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?  

[Todd Pultz]

@John Nachtigall good post!

On point 1 though, I’m not sure that is a negative for these type of properties. I have a dm great friend that drove a Honda Civic from 2005 until just last month, it had about 150k mikes on it. He upgraded to brand new Chevrolet Tahoe. He did not upgrade because he didn’t like the Civic, it was just time. He will tell you that Honda Civic was the best car he ever had and he loved it!

I think that’s more of the story with successful C owners. My friend will never go back to the 2005 Honda, but he will never have a negative word to say about it because it did exactly what it was supposed to do for him!

It takes a special type of landlord to be successful in this space being discussed, but I buy properties all the time from mom and pop owners ready to retire who have had their C properties or D properties for 20, 30 or even 40 years! I know many that have stayed in this space for a long time. I’ve never thought about selling any of ours because they are cash cows! Only exception was my first quad I sold 2 years ago to fund my wife’s inground pool, lol!

To be successful, I do think you need to be local or have a phenomenal PM that you trust.

We also have B properties and a couple A’s, but we will continue to buy C all day long at the right price!

[John Warren]

@Todd Pultz I feel your pain! I used to own a C-/D+ class property in a different state and it was a tough thing to find a tenant. I find that Chicago has a strong tenant pool, so even in the C class areas you have a lot of options for tenants. On one of my upcoming projects I posted a test add as part of my due diligence and I had 30 hits for a 1 bedroom apartment in two days. That is strong rental demand for sure. 

[Todd Pultz]

@John Warren we have the same thing here with applicants and we will get 20-30 inquiries with a few days of posting. 1 bedrooms are no brainers, we have a waiting list for them. However none of them will have a 600 credit score lol!

[Mike B.]

Your property management company will make or break your investment in these areas. Proper screening, quarterly property visits, proper background checks, etc... I always recommend finding your management company first and the investment second.

Also, I think there's a pretty big drop off from C neighborhoods to D...at least in Chicago. 

[Crystal Smith]

Originally posted by @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?  

Our strategy has always been to invest & improve in C class properties that are adjacent/near B or A. We make the capital investment upfront to minimize the cost of repairs in the long run. We chose that niche because quite frankly we couldn't afford B or A class properties. While the risk is higher w/ C, so is the return. Our primary location is Chicago. The advantage of working with this asset class is that buying in the right location, your asset may eventually be considered B, as other assets are improved around you.  This does not support Affordable Housing.

[Tim Jacob]

I think a few things people should note that want to believe in the fantasy of cash flow from d grade. One is multiple property managers have commented on this post and they all have said I don't work in D grade. One flat out said its not worth my time and I know its not worth my time either. If you don't want to deal with the tenants directly because that is too hard who is really going to do a good job for you at a rate that won't take your entire cash flow. The answer is no one who is reputable. No one is going to guarantee tenant quality and then you are talking about legal fees and tenant caused maintenance that crush cash flow. There is no way around it. Another thing is with all the CDC no eviction rules that have come into effect they are not hitting a and b rentals. They are hitting the c and d grade rentals. Especially D grade and I guarantee there are plenty of people on BP that are not coming forward telling everyone about how their tenants not paying rent and they cant get them out because of eviction delays. I think there will be a waive of foreclosures to hit this sector of the space as things move along from landlords who gave up because of this no eviction clause. I think and b rentals will be just fine with inventory and prices wont change much. Like others have said know what you are getting into.

[Gwendella Robinson]

Mike and Crystal,

What areas in Chicago do you find lucrative? I’ve been looking in Calumet City, Midlothian, and Harvey. What are your thoughts?

[Account Closed]

Originally posted by @Joe Bruck:

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

It depends on what price you buy at. I have 75% + appreciation over 5-6 years on C Class homes. And not just on paper, actually sold a few at those prices. I define class by rent, which is market specific. In Indy and probably other midwest cities between 700-1K is what Id call C. Above that is B and below that is D. That is for SFRs. Of course in the Bay Area 2K may still be a C property.

