Property Class and Cash Flow

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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y

@J Scott - E Class property has the best cash flow!  learn already:)

Understand - we cannot underline the concept of cash flow separately from underscoring "stable".  When most people here speak of cash flow, what they mean is a paper analysis which spits out a dollar amount.

In real life, however, over a period of time, these numbers are highly impacted by the stability which underpins their occurrence.  For many reasons, D and C are inherently unstable, and therefore paper (we call it Pro Forma) cash flow is about as meaningful as ... well, I duno...it's not meaningful.  Does this help? 

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  • Wilson Churchill
    Madison Heights, MI · Member since 2014 · 471 posts · 132 votes
    11y

    The less total investment, the better cash flow, regardless of class. Also, lower insurance and taxes = better cash flow. Lower repairs, etc. The alphabet system seems a little vague.  I target areas that are inexpensive, but also have low crime and low taxes.

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    I've been to Phoenix but I admit to not knowing that market.  Your "many older buildings" is not A properties by my definition, and perhaps that's where we differ.

    @Engelo Rumora 

    doesn't even have anything as low as a D!

    To me A is new.  The New NYC World Trade Center is A, the Empire State Building is not an A.

    Congrats on turning around a D property in an A neighborhood, way to go.

    2Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    btw... We have a different definition of A.  I define A as highly desirable or lots of amenities.  It does not have to be new to be a very desirable part of town.  It does not have to be old to be low end.  The 3 best locations in our valley have many buildings that are over 60 years old.  The Biltmore, Old Town Scottsdale, and Mill Ave in Tempe are examples.

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  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    Million dollar homes as neighbors equals A to me.  High end malls even if they were built 50 years ago and high rent business centers equal A to me. 

    It seems that everyone has a different definition of ABCD.  I don't match well with my rating system to most of the posts here but it is my tool for my use and I am successful with it. 

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Steve Olafson 

    I see your point.  I was recently in the home of deceased multi-millionaire captain of industry and founder of a company that you would recognize.  The house was being sold at a public sale (not a foreclosure) just an auctioneer.  I had occasion to meet the family and they have been known for their multi-million dollar gifts to charities and public causes.

    The house was built in the 1950's.  I was surprised at the dated-ness of the entire house.  The kitchen, baths, floor coverings, wall covering, heating system, layout, floor plan, etc were all stuck in the 1950s.  It was in need of a huge makeover.  Most of the other houses in the neighborhood were of the same vintage, but most have had significant upgrades and additions.  I'd rate the neighborhood as B, due to age, outdated-ness, etc.  The house at auction I'd rate at a C.  This was millionaire's row, but I still wouldn't rate it as an A. 

    I did have some interest in the house which was a well built house, but others liked it a lot more than me and imho overlooked the massive work required just to move into this neighborhood.  I was looking for an investment and wasn't thinking of moving there.  The high bid was double my bid limit, but that still didn't change my opinion of it being a C house that could be a B house with much work.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @David Krulac 

    Perfect description of Functional Obsolescense   

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jay Hinrichs 

    And to me Functional Obsolescense can't be an A property, a B at best but probably a C

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @David Krulac 

    Agree what makes a SFR sell like you described is only one thing and that is some one wants to live there... and they don't care about other issues.

    Its just like when I am at court house auctions if I am bidding against someone who wants the home to live in we stand NO chance of acquiring the asset they will pay far more than we will.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jay Hinrichs 

    As I related in Bigger Pockets Podcast #82, my first purchase was a house at auction from the highway department at a public auction.  The second bidder was a real estate broker, who I'm sure was not bidding to live there, either a flip or a rental.

    btw, you should do a BP Podcast.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @David Krulac 

      working on the pod cast but I need to get my computer equipment up to snuff and I just got a new e mail.. so after the first of the year.. 

    Have a great Holiday season I am off to the bank.. I have 4 closings today... some Decembers I do nothing this one I think I am + 20 deals funded  LOL> including 4 today in 3 different states   !!!  Love my JOB... well lifestyle or whatever it is I do !

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jay Hinrichs 

    Congrats, to your continued success, and Happy Holidays

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @David Krulac:

    @Jay Hinrichs 

    And to me Functional Obsolescense can't be an A property, a B at best but probably a C

    C property, A location.  But functional obsolescence can be difficult to deal with.  I would need to be able to make it at least a B for it to be worthwhile.

    0Reply
  • Nathan Paisley
    Flipper/Rehabber · Atlantic County, NJ · Member since 2012 · 514 posts · 209 votes
    11y

    Correct me if I'm mistaken but doesn't it matter more about HOW you buy compared to a b c d locations? I was thinking like @Wilson Churchill mentioned.

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Nathan Paisley:

    Correct me if I'm mistaken but doesn't it matter more about HOW you buy compared to a b c d locations? I was thinking like @Wilson Churchill mentioned.

    Perhaps with some people.  To me it is equally important.  Of course most of what I work on is multi-family.  I do a lot of value add deals because the cashflow deals are not enough.   I make 10-20 times more by buying right in the right location, making things better and selling for a profit than I would just buying for cashflow.  It is along the lines of 100 to 200% annually on money invested.  This would not be possible in the lower rated areas.

    This is slowing of course as multi-family has a lot of competition these days.

    0Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y
    Originally posted by @David Krulac:

    @Jay Hinrichs 

    And to me Functional Obsolescense can't be an A property, a B at best but probably a C

    I think this is where the single dimension of grading falls apart.  Generally there is a correlation between how nice neighborhood is and how new it is, however there are definite exceptions.  The most common cause of this is where desirable areas get built up and the only option is to improve in place or move significantly further away.

