages. 

Originally posted by @Alan Grobmeier :

@Syed H., I guess this means I’m doing it ‘wrong’?  ;-)

Haha, no it’s just that different markets have different advantages and disadvantages. Your buying much lower cap rates in places like NYC and SF, so your cost of debt needs to be a bit lower 

Originally posted by @Jay Hinrichs :

class A is usually not a day one investment many times its neutral to negative.. were properly located class A makes folks money is with real and consistent rent increases over time.. and ease of ( theoretically ) managing them.. better tenants less abuse less for maintenance etc.. 

And since this is a long game class A should have a real good shot at appreciation and that is where the big bucks are made.. 

Im all Class A/B+. Low low expenses. Low cap ex. Vacancy virtually doesnt exist. Low management time. (Me and Darren Sager who is in thr NYC suburbs self manage high class properties and spend 15 mins per month on them) Good appreciation, good rent growth. My average property goes up in value $25k per year, and my average rent goes up $100 a month every year.

I end up making, with patience, more cash flow from far less units in my DC area properties with initial low yields than the Baltimore guys just 30 mins away are making on fat more units on their high yield stuff.

 

@Jay Hinrichs @Alan Grobmeier @Russell Brazil

Alan- You answered it when you said you basically paying for cashflow (putting % down so your payment is less) BUT really, is that 175k max because that was your purchase price, or in general you cant cashout refi for more than 175k on any property? (doesnt seem right) On another note , I need to hone in on how the tax system works and how to save in that arena

Thanks guys, sharing this information and strategies in a nut shell really shed some light on how one achieves his/her goals in the Class A/B Arena.  

Russel- What kind of research do you do or have done to be able to predict your properties will rise so high (assuming they arent $1,000,000 homes with a 2.5% appreciation rate)

Originally posted by @Douglas Gratz :

@Jay Hinrichs @Alan Grobmeier @Russell Brazil

Alan- You answered it when you said you basically paying for cashflow (putting % down so your payment is less) BUT really, is that 175k max because that was your purchase price, or in general you cant cashout refi for more than 175k on any property? (doesnt seem right) On another note , I need to hone in on how the tax system works and how to save in that arena

Thanks guys, sharing this information and strategies in a nut shell really shed some light on how one achieves his/her goals in the Class A/B Arena.  

Russel- What kind of research do you do or have done to be able to predict your properties will rise so high (assuming they arent $1,000,000 homes with a 2.5% appreciation rate)

 I buy where demand is high. Appreciation and rent growth are just byproducts of simple supply and demand economics.  My properties are located close to train stations for instance, which always have high demand.  Location near major commuting routes into the city.  Close to DC.  Where supply is limited, so locations where you can not build new construction, or at least not a lot of it.  In the past Ive had stuff in gentryfying neighborhoods.

@Russell Brazil Yeah they just knocked down the local business's across the train station where my barber was.  They built a small apartment complex with stores on the first floor.  And I see it all over, but this neighborhood is class B/C.   Ill have to look more into it. And I see this near transportation theory in action all over. Every exit almost on the PA Turnpike , huge townhome/condo complexes are going up.

@Douglas Gratz , my cpa has recommended that I never get a loan that is larger than the acquisition/basis cost. In the past, I guess this used to be ‘ok'. Now, I guess, it is not as ok. Obviously brrrr would be different. But that's not what I'm doing, so it's not applicable.

Also, something to consider, is interest tracing if/when you do a cashout refi.  Again, not something that was considered in the past.  But often violated these days.

https://www.taxcpe.com/blogs/n...

It is my belief the only time this really makes sense is in hot markets that appreciate . In other words buying a class A asset in the Midwest is going to be far less lucrative and may never work out on paper . I know around my area which admittedly is no booming metropolis lol would be a very poor return had I bought in that niche .

