Why I’d STRONGLY Discourage Newbies From Buying D-Class Investment Properties

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Without a doubt, everyone has heard that real estate is all about “location, location, location.” I’ve bought in every class of real estate. I’ve bought A-class condos that I flipped, and I’ve bought D-class homes that I’m stuck with to this day. I’ve made money in every class.

Even though I’ve made money in every class of properties, I will no longer buy D-class properties. I will no longer buy properties based on price alone. This isn’t a new rule for me, but every now and again, I get reminders of why I have this rule.

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Criminal Records, Evictions & Low Credit Scores, Oh My

Most recently, the reminder has been a vacancy. We had a tenant move out end of October in one of the few properties I still own in a D-class neighborhood. The property was left in decent shape. We needed to go in, clean it up and paint it. It was a very minor turnover. The unit went back on the market five days later.

We got some leads on the property and some applications, but they were terrible. Criminal records, evictions, extremely low credit scores — you name it, and it was probably on one of the applications. So the property continued to sit on the market. The cost of getting a bad tenant is much higher than the cost to let the property sit, so it continues to sit until we can find the right tenant.

This isn’t uncommon for these few properties that I have. Tenant moves in, stays for a couple years, then moves out, and it takes me a couple months to fill it. The vacancy rate of property management companies and individual properties can be very different, especially if the properties are spread over different classes.

Related: Class A, B, C & D Real Estate: How to Know Where YOU Should Invest

For instance, our vacancy rate has been sub 3% for a number of years. Our turnovers each year have been minimal. But this handful of properties always has high vacancy rates, and the economic cost has always been high. That’s why it is important to ensure that you understand the difference of vacancies in certain neighborhoods.

D-Class Properties Require Twice the Management Work

Vacancy is just one of the issues we deal with in these D-class properties. They also require a different level of management. I don’t have hard data to back this up, but I would venture to say D-class properties require almost twice the work as compared to other properties.

D-class tenants tend to be high maintenance, and that high maintenance comes at a cost. So, if you are buying a D-class property and have a property manager, don’t be surprised if your returns are not as good as you thought they would be. I can still make money on D-class properties because I have everything in-house. I have my own leasing agents. I have my own maintenance crew. I have my own property manager. So, my expenses are not the same as someone else’s property who is managing everything on his/her own.

Too many people make a decision about buying property solely on the price level and the rents. Most of them don’t realize until it is too late that the expected returns aren’t going to be there.

Related: Newbie Investors: Here’s the Truth You NEED to Know About $30k Properties

Why I’d Still Buy Them

Apart from all this, I would still like to buy D-class properties in comparison to non-performing notes. Sure, you can make a lot of money out of it, but you’ll need the help of a professional and experienced team to do that. The risks need to be spread over a large portfolio. But if you are planning to do everything on your own or buying your first investment property, don’t get caught up in the low price point properties. The headaches are not going to be worth the returns that you get.

Have you bought any D-class properties? Would you like to share your experiences?

Let me know with a comment!

About Author

Mark Ainley

Mark Ainley is founder of GC Realty and Development and GC Realty Investments. Mark has been an active real estate investor since 2003. He started slowly by flipping condos and acquiring a couple of investment properties. Since 2003, Mark and his team have successfully renovated and stabilized over 200 properties.

20 Comments

  1. Curt Smith

    We agree completely renovated buy the highest quality possible and say NO to rough areas in spite if the sellers song of 15% cap rate. That cap rate as you said is nearly impossible to maintain given Capex turnover and damage.

    If we had to boil down to one buying tip it is: buy great schools high school ranking of 6 or better. Buy the cheapest home in the best school districts. Put the school name in your ad subject.

  2. Douglas Skipworth

    Thanks for the totally candid article, Mark. It was great to read about your experience.

    We own and manage properties in A, B, C, and D neighborhoods. In general, our experience with the D neighborhoods (as both an owner and a manager) has been similar to your description above.

    Here are 3 reasons why we like class D neighborhoods.

