New to Real Estate · Long Island, NY · Member since 2024 · 11 posts · 4 votes
Hello all,
I'm trying to decide on where I want to purchase my first investment property. I've been looking in both Rochester, NY and Buffalo, NY, but also looking at neighborhoods on the borders of these cities. I am trying to understand if there is an easier way to determine A/B/C/D/F class neighborhoods. I have spent a lot of time comparing different homes and reviewing crime maps of the area, etc. but I feel I'm wasting a lot of time looking in D class areas which I'd like to avoid. I always see people posting to stay away from D/F neighborhoods, but I don't ever see how exactly to determine that - I've read a breakdown of what each class entails, I guess I'm just looking for a tool that tells me that instead of trying to figure it out on my own in an area that is not well known to me. Is it just based off knowledge from experience/visiting with boots on the ground/from speaking with other investors/realtors?
@Amanda G. How much time have you personally spent in these neighborhoods? Have you been in these neighborhoods during the morning, afternoon and evening to observe the residents tendencies? Have you stopped into the local coffee shops and bars/restaurants to speak with the residents? What types of grocers are nearby? They serve the local residents. Have you toured rented properties to observe the types of tenants who are living in the units? Who is buying the single family homes that come to market? Mainly investors/landlords or home owners?
It seems you’re trying to arrive at your investment thesis while sitting behind a computer. Rarely is that effective or provide an accurate depiction of the neighborhood characteristics. Even when you contact realtors they often rely on the same computer data you’re probably looking at. That’s why it’s important to touch the neighborhoods where you invest.
The last thing I’ll add is your objective even when you buy in C or lower class neighborhoods is to invest in neighborhoods that have the fundamentals that suggest they can transition to at minimum a B neighborhood. Very few are successful buying real estate in C stagnant markets. At least not over an extended period of time. The assets become difficult to operate as the price points are disproportionately impacted by operating expenses and cap ex. It’s the appreciation that makes investing in these lower tier neighborhoods worthwhile.
It’s normally the investors sitting behind a computer who fail to recognize this. They’re also the investors who miss out on the transitioning neighborhoods because physical observation is the best way to spot the neighborhoods that are transitioning real time. Data chasers are always behind and miss the most meaningful appreciation events.
I'm trying to decide on where I want to purchase my first investment property. I've been looking in both Rochester, NY and Buffalo, NY, but also looking at neighborhoods on the borders of these cities. I am trying to understand if there is an easier way to determine A/B/C/D/F class neighborhoods. I have spent a lot of time comparing different homes and reviewing crime maps of the area, etc. but I feel I'm wasting a lot of time looking in D class areas which I'd like to avoid. I always see people posting to stay away from D/F neighborhoods, but I don't ever see how exactly to determine that - I've read a breakdown of what each class entails, I guess I'm just looking for a tool that tells me that instead of trying to figure it out on my own in an area that is not well known to me. Is it just based off knowledge from experience/visiting with boots on the ground/from speaking with other investors/realtors?
Thanks!
There are a few ways to determine the classification of a neighborhood. Keep in mind classification of a neighborhood is similar to the value of a home, it is subjective. The true value of a home is what a buyer and seller agree too. List price, appraisals, projections and pro forma's are all educated guesses. There is as much art as there is science to all of the above.
Neighborhood classifications are the same way. What my company believes is a C class neighborhood, could be classified a B class by other investors and vice versa.
With all that being said there are a few easy ways to start classifying neighborhoods. Cash on cash returns are, generally speaking, the inverse of risk. The higher the cash on cash returns the higher the risk. When you calculate 12% cash on cash returns on ever house on a street you are in a C class or lower area. If you are in the 20% range, you are better off going to the casino and putting all of your money on black and seeing what happnes.
Since you are out of the area properly calculating cash on cash returns can be difficult because you have variable expenses to calculate. Variable expenses like vacancy, maintenance, and CapEx get more accurate with experience. To get quick and dirty numbers you can use 5% vacancy, 10% Maintenance and 8% CapEx... assuming the building is in OK shape. Valuation of the asset condition is even more important than calculating returns because your calculation of returns comes after asset condition valuation. If you get asset condition wrong, your returns will be wrong.
There is a superior way to all of the above. Get a great team in place. A good investor agent using a good team, will tell you off the top of their head in 3 seconds every neighborhood by class, risk profile, and be able to evaluate asset condition as well.
Your job is to pick a strategy... C class investing, B class light value add, BRRR, etc... once you do that they will put the properties in front of you that fit your strategy. From there your job is to check their work and their assumptions. You take on the role of digging deep into their pro forma and grading it like a teacher instead of writing the paper yourself. Are there future maintenance projections realistic? Did they provide rental comps? Does the property inspection support their asset condition evaluation? Does the insurance company feel comfortable insuring in that area, does the lender want to lend on this property... and so on.
There is no formula for what you want. The classification is really just a creation for bucketing options. What is a C or D or a B or an A neighborhood is really in your hands, combined with some of the data you have reviewed. Since you are in Long Island and considering these areas, the best thing to do is to take a trip up there and decide for yourself.
