Whats it like to invest in C or D class properties?

[Chris Gawlik]

I think with the economy the way its headed there is going to be a need for more affordable housing.  

Wanted to hear from those of you who are successful in the C and D class property niche. How many properties do you have? How do you handle repairs, compared with other B+ and A type real estate classes? How and why did you choose this niche? Are you still currently buying this type of asset? What state and local areas do you buy in ( please be as specific as you can )? What are the advantages and disadvantages of working with this type of asset class?  

[Jay Hinrichs]

there is thread after thread on BP about this subject.. 

from my perspective C can be 50 50 for out of stand landlord   as in 50% chance of a decent outcome over time

D class for out of state I think is 80 to 90% of folks that try this will lose money and end up exiting as a loss sometimes a huge loss

[Mark H. Porter]

My c class units, built in the turn of the century, make $500 per door. It's where the cash flow and CoC can be found but admittedly they require much more management than my A or B.

[Chris Gawlik]

@Jay Hinrichs Yea I like your perspective on this Jay. I also wanted to hear from those who are currently and actively involved in this nice. I did take a look at the other posts, most of them bringing up the word slum lord, but nothing seemed really current and did not seem like the people involved in this asset class gave any advice or talked about there current experience. 

[Chris Gawlik]

@Mark H. Porter So when you say much more management, do you have to deal with people not paying the rent much more often. Would that be your biggest problem? Do you have section 8 tenants?  

[Mark H. Porter]

Not really. The management issues are the maintenance issues - older buildings just break more.  Faucets are older, towel holders are older, floors are older.  I also have section 8 in a couple and it’s a bit of a carp shoot.  The nice thing is you have the housing authority to back you up when they don’t pay their portion or there are issues with noise or messiness.

[Jay Hinrichs]

Keep in mind those with Success at C and D by and Large or local landlords that are very hands on.

if they are being honest here on BP..  

[Chris Gawlik]

@Account Closed. Also Jay you said you think most people go broke that buy the slums OOS? You also said C and D class landlords are much more involved? I wonder if being in the area to manage the problems better, if you could be profitable or even very successful as a D class land lord. Sounds like Im joking, but Im not. That's who I wanted to hear from and the real story about how it is to own that sort of asset class.

One reason is I read this post I think there is a newer one as well about this. the blog article is not so much about D class properties, but it got me to thinking, and I wondered what other investors thought about this type of investing. 

https://www.biggerpockets.com/... 

There is an area in Redlands CA that is pretty close to a war zone. What I wonder is when you start coming out of the hood and start heading into the nicer areas, there has to be that area in between that you could find some C and B neighborhoods. I wanted to know about those type of areas as well in the mid west.

Kansas City, Cincinnati, Cleveland, and Detroit

Anyone out there that does this sort of investing that the article is talking about, and successful at it. Thanks.

[Jay Hinrichs]

Originally posted by @Chris Gawlik:

@Account Closed. Also Jay you said you think most people go broke that buy the slums OOS? You also said C and D class landlords are much more involved? I wonder if being in the area to manage the problems better, if you could be profitable or even very successful as a D class war zone land lord. Sounds like Im joking, but Im not. That's who I wanted to hear from and the real story about how it is to own that sort of asset class.

One reason is I read this post I think there is a newer one as well about this. the blog article is not so much about D class properties, but it got me to thinking, and I wondered what other investors thought about this type of investing. 

https://www.biggerpockets.com/... 

There is an area in Redlands CA that is pretty close to a war zone. What I wonder is when you start coming out of the hood and start heading into the nicer areas, there has to be that area in between that you could find some C and B neighborhoods. I wanted to know about those type of areas as well in the mid west.

Kansas City, Cincinnati, Cleveland, and Detroit

Anyone out there that does this sort of investing that the article is talking about, and successful at it. Thanks.

Engelo is a personal friend of mine. I first met him on line on the Australian version of BP and when he first came to the US.

he is VERY hands on for his clients. 

the point is you buy low end assets with no one there to help you that have a vested interest PAST being your PM.. and your taking a risk

Also Engelo only deals with cash buyers.. So his buyers have no risk to debt.. 

