I’ll break down my solutions to @Philip Williams great list of issues.
1. To get rent paid on time, I use Cozy and let them know rent will be paid through direct deposit when they’re viewing the house. Anyone with plans of not paying won’t want their rent automatically deducted from their account. They also won’t like that their Cozy payments impact their credit score. I also have a Sec 8 tenant so getting the rent is never a problem.
2. If you have a nice home, people won’t want to leave it. Do the work renovating the space before and you’ll have a “one in a million” property with grateful tenants and super low turnover. Also, do the math to see if it’s worth raising the rent every year and risking the tenants leaving. I have good ones and don’t plan on raising their rent for the first 4 years they’re with me.
3. Don’t ever bend your standards in the screening process. I haven’t ever had to, but I’d rather give up a month of rent to look longer than lower my standards. I ask for 3 months pay stubs, last three bank statements, copy of photo ID, and contact info for their employer and past two landlords. I do a background check but not a credit check. Poor credit is assumed. I don’t even run it since that would bring it down even lower. If they tell me it’s very low and they don’t have much in reserves but they do have a good income, I’ll have them pay first, last, and security upfront. The last month gets paid in monthly installments and added to their rent payments.
4. Like I said, credit isn’t a big deal to me. Just use the last months rent installment payments to protect yourself.
5. No reserves is always an issue. It surprises me every time tbh but it’s the nature of the environment. You can use the strategy above and make sure your reserves are strong. If they have low credit and no reserves, I’d only rent to them if there are two or more working adults in the home. Or if they have Sec 8.
6. C and D doesn’t mean the neighborhood is dangerous. Check the crime report. My rental is in a town right next door to Newark, NJ (very high crime rate) but my area is extremely safe. With that being said, I still have video cameras and motion sensor lights on every door. It’s more to make my tenants feel safe than anything.
7. I choose not to increase rent but I definitely could. And my house has gone up in value about $25k a year since I bought it. You can’t buy in just any lower grade neighborhood. I looked for one within 30 mins of Manhattan with lots of access to public transportation. Mine was one of 3 houses being renovated on the street, and there are three schools within walking distance. Make sure the home you get is near something noteworthy and you should be okay.
There’s a lot of money to be made in lower grade neighborhoods. I also think it’s important for *US* to own in communities of color, which are often (but not always) C and D areas. Good luck to you!
I manage units in D neighborhoods (I have 8 units in the second poorest neighbor hood in Akron). In those units, I have 4 tenants with undergrad degrees, one tenant that has been with walmart for 8 years, another supervisors for Signet, a retiree that's been at the grocery store next door for 15 years. Just because the neighborhood is low income doesn't mean you can't find good, honest tenants.
The thing I hate most about the neighborhood is litter from non-tenants, and constant non-tenant use of my dumpster for big trash. Also, we had a rash of car vandalism and windows broken a while back. Before we had a dumpster, the homeless from tent city kept stealing our trash cans for collecting recycling. We've had one drug OD in a unit. I've kicked out one armed drug dealer. We had a drunk driver wipe out three tenant cars legally parked on the street.
Offering payment plans for rent when people have problems is essential if you don't want to churn the units-- I have 5 tenants in the 8 units that have been there for 3-4 years (I've owned the buildings 3 years, 9 mos.); 2 tenants that have been there almost 2 years and 10 months and 2 years and 8 months, and my short-timer has been there 18 months and she has worked at the grocery next door for 15 years so she's very happy to be there. We try to offer better than usual value by having the nicest units at every price point where we compete and we try to offer good service- we don't blame and nickel and dime tenants when they report problems. We have not had any tenants (yet) default on a payment plan and most got all caught up with their stimulus checks!
@Account Closed I have heard of cozy having many issues, Im not sure what's going on with their systems but I would definitely not want to add complications to already ongoing issue! Thanks
@Brian Ploszay How smooth is the procedure for getting S8 tenants? I know there must be a certain standard in regards to the property as they usually have someone from S8 come check that out. Is the procedure similar to getting regular tenants?
I agree, screening tenants is essential and a must be a very important part of the process.
@Ujwal Velagapudi you gave some great insight of things to look out for in these neighborhoods, thank you for that! I see you learned very quickly as time went on that systems must be put in place to mitigate issues. Great to see you have grown from your scars into commercial business!
@Nicholas LaGatta you bring up a good point, you can always do your due diligence to find a rockstar PM and have them find good tenants for you. Thanks!
@Jill F. That is very true. Just because the tenants live in D neighborhoods, does not mean they are always D tenants. Their are many people who live in these areas and understand that at this time, this is where they must be. I also believe strong screening helps with this.
@Mike D. lol I will keep that in mind! Thanks for the heads up!! In those situations, apart from tacking on late payments did you do anything else to help mitigate this?
D-C classes can be some of the toughest tenants. I own a D property in Detroit as a try out man when i tell you i have never receive a rent on time. Regardless when i threat them with late rent notices etc. Many tenants in those neighborhoods do not care.
