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?  

[Account Closed]

Back in 1965, I managed 135 rental units in the worst parts of Springfield Mass and as far as Hartford Connecticut.  The landlord knocked on one door to collect the rent and the tenant broke his nose and said, I told you not to come again for the rent".

We had the housing authority (if that is what it was called it at the time) on our butts every day because the tenants would break window screens, break door locks, keep their apartments filthy so they were infested with roaches and rats and we could not keep up with repairs. I was only 15-years old when I started working for the landlord and even though I knew nothing about managing properties I knew the landlord was spending more for repairs than his gross income. Fortunately, for him, he was filthy rich and owned 25 movie theaters, 9 huge shopping centers that eventually had K-Marts in them and he owned huge commercial properties e.g. factories and other commercial buildings. He was the person who inspired me to invest in the stock market when I was 15-years old and inspired me to invest in real estate.

We have some really bad areas in California, but the laws are more landlord friendly and even the worst tenants are more respectful that what I dealt with in Massachusetts. A few years ago, I owned some rental properties in Holyoke, Mass. and evicting tenants was such a huge nightmare I sold the properties after owning them for more than 40 years and the selling price was depressing when compared to the purchase price and slow appreciation over the 40+ years. I wouldn't have done much worse if I gave them to a charity.

[Bruce Runn]

I'm interested in people definition of class B, C, and D.  I think of those classifications in a two fold way.  Is the neighborhood class A-D and is the building class A-D and is building class only based on Age?

[Jay Hinrichs]

Originally posted by @Bruce Runn:

I'm interested in people definition of class B, C, and D.  I think of those classifications in a two fold way.  Is the neighborhood class A-D and is the building class A-D and is building class only based on Age?

good point.. we have to define the asset.. HUGE difference in MF A B C D and SFR they are apples and oranges.

along with location.  INNER city urban  is not small town middle America population 20k..  

then you have age..  again big difference .. you can have a 70s built home that the neighborhood has been taken over by gangs and drugs.

and you can have a nice 1899 in rural mid west .. both would be C class or D class right but for complete different reasons.

[Brian Ploszay]

@Henry Lazerow  

The neighborhoods of Chicago don't fit nicely into an A to F class system.  I'd add pluses and minuses.

Brighton Park, Cicero, Aurora, Elgin - rental housing can also be called "work force housing."   That is a B rating.  The people have jobs.  Maybe you can call it a high C rating, but the tenant defaults are just not there to call it class C.  Collections are simply high there.

South Shore is "C" housing.  To some extent, people have some employment.   The area is propped up with section 8 vouchers and this stabilizes the housing stock.   It gets a C rating because the tenant base has a higher rate of default and crime is higher. 

For Class D, I would say Harvey, Engelwood, Riverdale, part of Roseland.  I call class "D" impoverished areas.

Class F - if there is such a thing, would be housing that is not safe to rent to any type of people.  The properties need substantial rehab and the neighborhoods don't justify the investment.  Just like high school, F means fail.

The fact is that rentals tend to be housing for working class people.  The middle class eventually become home owners, condo owners, etc...

There is luxury housing and that's A quality.  Or even older housing stock on the north side gets an A rating.  Mostly because location and people pay almost trophy prices for these buildings.  

[Aigo Pyles]

C classes can provide you with nice cash flow depending on the state. But of course, B class properties tend to perform better. When it comes to rental properties, cash flow is always the target of the game. Class D is not usually advisable. 

[Johnnie Walker]

@Chris Gawlik Here goes my experience with a 2 flat on the west side of Chicago. When I go to my building, I never go at night or late afternoon. I always, without fail, carry a gun, always. I have to shovel garbage , literally shovel, like it is snow , near the dumpsters. There is a rat problem, there is a roach problem. The tenants call for anything, they even called when one of their kids got killed. Two policemen were shot half a block away about 10 days ago. The upside? When both apartments are rented I'm pocketing 2k a month after expenses. Also, the area is slowly improving, it's 10 minutes from downtown, 4 blocks from the blue line, 4 blocks from the Eisenhower Expressway. It's blood money.

[Chris Gawlik]

@Johnnie Walker Now that's the honesty that I wanted to hear! Wow. Crazy stuff. Deff gives me some insight into a war zone type area. 