[Brian Garlington]

C or D properties? I would say that you want to guarantee your income and get a Section 8 tenant in there on the C property. On a D property I would actually just simply avoid it. Returns look good on paper but the tenants will break you with all the maintenance requests.

[Christina Dillard]

@Todd Pultz thanks Todd! Got two applicants today for our C class rental with 580/575 scores. Will be sure to look at these other factors you suggest.

[Todd Pultz]

@Tim Jacob I agree that you will have a hard time finding the right property management for D and even C. For that matter, most find it hard to find a great property management for many areas. I self manage all of our C and D properties and have a management company that runs the same for some investors. You have to be a different type of manager and it’s not easy work, but we have very few issues of people tearing our stuff up. Certainly no more that ones that live in our B properties. I do completely disagree with you on Covid affecting C and D but not A and B. I actually think you have that backwards. First, I have hundreds of C and D doors and we have had 1 tenant not pay due to Covid and they were immediately helped by a local agency.

But here is why C and D are affected less. We partner with a lot of organizations that help certain individuals whether it be re entry programs, addiction programs, section 8, mental health organizations etc. with that a large number of our residents receive some type of subsidy and most are not section 8. We also have section 8. Lastly, in C and D there are a large number of individuals that have SSI, SSD or something similar, so 75% of our base has some guaranteed money coming in every month. Additionally, the other percentage mostly have some type of job that is essential or they are street smart and know how to hustle work for a buck! Where we struggled was the B residents that had some type of office job that was not essential or our waiters that were not essential.

There are plenty of reputable managers that will manage C and D properties. Some extremely large national management companies that are very well respected specialize in these properties. There are also a lot of managers that are simply afraid and out of their comfort zone. There is no fantasy about cash flowing, it’s a Realty if you have a smart business plan and manage your business correctly.

As far as maintenance, I must just have difrent experiences, but my C and D renters have much lower expectations and do not complain about stuff as much and my B renters are a bit more needy.

Just my 2 cents!

[Lisa Jones]

@Tim Jacob - Your post is spot on. I wish I read this before jumping head first into my small multi family in a D neighborhood. As a newbie back then, I couldn’t understand why it was so difficult as a hands off investor and why every single PM either bailed on me or stole from me. Every. Single. One. Conversely, my investment in a B class area was super easy with non of those issues. It look me several years to finally connect the dots. Location matters. The property quality matters. They determine the quality of the tenants. I learned that illegal dumping is like a hidden tax Based on the extra costs, etc., so much I didn’t know when I bought. I could write a book, LOL.

lisa

@Tim Jacob

[Lisa Jones]

@John Nachtigall- I enjoyed your post. It inspired me to think about graduating to the next class (C/B). I think it’s time!

[James Wise]

Originally posted by @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?  

Most folks invest backwards honestly. They start in the high risk stuff 1st. In reality you should probably start with lower risk properties and go into higher risk ones if/when you feel the desire after you've got your bearings in the biz.

[Mike D'Arrigo]

@Chris Gawlik There is a very big difference between a B and C class property. C class is a lower working class tenant but can do well with well screened tenants and good property management. D class is a much different type of tenant. I have yet to see D class work for any out of state investor that is more hands off. I see less of a difference between B class and C class tenants than between C and D. I would strongly recommend staying away from D class assets. I did a BP blog on this topic. https://www.biggerpockets.com/...

[Jason Nguyen]

I own a few class C multifamily buildings in Atlanta, and the tenants destroyed pretty much the entire unit after they have moved out. I was able to hold on to their security deposit but still not even enough to fix the damages. I then decided to remodel the entire building and refinance afterwards. I was able to raise rent after remodeling and have quality tenants living in there. Now it's cash flowing pretty well. $700 per door. I live out of state btw and have a property manager manage those units for me. It's really not that bad! Obviously class C will require a lot of management and repairs but you can always turn it into a more quality property and have quality tenants live there.

