What are your Cash in Cash requirements? B, C neighborhoods…

Question

I’m trying to land my first deal in Cleveland working with a prominent, investor-focused broker. I want section 8/ C grade duplexes for cash flow to hold onto. They are all in poor shape. Cash flow is like $250/door, 20% plus cash on cash. Switched gears to B grade, better hood/ nicer conditioned properties and it drops to $80/ door, 8%.
I want to invest in a large portfolio of multi family to buy and hold and I just don’t know what to do right now. I don’t ‘need’ the cash flow as I’m not quitting my W2, but that’s a lot of $$ to trade for better performance. And it’s month to month, at least for now- at market rent.

What would you do? Take lower returns for the consistency and hope of better appreciation, or the cash cow that is gonna be cheaper, better returns but less stable?

Mike D'Arrigo · Answer

@Valerie K.I'd be real skeptical of anyone telling you that you can get $250 cash flow and a 20% COC return on a C class property. Generally, rents aren't high enough to generate that kind of cash and I don't know of any market that is generating a 20% COC. The numbers don't look right to me.

Drew Sygit · Answer

The 20% COC assumes what vacancy factor, nonpayment of rent by tenants, eviction & turn costs?Most newbie investors stress out over all that comes with Class C rentals: nonpaying tenants, break-ins & theft, eviction moratorium issues, accepting lower quality maintenance, under 600 FICO applicants, etc.Here's our standard info to OOS investors:Many OOS investors set themselves up for failure because they don't truly take the time to understand: 1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area. 2) The Class of the PROPERTY they are buying - which is relative to the overall area. 3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area. 4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area. 5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area. 6) That OOS property Class rankings are usually vastly different than the local market they live in. 7) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS. 8) Class A is relatively easy to manage, can even be DIY remote managed from another state. 9) Class B usually also okay, but needs more attention from owner and/or PMC 10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. 11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them. ***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher. https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Brandon Sturgill · Answer

@Valerie K. I agree with the folks commenting so far...these are all lessons learned and things you can avoid...I think you answered your own question...why focus solely on the cash flow if you don't need the cash...sure, cash flow is great, but creating a sustainable career buying stable and appreciating assets is better.The high ROI properties you are looking at require an experienced, bulletproof property manager that understands how to get the property stable and performing....this is a rarity and will take a ton of due diligence on your part...lots of trial and error mixed in...Best of luck

Jay Hinrichs · Answer

everything looks great on paper when you start you really need to see what it looks like in 5 years . one bad tenant can wipe out 5 years of cash flow very easily. if you dont need cash flow then your in a great position to buy QUALITY assets which is what I would personally do suggest.. I look at these markets different than most to the metric is:Median price for a given MSA now this is SFR what ever that median is say in that area probably around 150k then thats where I want to be not half of the median or 2/3 everything goes down hill as you lower the value of the asset..

Caleb Barney · Answer

Personally, I’d still shoot for at least $100/door. I want the property to cashflow, regardless of if I’m working a W-2 job or not. I’d rather not go to too rough of neighborhoods that will likely have higher tenant-turnover and potentially higher property management turnover too. A lot of that extra cash flow may not actually equate to more money in your pocket if you’re losing money due to a higher vacancy rate and more repairs/maintenance.

Christian Morsing · Answer

Hi @Valerie K.I invest in Chattanooga.C-class and $200 per door.I have a great PM that handles a-lot of work but that’s the path I have picked.

Valerie K. · Answer

Hello All! First- thank you for taking the time to comment and advise, I truly appreciate it! This broker is very active here on BP. Not sure I should share names, but he is the largest in Cleveland portfolio size and has been managing for years. I have absolutely NO doubt in his property management. Being new, I have a lot to learn but my general impression is that these are cash flowing assets and I’m not going to see much/any appreciation. Section 8 has alleviated as much of the headache as possible. These are C neighborhoods. I figured I’d get my feet wet and start there. I’d love appreciation and would take that in lieu of cash flow when I can find that neighborhood that I’m not priced out of. Like I say- I’m new!Specifically these properties are multi family and costing around 55k/ day in rentable shape. With 20-25% down, 30 year mortgage, 5% allowance for maintenance, Cap Ex, Vacancy, 10% prop management, PITI, water/ sewer, lawn care- I’m left with about $150/ door. It’s been a whirlwind and I need to recheck my numbers but this is pretty darn close. Once mortgage paid off more like $450-$550 a door without any appreciable rent increase. These may be first base deals vice home run, and they will probably be worth the same when paid off. The trade off again is low entry point. I have been advised by several sources my vacancy/ cap ex numbers are reasonable. These being way off would be my biggest problem. Separately- I’d like to look at the newer areas people are investing but I may have missed the point. Chattanooga, Memphis, parts of Florida, etc. I’m open to advice/ suggestions!

Valerie K. · Answer

Appreciate the response. The section 8 stuff is super high cash flow, and likely super headache, higher vacancy and repairs. This offer is a side by side quad, but the cash flow is terrible. I haven’t seen much historic appreciation either. And they are offering it month to month. I’m new but that spells vacancy and a lot of paint. At $75 a door, nowhere to go.

Valerie K. · Answer

I’d love to get in touch with anyone you use there!!! I’m hearing great things. What are property prices for say a duplex?

Christian Morsing · Answer

@Valerie K. Let’s connect - I’ll ping you directly