Since your being so honest I wanted to know, why did you choose to invest in that location? Was the deal so good you could not pass it up...? Do you like investing in this type of asset class because of the cash flow? Are you going to buy more of this type of asset? Are you trying to clean it up? 

Sorry for so many questions. Just really curious about what got you into this type of asset from your perspective. Really appreciate your brutal honesty. Also not taking away from any of the other land lords contributing to the thread. Appreciate every ones diff perspectives and personalities.

[Joe Bruck]

'In a nutshell' A class neighborhood is negative cashflow  & positive appreciation, C class is the opposite

[Jim K.]

My life as a low C-class landlord is milk and cookies every day, chocolates when it rains and flowers when it doesn't. I know nothing about fixing houses and consider such knowledge beneath me, only fit for the menially-minded. I instead use my superior intellect to creatively manage my business and the people who serve me in it while I kick back and spend loads of time with my family, posting amazing shots of our living our best lives every day on Instagram and Facebook.

I am universally loved in my community and my minions and tenants routinely tell me I'm a angel sent by heaven to help them in their time of need. All the best families receive me and mine without any hint of stigma for the work I do.

Work on your business, not in your business. Only a fool picks up a hammer and bashes his thumb in with it when he could instead be making million, MILLIONS per hour using his real estate skills.

Come on in, the water's fine! Swimming with the dolphins in A and B-class will run you $100 an hour, but swimming with the crocodiles in C and D-class is always free!

[Michael Helfant]

This has been a great thread. In and around Detroit and the ring suburbs that touch it, we tell clients that you typically trade returns with location. Not always the case, but usually. While there's always a number with a property that makes it work, it is easier to find that deal that meets the typical BP standards in some of those lower grade neighborhoods. However, that property may take more work, need more hands on management, etc. Much of what has been said so far. The lower cost of entry often makes these properties so appealing. In a place like SE Michigan, we are lucky in that prices are low enough that you can find deals in solid neighborhoods that easily return well. It is a little easier to begin here, build your portfolio, and then begin to diversify as you gain more income coming in. Then, things may be different for some of our out of town investors versus local ones, too. Sometimes, its just about peace of mind, and investing from far away in a C-/D type neighborhood can make some nervous. 

[Staneley Cesaire]

I think you’re talking about C and D class neighborhoods, well here is the big difference when you put an apartment for rent you get tones of calls, the problem many don’t qualify. You have to careful in screening making sure you are trying to rent to the right person if you are waiting for a perfect tenant you may stay empty for a long time so you have to know what is the best tenant in that area for that apartment, it might section 8, or some other program recipient. # 2 the people in these neighborhoods Are generally low income, so they will fight about damages cause they don’t have the money to fix it, # even if you screen you still can end up with a bad tenants boyfriend or girlfriend who is crazy or sells drugs And say they don’t live there but is always there. Hey check this youtube video (ghomnet- 10 reason not to buy investment property in the hood there is also 10 reason to buy in the hood

[John Warren]

@Chris Gawlik I think one of the confusing parts of this conversation is that C and D class can mean different things. In some parts of the US, C class means older buildings. Here in Chicago, all the buildings are older so C class tends to refer more to a neighborhood where the tenants are all lower middle class from an income perspective. 

I own in Cicero which is one of these areas and as @Jay Hinrichs mentioned I am VERY hands on. I am about to take down a 22 unit that is a huge value add project. I also have learned that you have to update these buildings to give the market a nice product. I put in granite counter tops, new kitchens, nice bathrooms and also gut the plumbing and electrical so the housing is in good condition. 

From what I can tell, the most successful people who operate in C and even D class tend to vertically integrate their property management as most 3rd party managers just can't be compensated enough to make things work long term. The properties are not that intense to manage, but it is a lot harder than managing A class rentals where you NEVER hear from your tenants. 

[Todd Pultz]

@John Warren your on it with classifications. All properties have a class that talk to age and shape, but the bigger discussion on this thread is the class of neighborhood!

Although, you said not that intense to run?????come hang with me for a week! Lol

If we say C+ neighborhood things are fairly chill, but as we drop down to C- or D things can get and be dicey and you have to work!

[Todd Pultz]

Somebody tell me how to add pictures on the post and I’ll send some from this morning of the stuff you deal with in C & D neighborhoods. Can’t seem to find an option on the phone to add a picture, but I’ve seen others do it

[Scott R.]