Plus there's opportunity costs that were missed out on by tying up your money and credit which could have made much more had you invested in lower class assets . Some would argue it's like buying gold as it is a hedge of protection against inflation however the first people to get the ace in a recession are higher paid management white collar types that are usually your tenants base in A class properties

Originally posted by @Douglas Gratz :

I currently have 12 units all of which are Class C. My ROI for most is around 12-14% and CoC way higher but how do I make my strategy work for Class A Properties? When I buy a property the following has been my strategy

1. Buy only duplex's and above

2. For duplex's make sure be all in for a max of 122K prefably 100k

3. After buying, rehabbing, and renting, REFINANCE

4. Duplex's appraise for 175k so I break even or profit on the deal while still owning

So with the above strategy, I am able to refi and still cashflow 600-800 per house (because the mortgage on 122k is $600.00) This strategy allows me to leverage so I can buy another and another and so on...However, my question is...

I want to diversify, and not just have Class C properties, but the more expensive the property, the higher the refi, and thus a higher payment.  Let say I buy a property and am all in for 300k its a duplex. (2) 2 bed units at 1300 each. So I gross $2600.00 with a $2200 mortgage payment (including insurance and taxes) In Class A neighborhoods the taxes may be higher then my estimate.  With putting repair 5% away and vacancy 5%, I end up in the red....

How do you make this work?? I would really like to diversify (Aside from getting it cheap enough to where I do not have to refi for 300k, and aside from choosing not to refi as that does not fit my strategy)e

Thanks friends, cant wait to hear what everyone has to say!

Class A properties are almost never available for purchase at a price that would allow a landlord to cashflow. Class A properties are located in Class A neighborhoods which are almost entirely owner occupied and market prices will reflect that. In a nutshell it just won't work.

You'll be lucky to make money on an A class rental Unless you put a large downpayment & force it to work.  Take a look at the sale history.  Usually, in nice neighborhoods the schools are good, the house appreciates in value over time and you make your money on the sale.  Its money in the bank & Appreciation is where the real money is. 

@Douglas Gratz I think first off you will have a challenging time finding small MF in A class neighborhoods. Most newer A class neighborhoods do not have small MF. I invest in SFH in OH in one of the best school districts in the state. The last house I bought I paid 140K, put in 20K and it rents for 1900 and should appraise for 200-220K. If I wanted to pull out 75% of it I'd nearly have all my money out. It can be done but its much harder to find.

However, this property was recently purchased in August/Sept this year.  If I look at the houses I bought in Phoenix in 2013-2014, the rents have gone up from 1000 to about 1400 and prices have gone up from 120K to about 220K.  These houses are in B+ neighborhoods.  As many have said, time is on your side, you may not have the return you want on day 1, how about day 1000?

@Stone Jin Can you describe what qualifies as B and B+....Why do you not by duplex's in that neighborhood? (or maybe they do not exist) . I am asking because in my Class CishDish neihboroods, SFH just barely cashflow (taxes 3k yr) so I was happily forced to step it up. I guess when in B class hood, (obviously depends on so much but in utopia) one would buy a SFH, accept the lower cashflow in speculation of a significant rise in home sale price.

@Anthony Rosa  "Its money in the bank & Appreciation is where the real money is." What do you mean by that first one?

@James Wise yeah in nutshell maybe cashflowing is hard, but if I have so many other properties that could help chip in to my Class A , for what  5-10 years, then turn around sell it for a hopeful 50k plus :)...In this scenario you just need to be at a place with your finances that you can afford a short term loss

When I started 4 years ago, I got into section 8 and low income neighborhoods. The CoC was out of this world and ROI was 14-16% ....I am having difficulty shifting my perspective to one that gets me any more less of return, but I need to expand my horizons....B class seems the general consensus in which one can Cashflow while expecting appreciation yeah?

Originally posted by @Douglas Gratz :

@Stone Jin Can you describe what qualifies as B and B+....Why do you not by duplex's in that neighborhood? (or maybe they do not exist) . I am asking because in my Class CishDish neihboroods, SFH just barely cashflow (taxes 3k yr) so I was happily forced to step it up. I guess when in B class hood, (obviously depends on so much but in utopia) one would buy a SFH, accept the lower cashflow in speculation of a significant rise in home sale price.

@Anthony Rosa "Its money in the bank & Appreciation is where the real money is." What do you mean by that first one?

