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?  

[Diane G.]

@Todd Pultz; 

@John C.

Thank you both for a fun weekend read.... I have been investing in RE for around 10 years now, and up to this point, I have been focusing on A+ kind of properties, but I have ALWAYS been itching about C/D.....The thing with A+ properties is they take 5-7 years after purchasing to cash flow...For a portfolio of $4.5M properties, I am cash flowing maybe $50K annually if I dont count principal paydown...If I include full mortgage payment (both principal and interest), then cash flow is down to $20K....

But reading your posts, apart from being so funny and laughable (in a good way), made me realize that I probably should stay in my lane as I clearly lack the skillsets needed to be successful in those property type....

B class is likely the most I can stretch myself into....

[Finn Valjean III]

@Chris Gawlik currently reading through all this now.

I’m looking at going into the war zone area properties over the next year.

Would you be interested in connecting and working together on a case study from 0-D/C class property?

[Chris Gawlik]

@John C. Wow really amazing information. Thanks so much its what I was looking for. Really great stuff. Thanks for taking your time to write a really great response. Love the detail as well. I am considering this seriously ATM. I was thinking of OOS, but reading your post I think It would be to much risk and have decided if I'm going to pull the trigger on something like this, I would be moving to that location. Thanks again John. 

[Nicholas U.]

I own one upper C property and one B property.  These are the general properties I focus on because they are quick to rent, generally can find good tenants, and gives flexibility.  A properties usually are completely rehabbed with a layout and location that is appealing to everyone.  To me there is more risk in those properties if you somehow manage to get a bad tenant.  

To me to look at a "D" property the location needs to be good and I will want to rehab it.  That being said there are ways to make money on almost any property but figure out what is your target market and property.  Some people are fine with purchasing different levels of properties but for me being smaller owner I am focusing my attention on certain requirements to help with my business plan.  

[Christina Dillard]

Good Q's. Also, I'm curious to hear – how does renting to C class tenants modify (if at all) the criterion for accepting an applicant? 

(Thinking about Credit score req.'s, proof of income, etc. Maybe higher deposit for lower scores, etc. What do others do?)

[Rich Somers]

C Class Apartments are fine as long as you buy in a good location.  Median household income should always be north of $40K, preferably north of $50K.  Second most important thing is to have a great property manager.  Neighborhoodscout.com is a great tool for qualifying neighborhoods.  

Remember to always follow these 3 rules:

1. Invest for Cash Flow

2. Secure long term debt

3. Have plenty of cash reserves

[Diane G.]

@Todd Pultz - I did look up that Western Apt property on google, horrible story.... I think the current owners must be losing a ton of money...

Did  you use to PM this property up until the current owners bought it?

[Damel WIlson]

@John Morgan

Hit a home run Sir!!

[Todd Pultz]

@Diane G. We handled the security for it for many years, but one of my partners handled some management for it, but was removed from that position when the new owner bought the property. The rest was downhill!

[Todd Pultz]

@Christina Dillard in many scenarios my tenants have 0 or negative credit scores. If someone gets a 500 return, I’m super pumped lol! You have to change how you screen. Criminal past and eviction history are key, but number 1 for me is looking someone in they eye and making a decision with all of the reports on my tool belt!

I’ll wait for someone to beat me up on here for renting to someone with a -1 credit score, but I will compare my 3% vacancy and cash flow to anyone on this site lol!

There are key indicators outside of credit that will help you make a decision

[Chris Gawlik]

@Finn Valjean III Sorry Finn not sure I would have enough time to help you, but would love to see what you come up with. Also have not decided what location we may start to invest in. Going over pros and cons between moving OOS and starting more of a cash flow business. Or staying in Cali and more of an appreciation type of investment. I am very hands on and not afraid of confrontation. I worked in casinos dealing cards, while I don't have any type of security or police type background I grew some thick skin.

My wife would have a hard time moving away from family, but would not have to work a 9-5 any more. So its a hard choice. What happens with the economy over the next 6 months plays into our decision as well. We have made big moves though, just recently. We sold our home, our rentals, and are gearing up to make a big move and change our lives. One way or another we will be making real estate investing our full time business. 

@Todd Pultz really appreciate what you gave us in your response. I was reading your response to my wife and kids. Really impressive. I love your don't take crap style of how you manage your properties. 

Was wondering if you could give me an estimate of how many evictions you have done over the past couple of years? Have you ever had any problems with meth? What does that mean for your house if there has been meth use or someone cooking meth in your house? These are some of the things I am most afraid of investing in these types of properties. It would be horrible, but I have gutted houses before. I assume if theirs a meth lab in one your rentals you would have to almost tear it down to studs, but thats just a guess. Thanks again for the great reply Todd. This post has gone further than I thought it would. Good information in this post.  

[Doug McVinua]

Interesting tread with lots of great thoughts and ideas.