Comes down to having the right property manager at the end of the day. I had a tough love manager that always had a "bench of tenants" that wanted to move in case things went sideways with the current tenants.  I had a D 4plex in the slums of Las Vegas. After some basic rehab, I put in a few low level amenities and raised the rent a bit. After quickly moving on w/ 2 tenants and bringing 2 new ones in, things well pretty well. I added security cameras, new security gates, onsite laundry, and added a playground set. I gotta say, by month 6, it was cash flowing nicely. I ended up selling it about a year later but if I could do it all over again, Id probably section 8 it. It wasnt a bad experience for me but having the right hands on PM made the difference. 

[John Warren]

@Todd Pultz agreed. I mostly think about the tenant to see how much work they will be. If I can get a tenant with 3X the rent, credit of 600 or better and clean rental history then I normally find them to be manageable. As soon as you dip below that 600 credit world it turns into the wild wild west come collections time! 

[John Beasley]

@Chris Gawlik

So , I have 9 C to B properties.I have owned the C's for 24-25 years.

I quit my job 6 years ago and travel about 80-100 days a year.

I picked the houses because of low barrier to entry.They rent between $960 to $2000.

The sweet spot in my opinion is $1250- $1500 per month.Relatively low amount of time and management. I owned as many as 16 at one point .

I now also flip 8-12 a year for fun and travel money. Still learning and evolving.

[Steven Segal]

D properties are a nightmare. If you want to be successful, I think definitely need to be local and hands on; third party management will not work. C class is fine. My first deal ever was D class. I literally had to pay a two people two sleep in two units while their dogs were in the other two.  It was the only way to get it remodeled without having the place broken into. Luckily, I got out of that and moved on. 

[Todd Pultz]

@John Warren send me those tenants above 600 lol! 75% of our apps have -1 scores and the others are in the 5’s. I can’t remember the last time I saw 600 on those properties. However a lot of times are due to medical collections and phone collections. Most we couple criminal and rental history together to make a better decision. We do require 3x rent though and that keeps us rolling nice. They are all manageable usually as long as you are active and hands on while not taking any BS, you would probably agree.

[Cliff H.]

Jay's comment at the start of this thread is the most succinct and accurate assessment of D class properties you can make: 80-90% of investors will fail.

I bought, self-managed, and leased out dozens of D-class doors in Hartford, CT for 4 years after the peak of the last real estate crash (2008ish) while working a full time job. Put simply: I've worked jobs shoveling manure, worked my tail off on 3 academic degrees, and worked thankless jobs with bad managers and crappy pay. None of those things prepared me for what I faced in managing D-class properties. Someday I'll write a book on this, probably a comic book. 

I went all in on this strategy, buying and living in what I thought was the best of my D class properties, following the popular "house hacking" strategy often talked about on BP and other places (terrible idea). Over 4 years I experienced: 

• Cashflow that looked great on paper, but never in practice. 
• A bad area on the other side of town that unexpectedly moved into my neighborhood after federal law enforcement decided it was time for a crack down on gangs, who just relocated to my hood.
• A bullet through my bedroom window.
• A drive-by shooting 1 block over that I only woke up to at 4am after hearing a woman screaming outside her house.
• A friend managing similar properties across town clubbed on the head as he stopped by to collect rent, waking up hours later in the stairwell, pockets emptied. 
• Waking up at 6am to conduct repairs before work, staying up until 1am after work showing properties, buying supplies at Depot/Lowes, repairing more properties, and calling back applicants since no one in D-class has/uses email, ever.
• Confronting the realization that no screening any PM will ever do can filter out for populations that live off the grid and outside of traditional credit markets. 400-500 credit scores are expected, past landlords that were unreachable, and jobs that were often cash money with little/no documented receipts. 
• Evictions/move-outs that regularly included half a tenant's torn-up furniture, personal items, and damage to units that would take weeks to clean out and a state requirement to store tenant belongings for 30 days after move-out, even in the case of evictions. 
• Tenants who felt it their right to drop by my house after moving out and not receiving an immediate refund of their security deposit (versus 30 day timeline communicated in writing).
• Perpetually "nomadic tenants" that thought moving every year was a normal part of life (costing 1-2 months of lost rent/year).
• Constant maintenance/repairs from tenants that that let children destroy walls, carpets, and fixtures, repairs that inevitably fell on owners to repair for any subsidized housing program inspection. 
• More stable, longer term tenants were almost always S8 or other forms of subsidized payments. Not bad when run by a well-managed local PHA, but most PHAs were drastically understaffed and disorganized. In one instance a housing inspector outright attempting  to extort me by failing an inspection and demanding I repaint a house in the middle of winter unless I met him at the property to "work it out."
• Regular evictions with tenants defended by free legal services even when they never showed up to hearings or provided any response to court filings explaining why they could not pay rent. 