    1. As you mentioned, it’s part of a larger portfolio strategy.

    2. Being a good landlord in those D neighborhoods is a positive for the City and for the residents.

    3. There is less competition for houses and management services in those areas, which provides opportunities for enterprising individuals and companies.

    Thanks again for a great post!

  3. Luis Rosario

    This is most definitely an interesting and informative article. I am also in agreement that being a landlord/property owner in a D class neighborhood can be good for the community and assuming we have a great system in place, we can avoid some of the pitfalls of tenant turnover. This is especially true for tenant applications.

  4. Alex Sanfilippo

    Thanks for this post Mark. I’ve actually been looking into some D-class areas in my city as we have a lot of them here in Jacksonville, Florida. This is eye opening and I’m going through and reading some of the related posts. Thanks for sharing this!

  5. Utiba Max Deazle

    Mark – very timely article. We’ve been wrestling with this for the past few weeks on a possible 5 Duplex deal. We would never consider this area for a Fix & Flip but for a buy and hold we thought maybe. I don’t think it’s a total “D” area/war zone but iffy enough. As apparent by the 500+ days on the market. Another downside you mentioned, hard to exit.

    Side note: A new classification “F” should be created.

    I’ll continue to research the subject and make a decision quickly. Also unsure of how you would adjust your offer price/discount based on risk.

    Thanks for your insights on this topic.

  6. Lisa Phillips

    I have to say, this article seems to be one of the most balanced of why NOT to purchase in a D class neighborhood. I started speaking about how someone can successfully navigate low income areas about a year ago here on BP, I am a huge advocate due to the cash flow, lowered acquisition costs, as well as quick turn around time to full and total ownership of the asset. There are a lot of us in this asset class, and we love teaching others what we’ve learned to make it work.

    So, I really like how balanced your article is, instead of fear mongering. However, I am going to always teach those who want to learn, how if they go into a D class neighborhood, analyze it the way a D class neighborhood and tenants should be analyzed, instead of analyzing a D class neighborhood like its an A class neighborhood – different neighborhoods have different expectations. I’ve never had terrible tenants in my sub30k neighborhoods (which range from B,C, and D neighborhoods – although all where purchased for under 35k). There are a lot of investors here on BP who’ve done just fine in these markets, no more headaches or less headaches than other investors in different classes. I think it would be better to focus on what works for you, and if you have done things badly, what your lessons learned have been to not have that happen again. Im all about the learning how to make this work with solutions rather than blanket statements of “these can never work.” One lesson learn can be in your next posts about this asset class (and BP in general) – “Why I still buy in D class neighborhoods, but how not all D class neighborhoods are alike” – that would be more valuable (because, their not all the same, right? D class in Iowa isn’t the same as D Class in Detroit). Thats what is missing sometimes – that level of nuance, and a few of us try to teach about those nuances and others we’ve found across the country.

    Not to come off so strong, but I am seeing more and more anti-lower income neighborhood posts on BP, but less how to make this asset class work for you posts. Thanks for having a more balanced article on the subject though. There is a lot you can teach us about successes you HAVE had, and the differences between the D class properties that have worked for you (if any have worked for you) vs the ones that don’t – that analysis is priceless, and would be helpful for new investors.

    Where you’re absolutely right and in agreement – it should never just be about price in ANY asset class. Period. You just have to have the right factors appropriate to the right asset class. However, a new investor with either a good mentor or a good working knowledge how to approach these neighborhoods – should be just fine at a much lower cost.

    • ray gondal

      LIsa I agree with you and the others as well. D neighborhoods are pain but the community needs those properties and they need good managers. i have starting in Chicago urban neighborhood and i see a great needs for good clean properties but I am trying to figure it out how to make it work it is tough right now….however advantages of owning solid assets at low costs are there to entice many of us.