While @Nzinga Young suggested buying back the areas sounds good but is the headache worth it, especially when one manages remotely.
During this Pandemic only my D class went gosh on me. Extremely poor communication skills
While there is a big difference between class C and class D properties both require constant oversight to make sure things are kept on track. This even goes for if you outsource the property manager. Managing the manager is key. PMs who have a portfolio of C and D properties often can't keep up or choose not to keep up with issues like you would as an owner and those issues can snowball.
@Peter Tverdov, Thank you for sharing that story I had to make sure I read that correctly. Certainly sounds like a greater risk with the C/D classes. In our property management company, we certainly have to adjust the criteria for applicants depending on the city and the price bracket of the property.
Be careful of spreadsheet magic. Lots of assumptions go into these calculations such as 100% collections, no/little legal fees, modest maintenance, etc. Properties can look attractive on paper and be very challenging to manage.
Whether you plan to manage yourself or hire a third party, the manager needs to be well versed in these types of properties. They can be labor intensive. Your time and energy are part of your return, although often overlooked.
The tenancy cycle starts with a vacant unit, so the first question to ask is how is leasing going to be handled? Followed by tenant screening, tenant placement, rent collections, evictions, maintenance, unit turnover, deposit refunds, and repeat again.
I would recommend thinking about each one of these and how you plan to handle prior to moving forward.
@Philip Williams @Nathan G. @Peter T. @Nzinga Young @CJ M. @Calvin Thomas @Quincy Lockett
Great responses! This content will defintely help with future decisons!
I am curious to know, would you say the reward (ie. low barrier of entry, high cashflow) is worth the headache?
First starting out? Yes, as you learn the ropes and the initiation
fee is low. It's always best to make mistakes and learn on cheaper
properties and then use that knowledge and experience on better
properties. Two, if one is going after C - D props, consider section 8
and investing in opportunity zones to redevelop properties in run down
areas.
My experience has shown that the problem with c/d tenants are the ones with drug issues, not NECESSARILY just a low income family. Low income families often have pride of ownership, but my past tenants that have been the biggest headaches are the ones where drugs start to come into the picture...I think the most important thing with low income is to just have an amazing screening/application process if possible.
@Calvin Thomas it's an increase in monthly rent payments. They pay first and security upfront and the last month in gradual payments in addition to the rent. Then they have essentially no rent to pay their last month.
That's illegal in New York and New Jersey with huge fines if the Newark housing authority finds out. If I was you, I'd consult with a lawyer before continuing this practice. We're in Newark, Jersey City and Hoboken, so we know the laws quite well. Once you run afoul with the housing authorities, you would now be on their list. You need to fix this, like today. If your tenants Google your name, this post will pull up and you'd be essentially admitting to breaking the law. Here's the law:
@Philip Williams @Nathan G. @Peter T. @Nzinga Young @CJ M. @Calvin Thomas @Quincy Lockett
Great responses! This content will defintely help with future decisons!
I am curious to know, would you say the reward (ie. low barrier of entry, high cashflow) is worth the headache?
On paper, these D properties have great cap rates, but you are trading an increased return with your increased time, effort and attention. You'll have to decide if the increased cash flow is worth the time you will have to invest. (It may be, but only you can answer that.) There will be a regular number of contacts that you will require with these properties (others have mentioned them). You'll have to be hands on. You can't just ignore the property until someone needs you. You'll have to put in face time so they know you are paying attention, otherwise "the mice will play."
Another thing to consider is that if you get worn out, you probably won't be able to pass these off to a PM, as it just doesn't make business sense for a company to take these on. So, if you go down that rabbit hole, you have to be "all in" and could end up selling for a loss if you are not cut out for it.
It is a niche, I guess. And some people do it. I personally think there are more consistent revenue streams in the RE space, but that's me.
Good luck!
Some tenants are good, some are not so good. That can be in A, B, C or D areas. However, if they do not consistently see someone at their property checking on things, that is when things go bad. All tenants will test property management or the landlord in many ways. If they are consistently late, then they have money issues and will be a thorn in one's side. Is it worth it? Depends.
We manage some C/D class stuff in Central New Jersey. D class I would only consider D class because of the neighborhood. A class tenants usually want to live in an A class building, town, neighborhood...you get the idea.
One of our C-/D+ places we just filled and got lucky. Tenant made 3x rent, 600+ credit, no evictions. We deal with folks who don't speak English. My spanish gets better weekly lol.
However, this same house we just rented. I come to find out someone next door was squatting and broke into the basement of our property and ran 3 extension cords from our basement to connect electric into the house they were squatting in! Can't make it up. That's some of the stuff you deal with.
Most times you can't follow 3x rent, good credit...a lot of the times you are making a total judgement call on these folks. It's a tough business.
I have never heard of D+ class, but I love the positive spin.