How low should I go?

Question

I would like to buy small multi family properties and am looking for an experienced investors perspective on the class of neighborhood I should be focusing on. I live in Delaware County PA (bordering Philadelphia). It seems that class C and D properties are cheaper and offer better cash flow but management costs are higher and there is not much appreciation. But class A and B properties are easier to manage and appreciate more but the cash flow isn’t as much.

I feel like I should stay in the B-C zone to avoid extremes and look for good deals but I’m new and I’m sure there are plenty of factors I’m not considering. Which class of neighborhood is wisest to invest in for multi family?

Rich O'Neill · Answer

Hey Zach, Sounds to me like you should get a decent property manager lined up once you have your first deal ready. I personally would rather self manage but I am full time in REI and I like to be hands on. A good manager will help you grow faster by handling all of the little BS so that you can focus on acquisition. I worked with RentWell in the past and they did a great job for me. Might be worth getting in touch with Rob over there.

I do a lot in Collingdale and it is actually one of my favorite neighborhoods to invest in. I also have some in the nicer areas like Glenolden and Clifton Heights as well, but Collingdale has some great numbers. It seems like you can find more multi family a little further west from Collingdale. I purchase almost exclusively single family homes but that is because I am looking to acquire a lot in a short amount of time and the supply is much greater. If you are patient there are definitely nice small multi family deals to be had.

Hope this is helpful and if you have any more questions don't hesitate to reach out!

Zach White · Answer

Thanks for your input guys.

So my goal is to replace our household income with cash flow from rental properties so that I can commit my time to starting an industrial sculpture/ home decor brand and patenting some ideas which will take a ton of hours to get moving. I would like the freedom to be able to dedicate my time to the things I enjoy without sacrificing time with my family. So to answer your questions:

I am willing to work hard (I do have a full time job but would be willing to spend 2-3 hours after work and Saturdays doing whatever I had to do) and I enjoy learning about real estate but my goal is to get to a point where I don't have to put a lot of time into management related tasks. I'm hoping to get to that point within 5 years. But I guess I would prefer not to manage and spend more time trying to grow my portfolio now if I could find properties that cash flowed despite management costs. Even though I'm handy and I could do it myself, I feel like I'd be able to get farther faster if I committed the small amount of spare time I have to learning and business related tasks that would be much harder to outsource. Is that a good strategy? What are your suggestions.

As far as risk tolerance I'm definitely more conservative but I feel like I could make thing less risky by learning as much as I can about them so I'm open to any ideas or suggestions.

I like Collingdale also, but I'm concerned about future property values as there is an increasing crime rate in the area and they are putting in a half-way house right on Clifton Ave near the courthouse. I just don't want to lose money in the long run due to property depreciation.

Joseph ODonovan · Answer

Zach, will you be self managing? If so, the management costs will not be necessarily higher in C/D class areas. The key being knowing how to properly vet prospective tenants. If you can get the right tenant, you can reduce vacancy costs, repair costs and eliminate any eviction legal fees. I am very familiar with Collingdale and there is a nice pool of hard working, responsible people in the tenant pool. You can absolutely cash flow here but again choosing the right tenants are key.

Justin Seng · Answer

@Zach White I agree with Ned Zach, it’s really up to what your looking to do. Staying mid range like you mentioned is what I prefer.  I have a property in Briarcliffe and one in Ridley.  I see your from Collingdale so you probably know they are about mid range for DELCO.

Ned Carey · Answer

@Zach White it depends on the investor. What is your risk tolerance, your financial position, and how much work are you willing to do? you can make money in all classes of properties.