[John Morgan]

@Chris Gawlik

I prefer C class hoods. Huge demand and ROI is higher. I'm ok with not cared for yards and bad school districts. I target blue collar areas that are in high demand. Almost all my tenants will never be able to afford or qualify for a home to buy. I treat them great and keep the properties in great condition in the hopes they stay there forever. I'm not worried about a recession. People will move down from B class areas to mine. So if anything, rents in C class areas will increase more during good or bad times due to demand. Maintenance on my (1940-1955) C class properties don't seem to be much more than my newer nicer B class properties. My tenants all seem great too. So no complaints!

[Jay Hinrichs]

Originally posted by @John Morgan:

@Chris Gawlik

I prefer C class hoods. Huge demand and ROI is higher. I'm ok with not cared for yards and bad school districts. I target blue collar areas that are in high demand. Almost all my tenants will never be able to afford or qualify for a home to buy. I treat them great and keep the properties in great condition in the hopes they stay there forever. I'm not worried about a recession. People will move down from B class areas to mine. So if anything, rents in C class areas will increase more during good or bad times due to demand. Maintenance on my (1940-1955) C class properties don't seem to be much more than my newer nicer B class properties. My tenants all seem great too. So no complaints!

age of the homes makes a difference..  there is more to this than just saying this is C or D class..  

[Joseph Bramante]

Thanks for the question. First for our experience we have 1000 class B& c units w another 440 under contract.

i think Covid forced a slight correction in the b and C market since it was getting too tight and now owners see their exposure. In previous crashes, the market out performed class a whereas now, it is initially out performing A, but many economists are for casting a quick recovery for A while B and C take a few years to rebound fully. 

i think new buyers have to require a higher going in cap to protect themselves. This will result in higher cash flows but decreased exits. 

[Flora Nguyen]

For SFR , I think it's a smarter investment to be in the B or B- neighborhood in terms of quality of tenant and rent security. When it comes to C or D neighborhoods, multi-unit is a good hedge of your investment. One bad tenant out of 4 is better than one bad tenant in a SFR. I can't stress enough a good property manager who is local and has experience in managing these kind of investments.

[Mike Dymski]

There is already a massive shortage of affordable housing. The demand is there...that's not the issue. Good property management is the challenge. And, residents need employment; otherwise, units are full but some can't pay.

In many markets, there's a pretty large jump from C to D class...and in most markets, D class takes very hands on, local management.

[Richard Dunlop]

Originally posted by @Account Closed:

How are we defining class D? Mobile homes and such? For instance, here in MI we have Detroit. I wouldn't even call those "opportunities" to buy the $20k houses there class D. I'd call all but the small area that is being carved out and renovated by Dan Gilbert a flat out warzone. 

 Have you been to Detroit recently?

[Miho Y.]

@Chris Gawlik we do D class only because that’s all we can afford. Then metropolitan LA area is running out of develop-able lands so the value is climbing rapidly. It’s both good and bad. Cons: Yes, we can be in the slumlord category because we don’t improve unless absolutely necessary. Nothing fancy just bare minimum with the cheapest material. Next, with the rapid appreciation, the repair cost has nearly doubled. When we acquired this properly in 2015, we used to pay handyman 20-25 per hour. Now it’s minimum 45 and usually 60 and up. Thus, our funds must be preserved for the event any of the tenants leave so we can improve and charge market rent. Indeed, one of our tenants moved out because the crime rates became unbearable to them. After they left, we cleaned it up and posted on the Craigslist with 40% higher rent than previous tenant paid. We did one showing and the lease was signed 2 days later after we did all the background check. So I guess this should have been categorized in the pros section. Trash on the street is terrible. We have to file a report at least once in 2 months for illegal dumping in the alley. Pros: tenants are super grateful to have roof over their head. Even though it’s rent controlled, we don’t feel the level of tenant entitlement is as high as A or B areas. They pay on time and if not they pay 6% late fee with no complaint. Our tenants seem to understand the simple fact of no rent, no roof. Thus, none of our tent missed rent / late fee with or without covid19. There’s no entitled nonsense the state of California promotes. Best of all, it breaks even or cash flows positive while most of A and B class neighborhood in LA do not.

