considering C class SFR, talk me out of it (or into it)

8 Replies | Phoenix, Arizona

Here's my situation. I have 9 SFR rentals in Arizona. I'm in a good spot - decent equity, lowish interest, etc. I'm very interested in acquiring more and really expanding my portfolio. I could cash out refi and acquire another 9 or so. However, I'm concerned that I might be buying too high. Cashing out on my current, plus buying more, might just essentially mean I bought 18 properties at a high point in the market.

So instead, I'm thinking about holding onto my current homes with good terms, and investing in an area where homes don't tend to appreciate as much, but where I can buy for cheap and try to cash flow a little. Example, thinking about downtown Fort Worth where I can get some crummy homes on the wholesale market for around 40-50k. Maybe fix up a bit, and get the value to about 100k and refi and get most of my money out.

The thought process is, maybe during a high market, I should put my money where homes don't tend to appreciate or depreciate and try to make a little change with the rents. I know there are risks, but what are your thoughts (experienced investors) in renting to lower income/rundown areas?

@Ryan McCook

If you've figured out how to do long-distance rehab and make the bucks running D-class rentals from a distance, you're well ahead of the game. Me, not so much. I buy rental properties in borderline C/D-class neighborhoods, renovate them, and run them as rentals. The difference between what I do and your projected plan is that I live where I buy, I handle almost all of the renovations myself, and I handle almost all the maintenance on these properties myself as well. I'm the pop of a classic mom and pop self-managing DIY landlording outfit. If I tried to do this a state or so over there's no doubt in my mind that I'd get beaten up by the complexities of running these places and managing the tenants who choose to live in them.

@Ryan McCook it sounds like you are trying to transition to a cash flow vs appreciation strategy, which is a great strategy. However, I'm curious as to what information you are using to determine ft worth as an area that doesn't appreciate much. The last data I saw put Ft. Worth in the top 10% for appreciation over the last 10 years for the nation. 

Also, Texas has very high property tax which can really eat into cash flow. This can surprise a lot of out of state investors. Good luck!

Hi Ryan.

I’m in somewhat the same position but with only 2 paid of duplexes in Phx. And was figuring out what my next move is with a potential dip coming.

In my opinion, if you are buying more properties for long term cashflow purposes, just make sure you get a deal and buy where you know. Arizona is a great market and any dip you see won’t be like 2007. Plus with a dip, (it’s just my opinion) the rental rates won’t be going down and neither will the tenant pool.

My plan is to pull money out up to about 50-60% LTV because rates have dropped, and look for other small multifamily deals. Be patient and if the market dips before the portfolio is full, use that remaining equity to by ‘discounted' properties.

As long as you have decent equity and you’re looking to hold long term, you’ll be fine so you might as well stick to where you know.

No matter what you decide-good luck!!

@Ryan McCook A wise investor told me that you can only pay your bills with cashflow.  Diversifying into cashflow markets is a good idea.  Buying into C neighborhoods out of state is probably not a good cashflow play.  The real returns on cashflow on those investments are usually much worse than on paper.   We are selling a small part of our portfolio in Phoenix to fund acquisition in the midwest.  We like the appreciation of the Phoenix market and the cashflow of the midwest market so it's a good balance.  I wouldn't go all in on either but having that balance is good.  If you can maybe sell 1 of your Phoenix properties and buy 2 in the midwest and see how it goes for 1 year.  Sounds like if you free up 1 conventional slot, you can buy 2 financed properties with a 1031 exchange.  That seems a much safer way to diversify.  

If you are really considering buying in rougher neighborhoods, I would suggest you fly out there and drive them.  I think a lot of out of state investors have no clue what tough neighborhoods really look like.  Go educate yourself on that, a plane ticket and a couple nights in a hotel might be the best investment you make all year.

@Ryan McCook Seeing that you are local changes things quite a bit although, with houses that you are talking about, you may be a lot more involved than you hoped for. Many of those I would not call class C. I do see a lot of houses in Ft. Worth for under $60-90K on MLS, but the funny thing is there's many with sales pending. So you're not alone. I've done a lot of work on REO properties around there and it can get a little hard to make repairs with nightly break-ins. I'm sure that's not all of the areas, jut my experience.

I like the idea though. I'm looking at the same basic thing and I plan to rehab and run them myself as much as I can. Have you looked at other areas outside DFW? There are areas within an hour or two that have lower prices than the metro area and are in a little better shape as for as houses and neighborhoods go.   

@Stone Jin is right - it's important to diversify your investment with both cash flow and appreciation. Phoenix just doesn't cash flow well right now, but it would be good to hold on the good performers to see the appreciation. Let me know if you have any questions specific to your Phoenix properties!

@Ryan McCook I'm in the same boat. My husband and I live in the Plano area and have our rentals in C neighborhoods in Fort Worth. We had property Managment oversee it but we decided to take them over. Things have been better since we have taken them over. Tenants in this area need a personal touch with clear expectations set. We are cash flowing and looking to purchase more in the area. Many have told us we are crazy but we are super picky with who we rent our houses to but we set the tone from the beginning. I'm an school administrator so I use the same skills to make sure our expectations are clear. So far we have been good. We currently have duplex and SFH and closing on another in a couple of weeks. Good luck in your endeavors.