Take an area like Philadelphia. It doesn't matter if someone tells you one area is a B if you go there and think it's a D. It's data + personal preference + which way is this block trending (D+ to C or C to D+). Big difference there.
@Amanda G. How much time have you personally spent in these neighborhoods? Have you been in these neighborhoods during the morning, afternoon and evening to observe the residents tendencies? Have you stopped into the local coffee shops and bars/restaurants to speak with the residents? What types of grocers are nearby? They serve the local residents. Have you toured rented properties to observe the types of tenants who are living in the units? Who is buying the single family homes that come to market? Mainly investors/landlords or home owners?
It seems you’re trying to arrive at your investment thesis while sitting behind a computer. Rarely is that effective or provide an accurate depiction of the neighborhood characteristics. Even when you contact realtors they often rely on the same computer data you’re probably looking at. That’s why it’s important to touch the neighborhoods where you invest.
The last thing I’ll add is your objective even when you buy in C or lower class neighborhoods is to invest in neighborhoods that have the fundamentals that suggest they can transition to at minimum a B neighborhood. Very few are successful buying real estate in C stagnant markets. At least not over an extended period of time. The assets become difficult to operate as the price points are disproportionately impacted by operating expenses and cap ex. It’s the appreciation that makes investing in these lower tier neighborhoods worthwhile.
It’s normally the investors sitting behind a computer who fail to recognize this. They’re also the investors who miss out on the transitioning neighborhoods because physical observation is the best way to spot the neighborhoods that are transitioning real time. Data chasers are always behind and miss the most meaningful appreciation events.
Hi Stuart! Thank you for the informative reply. You are in fact correct that yes, I am currently analyzing potential investment areas behind a computer. I do have every intention of doing everything that you said. I am not quite at that step, maybe I wasn’t clear in my initial post. I agree that looking online is only going to get you so far, but I am trying to educate myself as much as possible before taking the next step.
I am early on in the process where I am looking at areas that are long distance, as I live in a HCOL area. Before I go and begin walking around neighborhoods to do everything you have discussed (which I fully intend to do), I am still trying to figure out where I should narrow my search down to. I have looked at a lot of data, I’ve talked to other investors and realtors, but I am getting stuck in choosing an area to start seriously looking and making offers. I don’t want to just start booking flights to different cities hoping I figure it out when I get there. I’d like to make informed decisions before doing so, if that makes sense. I also do not want to waste anyone’s time.
My plan is to purchase a home and use it as a long term rental, buy and hold. Hoping to find a home that needs some updating but still has good bones. I am looking for home appreciation over time in better and growing neighborhoods more so than cash flow in lower class neighborhoods. I am definitely getting stuck with analysis paralysis as many beginners do. I get different answers from different people - I know people who have invested in out of state neighborhoods I've never been or heard of, and then I know people who have invested in areas of upstate NY which is a bit closer to me. I'd love to hear more about your experience starting out.
I appreciate you taking the time to reply, and I will keep all that you said in mind!
I'm trying to decide on where I want to purchase my first investment property. I've been looking in both Rochester, NY and Buffalo, NY, but also looking at neighborhoods on the borders of these cities. I am trying to understand if there is an easier way to determine A/B/C/D/F class neighborhoods. I have spent a lot of time comparing different homes and reviewing crime maps of the area, etc. but I feel I'm wasting a lot of time looking in D class areas which I'd like to avoid. I always see people posting to stay away from D/F neighborhoods, but I don't ever see how exactly to determine that - I've read a breakdown of what each class entails, I guess I'm just looking for a tool that tells me that instead of trying to figure it out on my own in an area that is not well known to me. Is it just based off knowledge from experience/visiting with boots on the ground/from speaking with other investors/realtors?
Thanks!
There are a few ways to determine the classification of a neighborhood. Keep in mind classification of a neighborhood is similar to the value of a home, it is subjective. The true value of a home is what a buyer and seller agree too. List price, appraisals, projections and pro forma's are all educated guesses. There is as much art as there is science to all of the above.
Neighborhood classifications are the same way. What my company believes is a C class neighborhood, could be classified a B class by other investors and vice versa.
With all that being said there are a few easy ways to start classifying neighborhoods. Cash on cash returns are, generally speaking, the inverse of risk. The higher the cash on cash returns the higher the risk. When you calculate 12% cash on cash returns on ever house on a street you are in a C class or lower area. If you are in the 20% range, you are better off going to the casino and putting all of your money on black and seeing what happnes.
Since you are out of the area properly calculating cash on cash returns can be difficult because you have variable expenses to calculate. Variable expenses like vacancy, maintenance, and CapEx get more accurate with experience. To get quick and dirty numbers you can use 5% vacancy, 10% Maintenance and 8% CapEx... assuming the building is in OK shape. Valuation of the asset condition is even more important than calculating returns because your calculation of returns comes after asset condition valuation. If you get asset condition wrong, your returns will be wrong.
There is a superior way to all of the above. Get a great team in place. A good investor agent using a good team, will tell you off the top of their head in 3 seconds every neighborhood by class, risk profile, and be able to evaluate asset condition as well.
