To Class D or not to Class D ?

[Bill Florence]

I have to say the super cheap class D cash flow turnkeys I see companies marketing such as 2/1 30k homes with tenants and PM in place generating 15% ROI's are intriguing and even tempting. I know some investors go heavy into this market. I also know very well the unique and additional risks involved with these neighborhoods and what are typically vintage homes. But aside from obvious risks like the potentially higher vacancy rates and maintenance, I think a larger concern is years down the road when it is time to sell, where is the property value going to be and who is your buyer ? It seems to me the buyer pool will probably be limited to just other investors and recouping equity could be a problem. I would like to hear from others who have had experience owning (remotely or locally) and bought, held and resold properties in these types of turnkey programs. Would you do it again ?

[Doug H.]

Bill Florence - class D properties are almost their own business model.

Back when I did third-party management, I managed a 30-unit class C building. It easily required 3 times the work of the other 30-unit buildings in that same portfolio which were what I would characterize as class B, solid commodity buildings.

More importantly, the additional work load was composed almost entirely of headache-y, Mickey Mouse nonsense - painting over graffiti twice a week, tin foil over windows, residents in physical conflict with one another, problems with sketchy guests causing problems, etc.

It took three years and a lot of effort to turn that property around. Sadly, it took all of 6 months under the manager who came after me for that 3 years of work to be un-done.

In other businesses, people often talk about the wisdom of dropping the clients who demand high labor (disproportionate) in relation to what they yield. My feelings are that this is the same situation. A person can ultimately manage fewer Class C/D properties than Class A/B. Manager(Owner) burn out, manager fatigue, manager replacement, etc all have to play into the long term math.

If nothing else, ask yourself how many midnight nuisance calls you want to have...