    It seems really silly to rate a mansion in a desirable area with high prices, great schools a C just based on some horrendously dated cosmetic issues.  I do see a little stronger argument, if they are more serious structural/safety issues.  If those are serious the property becomes a tear down in an A/B neighborhood.

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jesse T. 

    But its more than cosmetics.  the house in question also had original furnace, original windows, original kitchen and baths from the 1950s.

    In a B neighborhood to be an A property it would need to be new or essentially new with a gut job renovation and all mechanicals, layout, finishes and cosmetic brought up to now 2015 standards and expectations.  Meaning something like a 3 car oversized garage, where there was a 1950s one car garage, that was torn down. 

    Teardowns are Ds and Es, (not a C in a great neighborhood)  would usually be a teardown. 

    0Reply
  • Scott K.
    Real Estate Investor · Madison Heights, MI · Member since 2014 · 693 posts · 216 votes
    11y
    Originally posted by @Wilson Churchill:

    The less total investment, the better cash flow, regardless of class. Also, lower insurance and taxes = better cash flow. Lower repairs, etc. The alphabet system seems a little vague.  I target areas that are inexpensive, but also have low crime and low taxes.

    This is my goal also.  Madison Heights is a good city for that.  Parts of all the surrounding burbs of Detroit fills this need. 

    I hope to add 4 more this coming year

    0Reply
  • Julia Rowling
    Real Estate Investor · Greenville, SC · Member since 2014 · 76 posts · 23 votes
    11y

    @Craig Wilcox...Thanks for the post!  Great explanation of the different property types...

    0Reply
  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    11y

    There has been a lot of talk about proforma versus actual. I believe management has much to do with the proforma. An accurate proforma should use market based vacancy rates for that specific neighborhood - which would be radically different between an A and D property.

    But, landlords of A class properties are going to be much more interested in maintaining the property. Whereas, generally speaking so as to not step on any toes here, owners of C and D properties are less concerned due to the low initial investment price. Minor updates and surface improvements help to keep costs down and returns high. Which conversely could explain high tenant turnover and vacancy rates.

    If a proforma is built based on the class of the property and verifiable figures, it should be accurate. If a new landlord is trying to declassify the D property up to a B-, well guess what, you proforma is simply fire starter and you most likely will not get any return on the cost of the improvements.

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

     Are you saying that if I buy a property for 1M and put 200K into it to bring the level of the community up, that I will be wasting money?

    0Reply
  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    11y

    If you look at the post again, I was talking about investing in D class properties. I doubt an investor would pay $1M for a D class unless it was a huge MF property. Additionally, buyers are rarely willing to pay you back $200k to increase community appeal. There has also been studies that show, on the average, that an improvement/remodeling project will only gain a 65% return on the cost. 

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Simon Campbell:

    If you look at the post again, I was talking about investing in D class properties. I doubt an investor would pay $1M for a D class unless it was a huge MF property. Additionally, buyers are rarely willing to pay you back $200k to increase community appeal. There has also been studies that show, on the average, that an improvement/remodeling project will only gain a 65% return on the cost. 

    This is why I like to break it out between location and improvements.  I can improve an old rundown building in an A or B location and get significant returns.  I base the majority of my business model on this and am quite successful. 

    Funny how things will seem relative.  1-2M purchases are fairly normal for me.  I have bought as high as 12M.  So that does not sound like a huge multi-family to me.

    I am really glad that I don't listen to studies.  Perhaps I would not be doing as well if I did not think that I could.  :)  My remodels return much higher rates.

    0Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y
    Originally posted by @David Krulac:

    In a B neighborhood to be an A property it would need to be new or essentially new with a gut job renovation and all mechanicals, layout, finishes and cosmetic brought up to now 2015 standards and expectations.  Meaning something like a 3 car oversized garage, where there was a 1950s one car garage, that was torn down. 

    Teardowns are Ds and Es, (not a C in a great neighborhood)  would usually be a teardown. 

    David:

    All of this is context/location dependent.   In several cities in the Maritimes and New England, the highly desirable 'A', and the 'B', neighbourhoods are 100 - 200 years old and the building stock is predominately Second Empire, Queen Anne, Victorian, Edwardian, and Georgian.  I have also had the pleasure to spend a considerable amount of time working in Europe over the past couple of decades, where 'A' class neighbourhoods may have inventory dating back to the 1600s (or earlier). 

    While it can be costly, these older buildings can be brought into the 21st century with relatively sound energy efficiency and modern amenities.   Such buildings are often more highly sought after than new construction.

    0Reply
  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    11y

    @Steve Olafson You've got the right idea here. Renovating a C or D building into a B class where all the other properties are C or Ds is not going to get a return on the whole investment. But, like you said, take a C or D building in a B neighborhood and you position yourself to make a sizable return whether it by in long-term rental income or fix and flip. Great business plan.

    1Reply
  • Mike Krieg
    Investor / Syndicator · Austin, TX · Member since 2015 · 366 posts · 220 votes
    11y

    I see a class E building for sale in my area...class E? Really? Yikes! Everyone is on section 8 though and 3/4 have been there for over a year. numbers are:

    4-plex: $3018 rent per month (total of all units), $745 HOA which covers all exterior maintenance, trash, water for each unit and security. year built 1983, my offer would be 135,000...but I'm going to let this one pass...not a great area!

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