@James Wise yeah in nutshell maybe cashflowing is hard, but if I have so many other properties that could help chip in to my Class A , for what  5-10 years, then turn around sell it for a hopeful 50k plus :)...In this scenario you just need to be at a place with your finances that you can afford a short term loss

When I started 4 years ago, I got into section 8 and low income neighborhoods. The CoC was out of this world and ROI was 14-16% ....I am having difficulty shifting my perspective to one that gets me any more less of return, but I need to expand my horizons....B class seems the general consensus in which one can Cashflow while expecting appreciation yeah?

 @Douglas Gratz - "Its money in the bank" is just an Expression for the property appreciating over time.  ie: In an appreciating area, the house can be vacant and still make money by appreciation over time.  You have equity in the house just for it being in the right location..That's money in the bank!

Originally posted by @Douglas Gratz :

@Stone Jin Can you describe what qualifies as B and B+....Why do you not by duplex's in that neighborhood? (or maybe they do not exist) . I am asking because in my Class CishDish neihboroods, SFH just barely cashflow (taxes 3k yr) so I was happily forced to step it up. I guess when in B class hood, (obviously depends on so much but in utopia) one would buy a SFH, accept the lower cashflow in speculation of a significant rise in home sale price.

@Anthony Rosa  "Its money in the bank & Appreciation is where the real money is." What do you mean by that first one?

@James Wise yeah in nutshell maybe cashflowing is hard, but if I have so many other properties that could help chip in to my Class A , for what  5-10 years, then turn around sell it for a hopeful 50k plus :)...In this scenario you just need to be at a place with your finances that you can afford a short term loss

When I started 4 years ago, I got into section 8 and low income neighborhoods. The CoC was out of this world and ROI was 14-16% ....I am having difficulty shifting my perspective to one that gets me any more less of return, but I need to expand my horizons....B class seems the general consensus in which one can Cashflow while expecting appreciation yeah?

 There are markets that appreciate and depreciate in all asset classes. The same markets themselves will both appreciate and depreciate in cycles. When you invest for appreciation you are betting that you are correct in where that particular property in that particular market is in the cycle.

All my rentals are in Class A neighborhoods, and my strategy was to buy the smallest homes in nice neighborhoods. (Disclaimer, I also own a couple of condos.) In my area, it's all starter homes or estate homes, with not much in between.  There was a glut of high end, executive homes and prices were stagnate on the upper end of the market for many years.  The lower cost starter homes have appreciated beyond belief due to supply and demand. 

I like the tenant profile of starter homes-- young people getting started with their families or careers, established families in transition, or empty nesters. Many of my tenants move to buy their own homes. Most of my vacant houses rent in a day or two, and keeping the rental price on the low end of the market is my method to fill them quickly and reduce turnover. But, as mentioned many times above, the "A" houses are SFH that are usually owner occupied. A high rental percentage knocks your value down. So "A" houses are always going to have a higher entry price point and a lower rental return. Just assume that they're going to cost more to buy, because that's why they're "A's".

You're going to have to think outside the box! My suggestion is that you mitigate your higher price point with other strategies. The best way to purchase a great deal is to know a bargain when you see one.  You can learn your market inside and out, and be ready to pounce when an opportunity arises.     Mine was to buy the smallest houses in the area.  Other ways might be to focus on bedroom numbers (4 vs. 3) or remodel into an extra bedroom.  Perhaps you could focus on properties with granny flats, mother in law wings, guest houses or rentable garage/yard/storage space. Maybe you could bring in a tiny home?    This might be a way to boost income by focusing on squeezing the potential out of any given purchase.  I rent a corner of one of my house yards to someone for RV storage-- almost $6000 per year!  I once nearly bought a 3 bedroom house with 2 unpermitted detached guest house rentals and a huge warehouse that someone stored boats in.   The monthly return on this place was unbelievable, but ultimately I couldn't accept that one visit from code enforcement would bring the whole thing down in flames.  It's still there, though, so who was right and who was wrong?  I don't know.  You have to navigate the river you're floating on...


Perhaps an Airbnb or student housing? The magic of a gentrifying or rezoning neighborhood might just turn your B neighborhoods to A's.