Deciding on the class type area where you want to invest
New to Real Estate · NY · Member since 2023 · 5 posts · 6 votes
Deciding on the class type area where you want to invest
Most Popular Reply
Nate HerndonPro Member
Lender · Springfield, MO · Member since 2023 · 277 posts · 195 votesGreat question - I'll be interested hear the responses you receive. I've seen my clients have some success in the following markets as well.
Some folks I work with who live in New York/New Jersey have been investing in Baltimore and smaller Pennsylvania towns.
o Cincinnati, OH
o Birmingham, AL
o Indianapolis, IN
o Memphis, TN
o Southhaven, MS
o Baltimore, MD
o Abilene, TX
o Kansas City, MO
17 Replies
- 2yNate HerndonPro MemberLender · Springfield, MO · Member since 2023 · 277 posts · 195 votes
Great question - I'll be interested hear the responses you receive. I've seen my clients have some success in the following markets as well.
Some folks I work with who live in New York/New Jersey have been investing in Baltimore and smaller Pennsylvania towns.
o Cincinnati, OH
o Birmingham, AL
o Indianapolis, IN
o Memphis, TN
o Southhaven, MS
o Baltimore, MD
o Abilene, TX
o Kansas City, MO Anything will cash flow if you put enough money down on it.
With some purchases there will be fixed up money that might need to be spent to bring the units up to market rent .
That could come from a loan or it could come from out of pocket .
Typically that's called value add, and is something you may be interested in or not .
That is in addition to the class ABCD area thing .
For a laugh about the value add situation, you could watch the Joe Pesci movie called the Super.
https://www.youtube.com/watch?v=0uhm03zFQsg
Good Luck!
- New to Real Estate · NY · Member since 2023 · 5 posts · 6 votes2yThanks for the advice! Much appreciated!
Quote from @Scott Mac:
Anything will cash flow if you put enough money down on it.
With some purchases there will be fixed up money that might need to be spent to bring the units up to market rent .
That could come from a loan or it could come from out of pocket .
Typically that's called value add, and is something you may be interested in or not .
That is in addition to the class ABCD area thing .
For a laugh about the value add situation, you could watch the Joe Pesci movie called the Super.
https://www.youtube.com/watch?v=0uhm03zFQsg
Good Luck!
- Real Estate Agent · Philadelphia, PA · Member since 2024 · 11 posts · 2 votes2y
Hey Gilad,
Glad to see you have an interest in starting your investing journey!I know you mentioned investing in Ohio and Georgia but have you considered anything closer, as in Philadelphia?
Would you be open to SFH conversions? I work with a lot of investors who target single family homes zoned RM1 with the thought to convert into small multi family properties.
If you are looking for turnkey properties, or those that are already setup as a multi family, what is your price point?
I'd love to connect further and see how I could help you!Matthew
- Real Estate Agent · Atlanta, GA · Member since 2020 · 1k+ posts · 1k+ votes2y
@Gilad Lifshitz, this is why you work with a reliable and resourceful property manager so proper screening is accomplished.
If Atlanta is one of your target markets, you should think about implementing a BRRRR rent-by-the-room investment strategy. Happy to connect and chat to discuss this further.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
i think cash flow on BRRRR is tough in any market or neighborhood class right now, even C. run the numbers and you'll see.
and, i would strongly recommend you pick a market within a couple of hours of you rather than OOS. OOS BRRRR starting out is very, very difficult. being close lets you be hands on.
- 2yMike PaolucciBusiness MemberRealtor · Columbus Cleveland Dayton, OH · Member since 2022 · 499 posts · 553 votes
Hey @Gilad Lifshitz
You'll have a tradeoff in any neighborhood you choose to invest in. I have 3 properties in Columbus in C class that have done pretty well for me. Tenant wise, you'll run into bad tenants, no matter what neighborhood class you choose to invest in. I also have 1 duplex in an A class neighborhood and inherited tenants that I ended up having to evict. It all comes down to how well your Property Manager will be able to vet your tenant applicants and ultimately who you as the landlord choose to rent to. Comes with the land lord territory in my opinion.
Building the right team (core 4) will be your best friend as an OOS investor.