[Briyana Hawkins]

Originally posted by @Richard Dunlop:

Originally posted by @Account Closed:

How are we defining class D? Mobile homes and such? For instance, here in MI we have Detroit. I wouldn't even call those "opportunities" to buy the $20k houses there class D. I'd call all but the small area that is being carved out and renovated by Dan Gilbert a flat out warzone. 

 Have you been to Detroit recently?

I plan to go to Detroit soon as I am exploring markets that are cheaper to get into. Was this statement a good or bad thing?

[Jill F.]

You really have to look at both the class of the asset itself and the class of the neighborhood. In our worst neighborhood (the second poorest in Akron), we have our second oldest property. These are 1930 buildings with old plumbing and electrical systems. Now, everytime we turnover a downstairs unit, we tear out the lathe and plaster bathroom ceiling and screw up pvc panels for the ceiling to ensure quick and easy access for when we do have and plumbing issues. To reduce electrical calls, we educate our tenants at move in on flipping a tripped breaker and limiting electrical use. Because we did a fair amount of work on these units at purchase, we know where the problems are likely to be so we can do a fair amount of phone trouble shooting.

@Dennis M. gave the best description I've ever read of a "D" 'hood, he said: "It's just a short stroll down the littler lined street to the local liquor store".

There have been 3 or 4 murders in the area in the last few years but they were domestic disputes not gang warfare. The biggest problem is constant litter and dumping by non-tenants and petty vandalism.

Even in this neighborhood, I believe that because we maintain our buildings well and are willing to do payment plans, we have four (of 8) tenants with B.S. degrees and a fifth in his 3rd year
of a BS. Many of these tenants didn't pursue high $$ degrees and
graduated with substantial debt so we don't have much turnover because
our tenants keep their places for a while after graduation. These are all one bedroom units and the mostly young tenants keep them nice and don't whine about petty stuff (i.e. the lawn guys blew grass on my car), and don't have a bunch of drama.

It would be tough to know the properties and tenants well enough to manage this kind of asset from afar, I think.

[Account Closed]

The question is like trying to stereotype people. You can't. Or, you should not try to!!!

The different classes come with the same and different scenarios. An 'A' property costs you significantly more money and you can't buy as many of them. You pay higher property taxes and higher insurance. The homes or apartments units are usually larger. So, this means all your maintenance costs are substantially more expensive because you have more square feet of flooring, walls, roofs, outside walls, etc.. You get filthy rich when properties appreciate in value. You hardly keep up with inflation when buy properties for only cash flow. So, owning fewer 'A' properties or more 'C' and 'D' properties is a question to reckon with.

High-end properties tend to increase in value faster than lower-end properties and many people use this business model to get rich. But, when you buy lower-value properties you accumulate a higher number of properties and you have multiple properties, or apartment units increasing in value and this larger number of units could appreciate more than higher-value properties. This is a question that has answered with a spreadsheet for each property.

I would not devise a business model based on the properties' class. Look at every property and the first one that lays eggs like the Golden Goose is what determines which class is best.

[Account Closed]

I have invested in C class properties. By that I mean rents between 700-1000/month in the midwest. Rents above 1000 are more like B class and rents below 700 are D class. I used to own 8 now own 3. All in all I made really good money on them. But a lot of it was timing and the fact I bought in 2013 and since then I saw a lot of appreciation. I roughly calculated 50% of my gains came from appreciation and 50% from cash flow and mortgage payoff.  I had my share of nightmare stories. The quality of people who rent these properties are not the best caretakers of your home. Turns were much more expensive than I thought. Maintenance was more than I thought also. On the other hand the rental yields were high, mortgage was low and my cash in was not that much. With a portfolio approach my returns varied from 10% in a bad year to over 20% in a good year but probably averaged out at about 15% not counting appreciation.

Now Im moving out of those assets into more syndications and passive. A lot of that is due to personal reasons of moving out of the US. My remaining properties still cash flow and I have nice appreciation as well.

So I guess Im in the lucky 50% that @Jay Hinrichs says did well with this asset class. But it was by no means without its challenges and bumps.

[John C.]

We have about 100 class C properties in Northeast PA.

Most purchased and rehabbed below 40k a building.

We use a private lender because it's hard to get a bank to do loans this small. When we were using banks we'd do blanket loans to refi across three or four buildings.