Your job is to pick a strategy... C class investing, B class light value add, BRRR, etc... once you do that they will put the properties in front of you that fit your strategy. From there your job is to check their work and their assumptions. You take on the role of digging deep into their pro forma and grading it like a teacher instead of writing the paper yourself. Are there future maintenance projections realistic? Did they provide rental comps? Does the property inspection support their asset condition evaluation? Does the insurance company feel comfortable insuring in that area, does the lender want to lend on this property... and so on.
Thank you for breaking all of that down for me. I am definitely an over thinker at times and it gets hard to simplify. I am going to tweak my plan a bit and keep moving forward!
There is no formula for what you want. The classification is really just a creation for bucketing options. What is a C or D or a B or an A neighborhood is really in your hands, combined with some of the data you have reviewed. Since you are in Long Island and considering these areas, the best thing to do is to take a trip up there and decide for yourself.
Take an area like Philadelphia. It doesn't matter if someone tells you one area is a B if you go there and think it's a D. It's data + personal preference + which way is this block trending (D+ to C or C to D+). Big difference there.
Thanks Jonathan. Maybe I took some information a bit too literal in all of the information I've been trying to absorb. Time to make some moves.
To identify investment-friendly neighborhoods, use A/B/C/D/F classifications. A-Class neighborhoods are high-end, desirable, with low vacancy rates. B-Class neighborhoods are middle-income, stable, with modest appreciation potential. C-Class neighborhoods have older homes, average appreciation, but higher maintenance. D-Class areas have high crime, poor tenant quality, and declining property values. Use neighborhood-specific data tools and connect with local experts for insights.
If it feels a bit sketchy but you don't feel in real danger, it's C Class.
If it feels like a place you could see yourself living, it's B Class.
If it feels like a place you could see yourself feeling the need to keep up with the Jones' it's A Class.
Hahaha @Travis Biziorek nailed it, and I agree. I prefer B class rentals. Yes, they do come at a slightly higher purchase price/downpayment than C class rentals, but I’ve found it to be worth it because of the improved tenant quality.
I'm trying to decide on where I want to purchase my first investment property. I've been looking in both Rochester, NY and Buffalo, NY, but also looking at neighborhoods on the borders of these cities. I am trying to understand if there is an easier way to determine A/B/C/D/F class neighborhoods. I have spent a lot of time comparing different homes and reviewing crime maps of the area, etc. but I feel I'm wasting a lot of time looking in D class areas which I'd like to avoid. I always see people posting to stay away from D/F neighborhoods, but I don't ever see how exactly to determine that - I've read a breakdown of what each class entails, I guess I'm just looking for a tool that tells me that instead of trying to figure it out on my own in an area that is not well known to me. Is it just based off knowledge from experience/visiting with boots on the ground/from speaking with other investors/realtors?
Thanks!
I use income levels. Find the median (not average, median) income level for the city in question. 45% - 70% of the income (50% is median) is C class. 70% to 90% is B class. 90 - 100 percent is Class A. 30 percent to 45 percent is D class. F is below 30 percent.
Works for me. Others will have different cut offs. I won't consider below 60% income level.
@Amanda G. I use niche website. It tells you each zipcode with its class. Also you can use reventure website that shows you market data by zip code and counties. You will know the current market rent in the area, population growth and house values. Spot crime can also show you recent crimes reported in a given zipcode. Hope this helps.
I think crime data is key. All the other economic and "do you feel safe" criteria seem intricately linked to crime. Here's a link for Rochester Crime Map.
I third or fourth the recommendation to just go there in person and I also like your plan that you're focused on the long term.
If it's an option I'd pick an area 1-3 hours from you and just start putting the time in. Go to meetups, walk neighborhoods, visit properties, meet humans. The market is tough right now.
This is why buying out of state is so incredibly difficult. As Stuart mentioned: Computer statistics can be useful but are not the end all be all for determining the value and class of an area. A lot of people want to buy out of state to chase cash flows and get really excited when they see the returns, but they fail to really get to know an area.
Classifications of A,B,C or D are really opinion based, but if you speak to professionals who really know what they are doing, they will generally agree across the board on what area falls into what class.
Take your area for instance. Can you differentiate between a C or A class area that is local to you? Are there area you wouldn't invest in for whatever reason? If you can apply this it is likely because you have gotten to know where you live over time. If you can't determine an area class by driving there and looking at it, then you need to get some more exposure and get to know the local market more.
You can use computer data to help you avoid areas and in fact its not a bad exercise to compare the data to a prospective area vs your current area. But that is just a good filter.
Driving around, walking around, enter local shops and evaluating the same things you do on a day to day basis in your local area is the best way to get to know a place. What kind of people are at the local supermarket? Are they friendly people you would have a conversation with or would you avoid them entirely? What are the conditions of the streets, curbs, lawns, and sidewalks? Is there trash everywhere? Broken concrete and curbs on every other home? Overgrown lawns and broken blinds?
Lastly: if you wouldn't live there - DONT INVEST THERE!