Happy to connect about my experiences in Columbus and answer any questions you have.
Reafco - Mike Paolucci 512 Reviews - 2yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Quote from @Gilad Lifshitz:
Hi there,
I'm new to BRRRR and looking to make my first deal. I understand there are classifications of zip codes/neighborhoods to Classes A/B/C etc -
I was told that usually classes A/B make more on appreciation, but barely cash flow (especially with the current interest rates), and that in C classes, you can generate some cash flow. My main focus would be to build equity so definitely appreciation is good, but would also like some nice monthly income from rent.
The thing is (and maybe it's just me) - these C class neighborhoods seem to be with higher crime rates, I'm not sure the quality of the tenants it might bring over etc, so I have some reservations about them, but not sure if it's justified or not.
Anyone have any suggestion on the matter?
In terms of areas to invest - I am currently looking at a few different options - either Columbus Ohio, or suburbs of Atlanta Georgia (I will be doing a remote investment as I live in NY)
Thanks,
Gilad
Not too familiar with Atlanta's real estate market but for Columbus, I wouldn't look at crime stats. There are two main drivers. Type of property and location. We specialize in new build single family build to rent and spec homes and we build in many C class zip codes. In the same zip new construction sells for the highest price per sq ft (typically $219 per sq ft average in Columbus OH). Buying older homes in columbus I would say is worse than buying in C class areas. it's easy to change tenants, not so easy to change properties you close on. Make sure to look at multiple strategies including buying existing, remodeling, new construction and see what strategy is for you. I have a build packet that is about 100 pages I can send to you that covers new construction and the product we build. for my first 6 years of real estate brokerage all I did was sell existing 2-4 family properties and set investors up on alerts for them to look, now it's much more relationship driven.
Section 8 Launch52 Reviews - 2yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
When investing in areas they don’t really know, investors should research the different property Class submarkets. If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.
Our OPINION for the Metro Detroit market (always verify each area for yourself!):
Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 yearsClass C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.
Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.Make sure you understand the Class of properties you are looking at and the corresponding results to expect.
Logical Property Management4.9455 Reviews - 2yBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votesThe key is not just looking for an area of a certain class, but to look for the class of a building that is lower than the area. For instance, a class C property in a class B area has a lot of room for you to add value with improvements.
- 2yMarc RiceBusiness MemberReal Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
Quote from @Gilad Lifshitz:
Hi there,
I'm new to BRRRR and looking to make my first deal. I understand there are classifications of zip codes/neighborhoods to Classes A/B/C etc -
I was told that usually classes A/B make more on appreciation, but barely cash flow (especially with the current interest rates), and that in C classes, you can generate some cash flow. My main focus would be to build equity so definitely appreciation is good, but would also like some nice monthly income from rent.
The thing is (and maybe it's just me) - these C class neighborhoods seem to be with higher crime rates, I'm not sure the quality of the tenants it might bring over etc, so I have some reservations about them, but not sure if it's justified or not.
Anyone have any suggestion on the matter?
In terms of areas to invest - I am currently looking at a few different options - either Columbus Ohio, or suburbs of Atlanta Georgia (I will be doing a remote investment as I live in NY)
Thanks,
Gilad
In any growth market (like Columbus), you cannot cash flow on purchase at 20-25% down in A class, and in B class you're most likely going to break even or lose $50-100/mo until rents rise. B-/C+, C, and C- areas are going to be cash flow positive.
Overall regarding appreciation, some C class areas have appreciated at much higher % rates than A/B due to the pricing already being so low. The fact that you can find turnkey 3bds in a rapidly growing city for $175k is unheard of.
Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews - Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes2y
Quote from @Gilad Lifshitz:
Hi there,
I'm new to BRRRR and looking to make my first deal. I understand there are classifications of zip codes/neighborhoods to Classes A/B/C etc -
I was told that usually classes A/B make more on appreciation, but barely cash flow (especially with the current interest rates), and that in C classes, you can generate some cash flow. My main focus would be to build equity so definitely appreciation is good, but would also like some nice monthly income from rent.
