Tenant Expectations for a C-Class Neighborhood

[Fan Bi]

Has anyone had good experiences investing in C-Class Neighborhoods?

To put some context around it, these are $60,000 a door multifamily units in Providence, RI, where a B-Class would go for $100,000 and A-Class $150,000. The C-Class unit rents for $900 a month with tenants paying utilities, and for these prices the demand is pretty good so physical occupancy isn't too much of an issue. On paper, this is a good deal. You hit a 1.5% rent rule, and cap rate of 10%+.

BUT, economic occupancy and its related costs are a killer. Most tenants in our C-Class units are either directly or close to living month-to-month which directly impacts their ability to pay. Cash flow stops, legal fees get involved, constable fees and varying degrees of tenant turnover later, on a $900 a month unit, your whole year's margin is gone. 

1. Outside of the tenant screening basics like credit score, no evictions, references and 3x salary to rent, do people who own C-Class properties have other things they've learned?

2. Once a tenant becomes late, how quickly do you push to go to court (expense), vs giving them a month to get current? 

[John Underwood]

@Fan Bi All great questions

Yes I have had great luck with Class C properties

1. Job stability of 2 years plus is also a positive. Screening tenants goes a long way to finding long term tenants. I have a very low turnover.

2. Its important to either get a larger deposit than one month or get 1st, last & deposit. It gives you longer to time in the black when a problem develops. Best policy is to file for eviction by mid month when late. When someone contacts me and tells me there is an issue and tells me when they will be depositing rent then I work with them. As long as they keep there word I will be flexible. Once they do no keep their promises, file the eviction ASAP and let them know that if they catch up you will cancel eviction. Sometime this is necessary to train new tenants that you will be fair but firm. They then either straighten up or you cut your losses and get someone that will pay on time every month.

I have one more than one occasion been too lenient and it has usually cost me, It is tough to toss someone out when they fall on hard times especially when you self manage. The more you run it like a business the better off you will be.

Also inspections once or twice a year are a good thing.