I could go on for another 10 chapters, but suffice it to say very, very few investors (on this forum or others) have any idea the demographics and challenges of this investment sector or the reality of what it's like to live in these conditions and economics. Everything you know, expect, or think is reasonable behavior in your middle-income reality simply do not apply.

Rules for success with D-class? Here's my shortlist:

1. Ability to DIY (or subcontract) repairs w/near zero overhead/margin.
2. Strong, clear processes for every possible tenant scenario.
3. Ability to acquire properties at 50% below market and generate  at least $800-$1k/mo cash-flow (inclusive of 10% management and 10% vacancy). 
4. A clear, defined exit plan prior to purchase that assumes flat or negative appreciation over time.

In summary, not saying investing in D-class is a no-win scenario, just that there is a certain type of street-smart, though as nails investor/PM that can handle this. Most here are not that type and won't even know it until it's too late. For me personally, I've found investing in other, more niche markets to be a far easier route to my goal of $1k/door. YMMV. 

[Amir Navabpour]

I haven't invested in Warzones, but I own one C class section 8 out of state.  In comparison to my higher quality properties (B or A), I did not find the cash flow on paper to actually materialize.  There is something to be said about the quality of tenant you attract.  My C class attracted a reckless tenant pool where in one case the person destroyed the property before he left.  Another tenant just stopped paying.  Even if you have one of these types of issues every 4 -5 years it neutralizes the higher return you see on paper in comparison to B and A class. If not worse. 

[Brian Boyd]

We have Class D, Class C+ and Class B-B+. Class D-C+ make the most money by far but requires the most attention and hands on management. Our Class B-B+ are solid earners and require almost no attention. For Class C+ and below, the age of the home, the socio economic status of the tenants, and the neighborhoods in which those properties are located impact the month to month profits. I think Jay Hinrichs has talked about this before, but I would have to search to find it. Reach out to him for some insight. He is the graybeard of BP.

[John Nachtigall]

I have no personal knowledge, but having read many accounts from class C/D landlords here on BP (some enthusiastic, some not) I tend to notice some trends

1.  No one goes from Class B to Class C/D.   They start in Class C/D and move up eventually, never the other way.   Despite the siren song of higher profits, you never see people sell the class A/B portfolio and more down in class.

2. Very few seem to stay in it for the entirety of their careers.   There are a lot of stories about owning 100s of class C/D rentals, but very few about how they reluctantly sold them.  Most stories are about how they got people started, but very few seem content to stay in that category.

3. Every single one mentions challenge of collecting rent.   Even the most enthusiastic supporter.    It is obvious it requires someone to track rent down every month without fail.    Almost all also mention that the spreadsheet never equals reality.   Sometimes it is close, but then there is a story about a tenet that does something outrageously amazing and there goes at least some of the profits.  

4.  The most successful always talk about not over improving.   The word "basic" is always used quite liberally.  

Like I said, I have no personal knowledge, but I do notice the trends.   When I was buying my properties I looked at the above list and decided it was not for me, despite the increased theoretical cash flow.    The risk is not worth this....

www.youtube.com/watch?v=OORgOe...

[Marc Rice]

@John C. Great post!

[Brian Lucier]

A good way to classify A - B - C - D properties are by the shirts your tenants are wearing.

A Properties = White collar professionals wanting nicer amenities to entertain friends.
B Properties = Blue collar working class, bread and butter cash flow tenants that respect the property.
C Properties = T-Shirts week-to-week paycheck residents, usually a mix of Section 8 and working class
D Properties = NO SHIRTS gathered on the front steps drinking 40's out of a paper bag at high noon. Get fitted for kevlar.

C properties can cause minor headaches.
D properties can cause BRAIN DAMAGE.

We focus on B+ to C+ properties in B+ to C+ neighborhoods in our personal rental inventory for less "da-rah-mah" and a more solid resident base for about $350 to $450 a door per month, if we own the property. For our landlord clients, we typically net 10% of collected rents.

Screen, screen, screen your tenants!!!