The thing is (and maybe it's just me) - these C class neighborhoods seem to be with higher crime rates, I'm not sure the quality of the tenants it might bring over etc, so I have some reservations about them, but not sure if it's justified or not.
Anyone have any suggestion on the matter?
In terms of areas to invest - I am currently looking at a few different options - either Columbus Ohio, or suburbs of Atlanta Georgia (I will be doing a remote investment as I live in NY)
Thanks,
Gilad
Haven't done any business in Atlanta, but we're seeing a lot of great stuff working in Columbus.
- 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Gilad Lifshitz
I invest in C+ class hoods. Appreciation is great due to higher demand and renters stay many years so my turnovers are low saving me a ton. And when the economy tanks, my properties are in higher demand because not as many people can afford A and B class rentals to stay at.
- 2yMilton ChamberlainPro MemberReal Estate Agent · Kansas City, MO · Member since 2019 · 236 posts · 107 votes
While the class systems are arbitrary and can be biased based on the person classifying the areas, you are correct that
usually classes A/B make more on appreciation, but barely cash flow (especially with the current interest rates), and that in C classes, you can generate some cash flow. but appreciation rates may be slightly slower
if your main focus would be to build equity with some nice monthly income from rent ($50-$100 cash flow after accounting for expenses) It would be in a C class neighborhood with higher crime rates in my market of the KC metro. But that doesn’t necessarily mean there will be drive buys and open air drug markets. More so, maybe account for the expense of internet and security cameras and pass that down in rent, and make sure the property has covered or off street parking to avoid petty theft. Maybe put in flood lights. Maybe allow and look for a tenant with a dog.In my market, appreciation rates are closely tied to school districts, I.e. you will see lower market values and appreciation rates for similar homes depending if they are .5 miles east and in a more ‘desirable’ school district or high school zone, or .5 miles west and in a less desirable district/high school zone.
to give you an example; my buyer just bought a 2bed/2bath duplex in a lower market value (LMV) area of Raytown. However, the HMV area of Lee’s summit is 5 min south where they bought in Raytown.
so, while the property was cheaper by $50k vs if it was in Lee’s summit, that buyer will now get to tap into the higher renter demand of folks working in lees summit, but wanting the lower rent of Raytown. These ‘green zones’ between less desirable and more desirable sub-markets are IMO great places to look to avoid the pitfalls of higher crime areas. Very case by case though, and at the end of the day, you need ‘boots on the ground’ eyes you can trust that can go walk the areas for you. - 2yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Quote from @Michael Smythe:
When investing in areas they don’t really know, investors should research the different property Class submarkets. If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.
Our OPINION for the Metro Detroit market (always verify each area for yourself!):
Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 yearsClass C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.
Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.Make sure you understand the Class of properties you are looking at and the corresponding results to expect.
this is very well written with actual tangible differences one of the first I've seen great job
Section 8 Launch52 Reviews - 2yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
@Robert Ellis thanks!
We try to be very logical about investing and property management:)
Logical Property Management4.9455 Reviews - 2yElise Bickel TauberBusiness MemberReal Estate Agent · Cranberry Twp · Member since 2017 · 385 posts · 198 votes
I think this is all going to come down to marketplace. And sometimes, even the agent you partner with. A lot of the agents in my area agree with my team and I on the class ratings but others don't. For Pittsburgh, I usually tell my clients that A areas are the trendier areas. Higher rent prices, better quality tenants, little to no cash flow (usually) but good appreciation and less of a chance of evictions or damage from tenants (and if they damage they usually pay). The goal on these is just long term appreciate and less day-to-day income.
B areas are lower cash flow, but longer term tenants. These tenants often stay a bit longer and are well qualified but there isn't usually a great margin. I often times see higher repair requests in these areas because tenants here expect a certain level of mechanical and cosmetic readiness.
C areas are my personal favorite. Especially those that are on the rise. You have a medium risk here of eviction and damage when a tenant leaves but you also have a good chance of a longer term tenant, good cash flow, and a slow and steady appreciation.
D areas always look good on paper but they are very high risk. If you find a good tenant here if can be a gold mine but often times you are dealing with a lot of apps before approval and the approved tenants are usually still borderline, lots of evictions, damage, etc.
Let me know if that helps!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.