Management is tough. Constantly chasing rent. Hard to squeeze and extra fees out of tenants for if they don't mow lawn etc.

You need to decide if you'll forget July rent in order to collect August rent. Tenants genuinely wonder if they paid August rent in full why they still $200 from when they partially paid on June.

My brother once dated a girl who lived in class C and he told me their constant struggle was parking and trash cans..... It's so true. Constant neighbor fighting about nonsense.... For this reason where possible we focus on single units or multis with seperate entrances.

It's amazing if someone is laid off how many things will magically break in their apartment just before the first... Making it unliveable.... But once they come up with rent money on the 20th.....it turns out it's OK because they want to sleep through the repair appointment.

We cash flow $250 per unit per month after financing which for us is about $250 a month on a 7 year term and after repairs/non payment /vacancy. Our more recent purchases are closer to $350 a month.

Key tactics:

-Make your presence known. Tenants need to know you and your helpers are watching.

- Collect rent every way possible including letting tenants deposit cash into a bank account. Venmo cash app etc...

- We text everyone who owes us rent every Friday (pay day). We (make sure you have a good helper) post notices and knock on doors to collect cash every Saturday after 12pm when banks close. The last 20 percent is the hardest. When a tenant doesn't have "any money at all" follow up with: "do you have $100? $50? $20? To avoid eviction " they always have $20....but many times have $100. $100 4 times a month is half your rent...

-Warn them if they don't show up for repair appointments you're "using your key and coming in"

-If they are completely unresponsive warn than you'll be doing an inspection to determine if they have abandoned the property.

-Have a good full time handyman or two.

-Get to know local code enforcement or inspectors. Make sure they know any issue will be dealt with promptly after a phone call....why waste their time on paperwork or citations.

-Evictions are your friend.... But your goal usually isn't to kick them out.... It's to almost kick them out but they often pay the day before the constable comes.... Make sure it's cheaper for them to pay you than move.... And make sure you remember partial back payment is better than a cleanout and vacancy bill.

-Always keep a dumpster, a cleanout crew to turn an apartment in 24 hours... And a list of prospective tenants.

-Cash for keys is better than eviction if you want somebody out.

-Be able to turn your phone off because your voicemail lists an emergency contact for your on call plumber/hvac guy.

-Tell tenants you don't get involved in neighbor drama.... They need to be adults. When you do get involved tell them this is the only time you're giving this little speech and next time you're driving directly to the magistrates office.

It sounds like a lot of work.... And I suppose it is.... But it's less work than a full time job with more freedom and more profit. 20 percent of your tenants are causing 80 percent of your work...

I imagine if I was a little less accommodating it would be less work. Well see.

It's a lot of fun, a lot of profit, but At least a week you'll want to Evict everybody!

Our towns are mostly happy with me because I've turned dilapidated condemned buildings into places for people to live.... You're not a "slumlord" for having problems at your buildings.... You're a "slumlord" when you don't address them. The Code Enforcement people always say that.... You've got a problem here.... But we appreciate that you'll handle it quickly and professionally.

I'm not an expert.... Just trying to get better every year.... Message or post and questions... I'll try to answer as best as I can. Keep in mind there are many on BP who will completely disagree with many of the above.

[Jay Hinrichs]

Originally posted by @John C.:

We have about 100 class C properties in Northeast PA.

Most purchased and rehabbed below 40k a building.

We use a private lender because it's hard to get a bank to do loans this small. When we were using banks we'd do blanket loans to refi across three or four buildings.

Management is tough. Constantly chasing rent. Hard to squeeze and extra fees out of tenants for if they don't mow lawn etc.

You need to decide if you'll forget July rent in order to collect August rent. Tenants genuinely wonder if they paid August rent in full why they still $200 from when they partially paid on June.

My brother once dated a girl who lived in class C and he told me their constant struggle was parking and trash cans..... It's so true. Constant neighbor fighting about nonsense.... For this reason where possible we focus on single units or multis with seperate entrances.

It's amazing if someone is laid off how many things will magically break in their apartment just before the first... Making it unliveable.... But once they come up with rent money on the 20th.....it turns out it's OK because they want to sleep through the repair appointment.

We cash flow $250 per unit per month after financing which for us is about $250 a month on a 7 year term and after repairs/non payment /vacancy. Our more recent purchases are closer to $350 a month.

