Do C class property only attract C class tenants and what to do about it?

[Nick B.]

Hello BP!

I keep reading on BP and elsewhere that renting to high quality tenants is the most important risk control a landlord can have. There were a few BP blog posts on this topic with the main idea that if you want to have a steady income and few headaches from your properties rent them to those with 650+ credit score, income of 3.5 rent payments, etc. I totally agree with this idea but the reality is quite different.

I am looking for properties either SF or small MF with cap rates of 8% or better. Sometimes I even find them but they all are C class in C neighborhoods populated by C tenants.

There is another interesting fact I learned. I always thought that security deposit is supposed to be one month rent and sometimes even higher (pets, waterbeds, etc.) but looking at rent rolls of two completely different properties (C and B!) I found that the actual deposits ranged from 0 to $300 on $700-800/mo units. An owner of yet another C class apartment confirmed the same. 

Is the small deposit a function of class C properties and C tenants? I thought it would be the opposite as higher risk people should have higher deposits.

If I don't want to deal with C tenants, what kind of property should I look for? A or B seems the obvious but the cap rates are a lot lower and the properties are generally more expensive.

If I buy such a C class property, are C class tenants is my only option? I can renovate a building and make it more attractive but I cannot change the neighborhood. So, why A or B tenants would want to live there?

Thanks
Nick

[Brett B.]

@Nick B.

Here is my experience. I own Class A, B and C properties.

1. Deposits are generally lower on Class C properties because most Class C tenants can not afford Rent and Security deposits up front. Typically you get a little from them so they can afford to move in.

2. Class A have the lowest Cap rates and Class C can have the highest. However, Class C requires a lot more work and dedication. If you are not in for the work, go for the lower cap rates, if you can afford time and energy, go for the Class C .

3. All my Class A or B were Class C. I found a growing neighborhood, bought a Class C Apartment complex and held on to it for awhile. When the area was ready, I renovated and rented out to a different tenant. 

My advise, drive by emerging areas and look for apartment complexes that seem run down. Contact owner and see if you can buy. You will know when the time is right to flip your Class C into a Class B.

Brett