I manage multiple multi-family "C" properties in Chandler, Mesa, and Apache Junction AZ. I refuse to manage "D" properties, I value my life and time more than that. Some of the "C' might even be "D" buildings but they are in "C" areas that are coming up, not down. Yes, crime exists in the area but I won't tolerate it on property.

Managing in the "C" area in the Phoenix, AZ market does take more hands-on and some additional time. For me it starts with a decent property, we repaint units, they are clean, everything works and at each turnover, I try and add one or two little improvements. Improvements might be a new light fixture, a ceiling fan, and or nicer blinds. Over time we are making marginal improvements to the building that the tenant's notice and the good tenants seem to appreciate. The buildings are still old and aren't fancy but they are clean, livable, and give them some sense of pride in living. Offer a product slightly nicer than your competitors and the good tenants will want to live in your buildings while the trash lives in your competitor's building. I get calls all the time from tenants wanting to live in the oldest building I manage with zero vacancies.

"C" tenants are not all bad people, economically they may not have a bunch of money but they are not all bad people. Market, screen, screen some more and you will find decent people that need an affordable place to live. We manage multi-family in Apache Junction, AZ that when we took over it had drug dealers, no-payment of rent, and vacancy issues. Today the buildings are full of paying tenants, carving out there own little world. As long as they treat me and the building with respect I return the favor, when you get a bad one get rid of them and find a good person. We respond to maintenance requests and fix the items as needed.

I refuse to manage for a slum lord. Treat tenants poorly and tenants are going to treat you and your building the same. These places are not castles but they can still be clean, bug-free and things work.

We adapted and offer them ways to pay online or with cash at certain retail locations. They aren't all high tech so they appreciate the Pay Near Me (cash) option.

Treat the tenants with respect and firmness when needed and hopefully, your experience is like mine with raised rents and nearly 0% vacancy. Good tenants in these multi-family are the best sources, they know every movement and let me know of negative activity first in many cases. 

End result: Owners are seeing the highest level of cash flow and return ever in the properties with little drama. It's a bit more work but not bad!

[John Morgan]

Originally posted by @Damel WIlson:

@John Morgan

Hit a home run Sir!!

Haha! I’ve swung for the fences a few times. But they ended up a little short. I’ll keep looking for my pitch.  

[Todd Pultz]

@Chris Gawlik so drugs are different by the city. We do not have a huge meth issue here like California, but we do have a serious problem with opioids. Although it exists and yes, I have found it in units and properties.

This is my simple answer to your question. If someone had enough time to set up a meth lab in your rental property or devise an organized drug ring in one of your units, you suck as a property manager! Ok ok, maybe you don’t suck, but you are not an active property manager or owner. We have cameras at every property and review them often.

We also establish certain policies to avoid these. Example, the second Thursday of every month is a standing inspection day for pest control. My pest guy goes into every unit. I’ve trained him on what I need to know about besides pests. The 4th Thursday of every month is a standing inspection for fire prevention to check all smoke detectors and CO detectors. My maintenance go in the units to check these items.

So at a minimum we are in units twice a month and keep our eyes on stuff really close

I go out after hours and sit blacked out at my properties to see if there is any traffic that there should not be!

Example from yesterday, while at a new property with another investor a girl approached us and offered dope and whatever else we wanted! I gave her my card and told her I was happy we ran into each other. I told her I was the new owner and she looked like an upstanding gal that likes to make money! From there I told her I was working with the drug task force to shut down the illicit activity in the area and I would personally give her a $500 reward if she identified any of my units that were dealing dope! I told her there just some things our cameras can’t see and I needed local experts like herself to help me catch the s^*% heads! After a stunned and surprised look, she basically told me it was a family oriented community, LMAO! Will she snitch? Hell no, but she knows I got her and her boys number everytime I catch them on my property.

Gotta be active when your in this space!

[Caleb Christopher]

@John C.

Thank you for this wonderful reply. Lots of wisdom and experience. I want to save this.

[Todd Pultz]

@Chris Gawlik I forgot to answer your eviction question. In the last 2 years I’ve had to do maybe 4-5 evictions. Highest vacancy we ever ran was 3%

[Zachary Ray]

As stated above those kinds of properties require a lot of hands on management. They are a little rougher around the edges. Just implement the same standards across the board and you can be sucessful with it. 

[Michael Temple]

@Diane G. I think you and I have similar investment styles. As I started investing in real estate I decided I liked managing, but I don't have the patience or skill set to manage properties in the D class. I have 2 properties I would classify as C+ or B- and those, so far, are OK to manage. I have one I would rate as A or B+ and that is by far the easiest to manage, but also the least profitable relative to the investment.

As I read the stories and experiences from others I realize I am not cut out for D class. However I am looking for long term cash flow and appreciation that I can still manage during retirement someday. So, I don't mind paying more for better class properties and working to reduce debt and increase cash flow over time that ultimately will contribute to, but not be my entire retirement income.