Key tactics:

-Make your presence known. Tenants need to know you and your helpers are watching.

- Collect rent every way possible including letting tenants deposit cash into a bank account. Venmo cash app etc...

- We text everyone who owes us rent every Friday (pay day). We (make sure you have a good helper) post notices and knock on doors to collect cash every Saturday after 12pm when banks close. The last 20 percent is the hardest. When a tenant doesn't have "any money at all" follow up with: "do you have $100? $50? $20? To avoid eviction " they always have $20....but many times have $100. $100 4 times a month is half your rent...

-Warn them if they don't show up for repair appointments you're "using your key and coming in"

-If they are completely unresponsive warn than you'll be doing an inspection to determine if they have abandoned the property.

-Have a good full time handyman or two.

-Get to know local code enforcement or inspectors. Make sure they know any issue will be dealt with promptly after a phone call....why waste their time on paperwork or citations.

-Evictions are your friend.... But your goal usually isn't to kick them out.... It's to almost kick them out but they often pay the day before the constable comes.... Make sure it's cheaper for them to pay you than move.... And make sure you remember partial back payment is better than a cleanout and vacancy bill.

-Always keep a dumpster, a cleanout crew to turn an apartment in 24 hours... And a list of prospective tenants.

-Cash for keys is better than eviction if you want somebody out.

-Be able to turn your phone off because your voicemail lists an emergency contact for your on call plumber/hvac guy.

-Tell tenants you don't get involved in neighbor drama.... They need to be adults. When you do get involved tell them this is the only time you're giving this little speech and next time you're driving directly to the magistrates office.

It sounds like a lot of work.... And I suppose it is.... But it's less work than a full time job with more freedom and more profit. 20 percent of your tenants are causing 80 percent of your work...

I imagine if I was a little less accommodating it would be less work. Well see.

It's a lot of fun, a lot of profit, but At least a week you'll want to Evict everybody!

Our towns are mostly happy with me because I've turned dilapidated condemned buildings into places for people to live.... You're not a "slumlord" for having problems at your buildings.... You're a "slumlord" when you don't address them. The Code Enforcement people always say that.... You've got a problem here.... But we appreciate that you'll handle it quickly and professionally.

I'm not an expert.... Just trying to get better every year.... Message or post and questions... I'll try to answer as best as I can. Keep in mind there are many on BP who will completely disagree with many of the above.

well written by a hands on landlord... also I know Rural PA kind of well.. its a far cry buying low cost homes in those little rural burgs than what landlords have to put up with in C and D in major metro areas.. In other words eaiser for you..  Less theft vandalism shootings etc . 

and getting those paid off in 7 years is the way to go.. you get them paid off then you can hire a full time GM to take over your roll of owner enforcer..  Nice work.

[Henry Lazerow]

It really depends on area and what you call C class. In Chicago lots of realtors call areas like the south shore C class when in my mind it's D/F class and then working class areas like Brighton Park, suburbs Aurora and Elgin I would call C class. In the working class areas you can make it work profitibly especially the ones we have locally that are $1000+ rents and pretty solid tenants. If the rents were cheaper I could see cap/ex taking up too large a percent of rents and killing the numbers pretty quickly. A roof is same cost on cheap and expensive buildings. In the D/F I have pretty much just heard horror stories of the properties going negative except for a select few operators who often have their own management company and really know how to operate profitably. 

I was curious about all the $50-100k duplexes in Wisconsin and toured about 20 of them. A good portion the tenants weren't paying rent or the building had deferred maintainance that atleast in my mind was a huge liability. Think of stuff like rotting wood on porches, etc. that no owner wants to spend big money fixing due to the low cost of the property. It's not a risk I am comfortable with but some people are. 

[Tim Jacob]

I think to be clear we should define them.  

 D is usually the hood.  Drugs, Violence, and boardups all around.  C is blue collar areas where they are a decent amount of homeowners living there and people giving a damn and cut there grass.  

1 thing newbies like to think is D is ideal for section 8.  Before you assume that go to your local section 8 office or talk to some locals and see if that is even feasible.  In baltimore where I am the voucher holders can and will get better.  Usually c grade areas to live in.  