    • Celia Rudder

      Thank you for your comments Lisa. My parents have consistently made significant profits in this class of properties over the last 25 years without being a slumlord or an enforcer! I am seeing a trend as well with people taking their experience and making rules for others to live by. I thought we all knew that Real Estate is local and therefore it should be stressed that new investors get to know their markets before investing and settling on specific price category. For some people the opportunity to invest is determined by the cost of the investment. That was the case for my parents who felt more comfortable investing in a 25K rental property as newbies. They did not lose a penny in the crash as did many others who invested in higher priced properties. Also, not all tenants in these areas are deadbeat. And as we learned, terrible tenants exist in those higher priced categories. Trash is trash at any level. We have also found that a solid percentage of people in D areas want to own their homes. Maybe RE investors need to also consider that investment is not only for their profit but for the community as well.

  7. sherwood sohmers

    I look at investing in a “D” class area differently then your view point. I would suggest if you want to control your investment then do not invest in a “D” class area.
    You run a credit check to find a good, a decent tenant. But once the decent tenant rents from you, they can not wait to move to a better area. A more safer area. A better school area. So you can count on loosing them. To fill vacancies, you have to lower your requirements for potential tenants.
    If you keep the property long enough you take the chance that the neighborhood will degrade to where you can not sell the property or have to give it away at a significant discount. Forget about appreciation.
    When a unit is vacant, you have to worry about the unit being striped of wiring, plumbing fixtures, AC, and so forth.
    Basically you can not manage your investment because you can not count on renting to good tenants. You can not count on immediate renting or selling the place. You can not count on having good tenants that do not do extensive damage.
    The option to compare it to is not to a bank CD, but gambling at the casino. You can not count on things going smoothly and that can be a risk that might cuts into your profit in the long term.

  8. I totally agree. In addition it being hard to find tenants that meet the screening criteria and the property needing more maintenance, your rents tend to be lower and your other expenses such as taxes, operating fees (yearly city landlord inspection required for some of these areas), and other city services (mostly tacked onto the water bill) can be higher. Also more regulations, like inspection fee if property is vacant for more than 30 days. Plus weird, annoying, and sometimes scary stuff can happen in these areas. So for us it’s just not worth the hassle.

  9. Rod Hanks

    @Lisa Phillips
    My best cash flowing properties are in the neighborhoods a lot of people would call D class areas. A mentor of mine told me when I first started in real estate to….”make your money in the mess”. In other words don’t buy a $150,000 house to make $100 a month when you can buy a $30,000 house and make $500 a month. There is this misconception that the more money you spend on a property the better the investment. Hogwash…on a balance sheet 10 properties cash flowing $5,000 a month in D class neighborhoods is a lot more attractive than 10 rental properties in A areas cash flowing $1000 a month. Where mistakes are made is trying to find an A class tenant to live in a D class neighborhood and not properly rehabbing the houses from top to bottom. My advice is to know the area, know the tenant class and properly rehab the property. I have had great success with Section 8 and elderly tenants.

  10. david c.

    Thanks you for the post, it hits close to home for me. I’m still a newb and I think I probably always will be! But so far I try and buy exceptional homes in exceptional locations. Wrecked homes that I can bring back to greatness. There rental homes when done but way nicer then what you’d think of as being a rental house. My tenants are people that are upper income that really should be home owners not renters. So my brain damage with tenants etc. so far has been next to none! Knock on wood. One home I have has never been vacant and I’ve never advertised it for rent, someone in the neighborhood hears about the current people moving out and knows someone they’d like to be there neighbor. It’s a sweet house in a very sweet location. So there can be some great intrinsic upside to great homes. Cash flow isn’t one of them, but higher then normal appreciation might well be. A few rules I’ve set for myself are. the quality of the space determines the quality of the tenant. I’d have to be ok living there myself. I don’t want to rent to people that might have to make a choice between paying rent and buying food for there family. Just what I’m doing now, who knows about tomorrow. Thanks again for your post

  11. Cody L.

    A very basic rule of thumb I used is buy in the best area you can while paying less than 100x rent.

    The better the area, the higher the home cost is relative to rent. So buy for cash flow where you get a good rent multiple, then rent for yourself where you’d pay a bad multiple.

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