D class neighborhood $200 a door ?

Question

Is it worth buying multi family properties in D class neighborhoods if your getting $200 per door cash flow?

Linda S. · Answer

@Michael Paradine,

We focus on C areas, although when my wealthy non-investor friends come, they think it's D area, but anyhow.. just remember a few things..

You pick the tenant,     Your screening abilities will determine how much stress you get with these people, not the people.     So many people stereotype low income as the worst of the worst, but again-- your tenant reflects *YOUR* ability to screen and find someone good.. that will tie directly with the quality of apartment you offer.   If it's a nicer low income place, you'll get better people... low income want nice, affordable places too!   If you get the person that jumps jobs every 2 months, it's your fault, not his...  *YOU* decide who rents.

You pick the tenant, so you are picking the stress.   I will say, if you do the minimum with low income,  and treat them like the stereotypical slumlord,  everything people warn you about is true.. they don't give a crap and will treat you like crap.. I have heard a lot of stories of people purposely withholding rent money from landlords because they aren't doing repairs....  but if you establish a positive relationship from the beginning, it's actually pretty easy!   People appreciate respect, and  as long as you establish it upfront, it will be fine!   Good luck!

Ujwal Velagapudi · Answer

@Michael Paradine I manage 11 of my own units in C-/D neighborhoods. Net cash flow was 60%, so roughly $350+/door. When I budget/scout new properties, I put 10% for vacancies, 10% capex, and 10% repairs, and in addition take off utilities, tax, insurance, mortgage (if applicable), etc. Note 9 of these 11 units are commercial, and they do take care of most of their own repairs, and I generally handle the major items. So numbers look pretty good, but remember that at some point I will take a bit larger hits with capex, there are many risks with the area concerning safety, and you definitely need to put more effort initially with tenants/neighbors/building. At this point I've had full occupancy for over 1.5 years, and having to travel internationally quite often for work, I have streamlined it to the point where I rarely ever need to go to my units and can manage half way around the world. So to answer your question, yes, I think D neighborhoods are worth it.

I have a 15 building in a B area, where I have given it out to a PM. After nearly 5 months of taking over management, they have yet to get it occupied, address minor tenant concerns, etc. I know if I were managing this myself it would be at 90%+ occupancy at all times, especially after 5 months. This property will yield no more than 40% cash flow for me, just because the PM won't take care of it like you would take care of your own investment.

@Audrey Ezeh, if your PM is truly amazing and has some vested interest beyond just a 10% fee charge, then you might get nearly the full potential of what you could get if you managed yourself. I think a PM in these types of neighborhoods will cause a much more significant loss in profit than just the 10% gross rent fee you pay them. Either way, you will still cash flow better in these areas than others, for the most part with a good PM.

David Faulkner · Answer

Make sure you look long and hard at realistic vacancy (both physical and economic) rates for that D class neighborhood (it will be way higher than the nice end of town). Make sure you really scrub the long term CapEx expense estimates ... if you are using 5% of rents or other such rubbish you will be deeply disappointed and under funded. Do a grass roots estimate for that (gross rents have nothing to do with that calculation). You're probably dreaming at $180.

Even if you do this and even if you do come up with $200/unit, I still would not do it. My time and effort babysitting knucklehead D class tenants and chasing them around town for rent is worth more than that ... ... you couldn't get me out of bed in the morning for $200/mo/unit and no appreciation LOL. If you want a minimum wage job (which is what this will become), then go flip burgers; at least then you won't need to pay thousands for the privilege.

Michael Paradine · Answer

Great advise Linda D. I think you make a very good point. One of the tenants I spoke with has lived in her 1 bedroom apt for 31 years.  I asked her what she would fix if anything and she said the carpet because it was original from 31 years ago. Another tenant said she would love some fresh paint. basically I feel like some cheap rehab\updating would create good relations with the existing tenants and allow me to slightly raise the rents.

Linda S. · Answer

@Michael Paradine,

That's wonderful!    Keep up the good mindset and good work!   Definitely do the repairs ASAP  (very reasonable IMO),.. it will show them you listen, are involved, so it also sets the tone that you are active  landlord so they can't get stuff by you.     Remember, even though it's a business, and this is an investment.. your dealing with their homes, they have a strong connection to the place.. A good relationship with your tenants based on respect will make your job sooooooo easy, enjoy the ride!

Diane G. · Answer

@David Faulkner

You are funny.... What you said, however, is very true unfortunately.... This is a min wage job chasing D tenants, that is how I look at it too.....

Thomas S. · Answer

At $200 per door you need a upside. Transitioning to a C class and increasing rents as well as reducing operating costs by better screening could work but you need a greater return in the lower class areas to justify the headaches.

Start with a really low offer and test to see how desperate the seller is to unload the property. Probably a burned out investor.

Audrey Ezeh · Answer

Thanks! I appreciate that! I'm asking because mine is not exactly D, closer to C ( next to university) but I've lined up a PM who charges a flat 10% and nothing else ever and no discounts ever. She loves her job and loves evicting tenants asap. Screening meets my rigorous standards so I'm pretty happy with my choice of PM. I asked her to visit the property and she came back saying "easy rentals, go buy it." Offer is going in today....wish me luck :)

Kyle Mccaw · Answer

@Audrey Ezeh Sure but finding a good manager for class D is difficult and not cheap. Be willing to step in if things don't work out.

Linda S. · Answer

@Michael Paradine,

If it's a D-neighborhood, I think it all depends on the quality of tenant..  good people live in bad areas too!  D-neighborhoods rents have to be low due to the desirability of the area, so increasing the rate a lot IMO will just leave you with vacancy.

As long as the income reflects the level of stress, I think it's okay.   If they're already in place, and they don't have a history of being a problem, I don't see why not.

D class neighborhood $200 a door ?

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