Secondly like has been stated every successful d grade investor I know has been local.  PM won't work.  Its not profitable and the tenant base will be too much of a pain.  The best thing for you if you go that route is to do the pm work yourself.  The people qho do take it will rob you or quit.  Do not think its possible.  That leaves c grade.  You can do well in c and get pm.  It wont be as easy as b grade and things like unreimbursed utilities and tenant caused maintenance will take a bite out of profits but it is feasible and uou can make money and probably hit the 1% rule with a lower entry point. 

This is over time.  Dont listen to a long distance investor who got lucky  once or twice.  Talk to people who have done it a while.  

Dont put your hand in the cookie jar too many times in this business with D grade.  Metaphorically speaking your hand is going to get stabbed one time and you will leave salty and frustrated hating real estate.  Wait til you have enough for c grade or  better yet b grade and get an investors agent in your local market to guide you and you should be alright.

[Stephanie Drouillard]

@Chris Gawlik

I own 3 rentals in a small, blue collar area of northern Michigan. They have all rented out quickly (less than 2 weeks) but I make sure to "upgrade" them more than what other local landlords do and offer market rent. All cashflow between $200-$300 a month after setting money aside for capex, repairs, vacancy. All of our tenants have paid on time, with no complaints. When a repair is needed we handle it right away, with our trusted local handyman. We do live here and self-manage and have a great relationship with our tenants. Decent rentals are hard to come by, since we live in a "vacation town" a lot of the previous rentals have now turned into Airbnbs. A lot of our family thinks we should jump in the Airbnb wagon, but we prefer to provide quality and affordable housing to the people in our community. I do believe hands on is a must for c class neighborhoods.

[Todd Pultz]

@John C. @Chris Gawlik I agree with many points John listed. I have hundreds of C doors in Dayton, OH and some D neighborhoods. Let’s make sure we are clear though, a C building can be in a D neighborhood and a D building can be in C or B neighborhood. So you need to ensure your looking at the building and neighborhood which it sounds like you are.

Managing these properties are very hands on and you have to be serious about your business. Firm, fair and consistent will go a long way and tenants need to know you will not put up with any crap! We address quality of life issues immediately and I spend plenty of time at the properties so they see my face. I also challenge the neighborhood when they test the waters to see if they can loiter on our properties.

You can do this out of state, but you have to have the right PM and very few have the ability and skill to manage challenging areas. If they are timid, the residents will know this! My background is law enforcement and I am still the VP for a large security Officer firm. We specialize in security at C and D properties in challenging areas. We handle security for metropolitan housing as well and in my younger police days I worked off duty at the worst of the worst properties in this city. I say that because I am a little different and I know how to adapt and handle these properties. Most PM’s will not.

Just yesterday I had an acquaintance with me driving properties and looking for properties for him to invest in. While at a new building of mine, we were approached to buy dope and other stuff. @Jesse B. Could probably share an outside view of this interaction, but you have to address these situations head on or they will take over your property.

Recent D story you can google is Western Manor Apartments in Dayton, OH. 15-16 years ago the property was a war zone!!! We took security in and cleaned it up and we also took over a small portion of management for the owner. Property was successful for the next 12 years with minimal issues. They sold the property two years ago at a good amount due to the success. Mostly section 8 buildings. However, new owner pinched pennies and started cutting onsite security. Against our best advice, they cut security down to a few hours a week. We knew this was not effective and they stopped paying their bill. We cut services off. That was less than a year ago. A little over a month ago the city shut the entire complex down and made everyone get out. This is over 200 units. That property is vacant and now sitting being destroyed as we speak and the owner has about 6million in loans on it.

I guess the point is if you know nothing about these neighborhoods, stay away unless you commit to learning and being hands on.

However, if you do it right, the cash flow can be very nice! It’s not hard for us to get $300-$400 cash flow per door! We work our tails off though to keep them right

The only thing I disagree with from john is all the ways to collect rent. We have two options, they can pay on our software through their app or they can drop payment to our office durring office hours. If they don’t pay we issue a notice, if they don’t respond we evict. We do not chase rent!!!! We run 3% occupancy. It’s about changing the culture of your tenants and training them how to work within the system you have created. We never give cash for keys, because that’s unfair to next landlord! We need to be able to see evictions through our screening process.