In my local REIA group I hear a lot of stories of people that talk about the amazing cash flow and ConC returns in the lower end properties, which sounds enticing from a financial perspective. Then I weigh that against potentially living in housing court evicting people, fixing up destroyed units, and the far more intense hands on management required. I like John Schaub's approach in his book Building Wealth One House at a Time. He mentioned he has only evicted a handful of times over 30 years or something. I chalk that up to he must be buying a bit higher end that is easier to get a different level of tenant. I like that approach better personally.

[Chris Gawlik]

@Todd Pultz Holy %&&#, great post here. Great detailed info again Todd. It really gives you insight as to how to be a hands on manager. Never would have thought about the cameras. When you say you have 100 doors what type of properties are they? Mostly Multi units or SF or a mix? When you have a vacancy do you have a system for what you do rehab or repair wise to get the unit ready for next tenant. For instance you won't put in a garbage disposal, or you only put in vinyl flooring instead of carpet ect...? Have you ever purchased a property and replaced all the systems like a total gut job, new electrical plumbing ect?   

[Nic S.]

@Chris Gawlik it all comes down to tenant profile. I have 3 properties in c+/c neighborhoods of KC. 1 property has great tenants screen properly by my PM. The other 2 were inherited from seller(big learning lesson for me). There’s a constant dialogue about 2 tenants either not paying rent on time, fighting, or overall disgusting living conditions.

It’s been so annoying I’m in the process of diversifying into A/B+ neighborhoods now.

Learn from my mistakes and properly screen your tenants and you should be ok.

[Bonnie Low]

As an out of state investor, I wanted to point out that your definition of C or D class may be different than a local's definition. We experienced this in Pocatello Idaho. We live in CA and were investing in Pocatello. Our Realtor would frequently reference properties we were interested in as being "in the hood." We though they were solid C neighborhoods compared to what we were used to seeing! Obviously blue collar. Older homes in obvious need of renovation but no gang traffic, crack houses or abandoned boarded up buildings. So just be aware of that when talking to someone about their definition of neighborhoods. Check it against your own. 

[Todd Pultz]

@Chris Gawlik on vacancies we have the same paint color, the same flooring, VCT in common and we use a laminate in units, same stoves, same refrigerators same everything for the most part. We have a network of used appliance guys that work on appliances and sell is fridges that looks new for $200 and stoves for $150. Same windows for replacement. We use the same master lock system so keys are easy. I have 1 key for all my properties.

Yes we have often did big jobs on multi-family. If we get into a quad for say 25-30k, we know we will have to replace all electric, all galvanized plumbing, hot water heaters, furnaces etc. and yes I use the same everything except furnaces as those might depend whether you have Up flow, down flow etc.

I use the same led address sign, the same unit number plate, the same towing company sign,

It’s like an assembly line, but that’s for when we take new buildings as Like I said we run very little vacancy.

I could write a book with stories on landlording if I was any good with grammar!

[Jay Hinrichs]

Originally posted by @Todd Pultz:

@Chris Gawlik on vacancies we have the same paint color, the same flooring, VCT in common and we use a laminate in units, same stoves, same refrigerators same everything for the most part. We have a network of used appliance guys that work on appliances and sell is fridges that looks new for $200 and stoves for $150. Same windows for replacement. We use the same master lock system so keys are easy. I have 1 key for all my properties.

Yes we have often did big jobs on multi-family. If we get into a quad for say 25-30k, we know we will have to replace all electric, all galvanized plumbing, hot water heaters, furnaces etc. and yes I use the same everything except furnaces as those might depend whether you have Up flow, down flow etc.

I use the same led address sign, the same unit number plate, the same towing company sign,

It’s like an assembly line, but that’s for when we take new buildings as Like I said we run very little vacancy.

I could write a book with stories on landlording if I was any good with grammar!

wanted to comment on your credit score comment..  my clients that i have funded for a few decades who buy this stuff.

its the same thing fico is run but the number does not matter when they are working in a state were the average fico is 600 and so you can imagine what the fico is in the C and D..  its all about criminal and do they pay their cell bill..  most will have medical collections this is not counted against them.. but if there is collections from Cell phone and Cable etc.. then they will be problems.. at least that is what my clients tell me.. 

[Todd Pultz]

@Jay Hinrichs pretty right on. Gas and electric collections is huge because they won’t be able to get in their name and we do not carry utilities. Not real sure on the cell phone thing as many of my applicants have cell phone collections. They run one bill up and the switch carriers. Your spot on though with what we are looking for.

[Matt M.]

@Chris Gawlik

I have c+ properties. Working class people. I have no issues and I bought right so my cashflow is great. They all actually paid early during the big covid months. All really good people.