@Sergey Toshinskiy welcome aboard!
You should pay attention to the following:
1) Many service providers will hit you up with their advice to try to do business with you.
- Make sure you're careful with their advice as it's usually biased, so do some of your own research! Also, make sure you learn to separate facts from opinions:)
2) Many fellow investors will also share their advice.
- Understand that while they are trying to be helpful, their advice is often extremely biased & myopic as it is based on their limited experience.
- A few others may appear to be giving their personal advice, but if you track their posts you'll soon see they are actually covertly promoting a service provider:(
3) Age of advice - be very careful with this one. Many of the materials available here on BP were written several years ago in a vastly different market and no longer really apply today. Read below for a quick overview on why that's important to understand.
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The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.
This couldn't last forever, and it didn't, as excited new investors drove up prices.
Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.
So, the flood of new investors switched to buying Class B properties.
COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!
Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).
Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.
In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.
If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property to Class A standards in a Class D neighborhood and try to get a Class A or B tenant to rent it.
Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results.
In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:
|
FICO Score
|
Pct of Population
|
Default Probability
|
|
800 or more
|
13.00%
|
1.00%
|
|
750-799
|
27.00%
|
1.00%
|
|
700-749
|
18.00%
|
4.40%
|
|
650-699
|
15.00%
|
8.90%
|
|
600-649
|
12.00%
|
15.80%
|
|
550-599
|
8.00%
|
22.50%
|
|
500-549
|
5.00%
|
28.40%
|
|
Less than 499
|
2.00%
|
41.00%
|
Source: Fair Isaac Company
According to this chart, investors should use corresponding vacancy + tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.
To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.
Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.
We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.
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