What is a “D” property?

Question

Hi there,A little background - I started investing 2 years ago and have a 7-unit multifamily property. My investing strategy is to buy B-/C+ buildings with great ROI to keep for buy and hold rental income. I am in acquisition mode, now looking for a second building.Over the weekend I looked at a property that has terrific ROI but I’m not sure it’s something I want to invest in. It’s a 5-unit building on a major street with low rent (around $800 for a 3BR). The building is not pretty and definitely needs work (it’s over 100 years old). However, the tenants all seem pretty happy and have long-term leases; one tenant drives a late-model Jaguar and showed me a picture of an AMG he’s picking up later this month while another tenant has been there 10 years.If I bought the building, I doubt I would ever be able to resell it.So I guess my question is, what is a “D” property? The financials are great but I worry that my standards are dropping because of the ROI.What’s your experience with lower-rent properties?Thanks!Robert.

Andrew Johnson · Answer

Robert Lindsley For now I'd take the building out of it and just look at the area. A good rule of thumb that I think throw is if I'd let my wife (substitute child, elderly parent, etc.) come by at 10:00 pm to pick up late-rent in cash. I don't do that, I have a property manager, but I still think through that scenario. You can fix and "ugly building" by yourself but it's much more challenging to solo-fix an area (unless you have a few billion in Detroit and want to gentrify the area are your sports stadium). So if I were in your shoes (looking at crime heatmaps aside) I'd drive by the building at 2:00 pm, 10:00 pm, and 2:00 am. Do it on a Tuesday night and do it on a Saturday night. I don't know if that helps but I know that's what I've done 🤷🏻‍♂️

Filipe Pereira · Answer

@Robert Lindsley there's a lot of good feedback here, but if I could add something, it would be to check out the area via google maps and street view. Google has now given us the ability to look at the same site at different points in history. Go back a year, 3 years, 5 years etc. I'm always looking for a couple of hints of how good/bad the area is...for example, if there are more people sitting on the front porch than there are cars parked in the drive way, that's probably not the place for me. Secondly, I am not sure if you plan on self managing, however, as a property manager myself, I will happily refuse to take on certain areas. Around here, for example would be the north end of Hartford, and certain areas of Waterbury. My rule of thumb is that if I have to wear a bullet proof vest while doing my quarterly inspections, it ain't worth it! I know I am in Connecticut and you are in Massachusetts, but I think these guidelines are generally universal.

Jason Chen · Answer

I would just factor the cost of the renovation/repair costs into the total purchase price. There's no reason why you shouldn't get a good deal here or why you shouldn't put yourself in a strong position

Ryan A. · Answer

@Robert Lindsley - you are spot on, Taftville is a D area. Generally avoided by investors unless you are comfortably familiar with the neighborhood, or live there yourself.Currently there is some development; an old Mill in Taftville being converted to apartments. That may have further negative impact on your rents. Taftville is the armpit between Norwich (C area minimal growth) and Lisbon (B area currently experiencing high growth.) There is a lot of pass through traffic between towns.If you need a drive by I am semi-regularly in the area.

Filipe Pereira · Answer

Sorry @Robert Lindsley unfortunately I am not all too familiar with Norwhich. I am much more active in towns from the New Britain line and North through Springfield, MA. We have an agent in southern CT, but on the other side of the state. I did read your post however, and noticed your concern about selling potential. Remember, a property will ALWAYS sell, as long as you price it right :) In all seriousness though, sounds like a quiet area, which isn't necessarily a bad thing. Stability in a market can be just as good as "potential". It's sort of the idea that one bird in the hand is better than two in the air!

Robert Lindsley · Answer

@Andrew Johnson Good advice. The area isn't bad, per se (doesn't appear to be a lot of crime). Not sure I'd let my wife go there by herself at 10pm simply because there's not a lot of activity around - it's pretty industrial and quiet other than the major street (which has a lot of buildings just like this one).@Jeff Greenberg There's no graffiti or people hanging out on corners. There's a fireworks store across the street, a DQ and a gas station a couple of doors down. There's a driving range and nice coffee shop a couple blocks away. I wouldn't say it's a bad area, but there's so little going on there I don't imagine it's going to be an area for investment anytime soon. My strategy wouldn't be to sell the building, but rather buy-and-hold long-term. But it would be nice to be able to sell the building if I needed to :)@Joe Hughis after reading that article (thanks for posting) it looks like this building is in a C neighborhood. It's probably a C- just because there's nothing going on in the neighborhood. It's definitely not a war zone though.@Filipe Pereira I see you're from CT, which is where the investment would be. I'm not sure if you're familiar with Norwich, but the property is in an area called Taftsville. It's a low-rent area with not a lot going on, although I wouldn't say it's crime-ridden (but I could be wrong). If you know anything about this area I'd love to hear your thoughts.@Jeff Kehl Most of the buildings in the area are pretty old -- this one was built in 1910. I imagine long-term if the area gets revitalized then it would be worth it to fix up and add lots of value.Thanks everybody for your thoughts! There's also the possibility of adding two additional apartments in the attic, although an additional ingress/egress would need to be added. Maybe there is some potential here...

Jeff Kehl · Answer

@Robert Lindsley"on a major street with low rent (around $800 for a 3BR). The building is not pretty and definitely needs work"You just described exactly the 'value-add' holy grail so many investors are looking for right now. Buy it, fix it up, raise rents and then sell it or refinance it at a higher value.But as others have said, it all depends on the area. If it's in an area that is decent/getting better you're on to something. Crime is really important. If it's in an area with a lot of crime run the other way.Also, the fact that is older should give you pause. Sometimes buildings that old have problems you simply can't fix cost-effectively.But I see you're Massachusetts near Harvard. If that's where the property is at you're probably on to a good property.

Joe Hughis · Answer

Here is a previous article written on Bigger Pockets about property classification, which you might find useful. I don't agree with everything on it, but it generally provides a good classification background. https://www.biggerpockets.com/renewsblog/2015/12/0...

Jeff Greenberg · Answer

@Robert Lindsley you did not mention much about the are except that it is on a major street with low rent. As @Andrew Johnson said you can't change the neighborhood. What is going on in the hood? What is the crime level. Talk to others in the neighborhood, the local restaurants, stores. What kind of retail is around? Check cashing store, liquor store, pawn shops, bars on windows. Graffitti, people hanging out on the corners. You can bring the property up to livable standards, but can the rents be collected without packing. Can you get a PM to manage the property? If you don't think that you will ever be able to sell it, then are you sure you want to buy it?

Yettekov Wilson Jr · Answer

That is good sound advice. I did my drive by's at 9:00 PM when I was investing in Baltimore years ago. You get a real good feel for the area doing that.