[Duane Alexander]

Originally posted by @Lisa Jones:

@Tim Jacob - Your post is spot on. I wish I read this before jumping head first into my small multi family in a D neighborhood. As a newbie back then, I couldn’t understand why it was so difficult as a hands off investor and why every single PM either bailed on me or stole from me. Every. Single. One. Conversely, my investment in a B class area was super easy with non of those issues. It look me several years to finally connect the dots. Location matters. The property quality matters. They determine the quality of the tenants. I learned that illegal dumping is like a hidden tax Based on the extra costs, etc., so much I didn’t know when I bought. I could write a book, LOL.

lisa

@Tim Jacob

How did your PM's steal from you if you don't mind me asking?

[Gaudys Rivas]

Hi 

I have been an investor for 12 years in B and C neighborhoods in Miami and Jax . The key for C class is to have a well renovated property, that will prevent maintenance calls , believe me that that tenants on C neighborhoods are less demanding than tenants in B or A neighborhoods. A good tenant screening will prevent frequent turnovers and lack of payments ( job stability is more important than a credit score in my opinion) . No vacancies . House will rent within 15 days of being listed . I have done 3 evictions in 12 years ( hard to believe I know ) . Unfortunately even in C neighborhoods is hard to find deals these days . In Jax for example a year ago , you could buy a property for 35k , renovate for 5k and rent it out for 950 to 980 , annual taxes are between 500 and 700 hundreds and PM around 100 monthly . For me a successful story . No regrets 

[Tracy Streich]

What is it like?   Imagine you think it a a good idea to get your car washed.   You go to one of the nice new automatic washes with the free vacuum cleaners at the end.   Right as you enter the wash all your windows on the car roll down automatically and you cannot get them back up.   You are on a track and cannot get out of the car wash.  By the time you exit you car is filled with water and soap.  But the car is clean and you get a free vacuum.   Welcome to class C and D.   It is filled with things you never expected and surprises. 

[Andrew Watson]

In my opinion, talking about A, B, C, or D "properties" is really focusing on the wrong thing - it's all about the tenants. For example, we have an "A" tenant - she's a multi-year tenant, was late once (by 1 day) and keeps her home clean - my one complaint: she let's her grass get too tall. She pays $550 / month and we paid $20,000 for her house. Do I care if it's a C property?  No, I have an A tenant.  

@Todd Pultz makes solid points on self-managing properties, impact of COVID and maintenance costs / hassle-factor.  And he's right, the cash-flow is not wishful fantasy - the house above flows quite nicely.

Would I do this from out-of-state?  Honestly, I don't know.  We self-manage our properties, and would do so with A properties or C properties - I don't think the PM business model can produce the kind of service most of us expect. Would I try to self-manage any of our properties from out-of-state?  Not a chance.  Would being out-of-state stop me from investing in our properties (all of which are C)?  I think it goes back to my first point - it's about the people:  in this case, the PM.  

Carefully, patiently, thoroughly select your tenants...and your property manager.   

[Rita Medeiros]

@Gaudys Rivas Come to our women’s group tonight in ft lauderdale listed on events page.

[Chris Gawlik]

Really appreciate all of your input, learned a ton from this post. Good article, @Mike D'Arrigo. I guess finding deals in good neighborhoods is always going to be key. I think I have always looked for a shortcut or an easy way out, but there really is no easy way out of this. No matter how you look at it if you want to make money in RE you have to work your *** off. 

[Mike D'Arrigo]

Originally posted by @Chris Gawlik:

Really appreciate all of your input, learned a ton from this post. Good article, @Mike D'Arrigo. I guess finding deals in good neighborhoods is always going to be key. I think I have always looked for a shortcut or an easy way out, but there really is no easy way out of this. No matter how you look at it if you want to make money in RE you have to work your *** off. 

Chris, the notion that you can become a millionaire while sipping pina coloda's on the beach isn't a reality. You do need to work hard but more importantly, be persistent and not give up. Things are particularly challenging right now with inventory being so scarce is many markets. The key is having a well defined criteria so that you know a deal when you see one and be ready to take action.

[Estelle Reyna]

Quote from @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. 

What an amazing response! Thank you so much.  I am brand new to MF investing and wonder where you invest with1k cash flow per door?