How to determine what class a neighborhood is?

Question

For all those investing OOS, what is your process in getting familiar with the neighborhood your property is in?

Lane Kawaoka · Answer

@Nam Trang

Property Classes

• Class A: new construction, command highest rents in the area, high-end amenities
• Class B: 10 – 15 years old, well maintained, little deferred maintenance
• Class C: built within the last 30 years, shows age, some deferred maintenance
• Class D: over 30 years old, no amenity package, low occupancy, needs work

Neighborhood Class

• Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course
• Class B: middle class part of town, safe neighborhood
• Class C: low-to-moderate income neighborhood
• Class D: high crime, very bad neighborhood

As a real estate investor, it's often best to buy in "the middle of the market" - not in the high-end areas, but not in the low-end ones either.

Michael Haas · Answer

An interesting question would be weather every city actually has every class of neighboorhood. It seems like thriving cities like New York, San Francisco, San Jose, and Seattle don't really have D class neighborhoods anymore, while struggling or shrinking cities may not really have A class neighborhoods anymore.

I halfway agree with @Lane Kawaoka, with one edit: (Traditional Rental Properties) in Seattle are not going to work for cash-flow. You can cash flow just fine in Seattle with non-traditional strategies though if you decide that you'd like to invest in Seattle, like:

- Rent by the room / large homes

- STR's (Airbnb)

- ADU's & DADU's (legal in Seattle, Tacoma, and Bellingham)

PS: My Cashflow Assumptions are 8% CAPEX, 3% Vacancy, optional 9% property management. That may be a little aggressive for some investors but is how our actual expenses pan out. The assumptions you make when calculating cash-flow are very important to make sure everyone is speaking the same language.

Johnny Wolff · Answer

@Nam Trang - here are a few things I like to examine:

1)  Google street view.  What do the cars look like?  What does the street look like?

2)  Ask an unbiased local that you trust - you can find one on a local RE investor on Facebook.

"Would you live in this neighborhood?"  "Would you invest in this neighborhood?"

People are happy to weigh in.  The turnkey company or your RE agent is going to make money off of this transaction.  You should find someone (or more than one person) that won't provide an unbiased opinion.

3)  Trulia - demographic data (crime, schools, poverty level, unemployment %)

4)  Population growth.  The population NEEDS to be growing.  If the population is shrinking that's a very unfavorable sign for the future of your investment.

5)  The income per capita - county, city, zip

Jeffrey Franco · Answer

Hi @Nam Trang - @Lane Kawaoka is on point with his comment, but I found this article by @Whitney Hutten helpful when I too needed a bit more clarification.

https://www.biggerpockets.com/...

Best of luck!

James Wise · Answer

I've made detailed guides on how to do this in several markets. You'll want to start with The Ultimate Guide to Grading Cleveland Neighborhoods. I also have similar guides that you may want to look over for Kansas City, Missouri. & Birmingham, Alabama.

In addition there are tons of other turnkey markets out there besides those listed above. Many of these markets are very well represented by sellers & turnkey operators here on BiggerPockets. In no particular order I have listed some of the most popular markets for out of state investors

• Cincinnati, Ohio
• Dayton, Ohio
• Toledo, Ohio
• Youngstown, Ohio
• Cincinnati, Ohio
• Memphis, Tennessee
• Saint Louis, Missouri
• Indianapolis, Indiana
• Detroit, Michigan
• Erie, Pennsylvania
• Louisville, Kentucky
• Milwaukee, Wisconsin
• Jackson, Mississippi

Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

One thing to note when looking at the individual markets, you can make or lose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Jonathan Oh · Answer

@Nam TrangFor starters the best metrics are ownership rate, unemployment, income levels, and population growth. These 4 will give you an idea of how wealthy the residents are and how desirable the neighborhood is. I'm actively working on a software to pull all this data and much more. If you're interested, check out my profile. Also, you may want to connect with property managers and other investors in the area to get their opinion as well. They can offer valuable local insights that data cannot such as whether a factory is about to be built right by your property, etc. Hope this helps!

Lane Kawaoka · Answer

Seattle is not going to work for cashflow. I sold my three units back in 2015 in seattle.

Steve Morris · Answer

At the end of the day what matters is net income.

Get an avg rent in that area compared to the rest of town since expenses (outside of the building itself, like newer bldgs need less maintenance) will be about the same.

Anna Sagatelova · Answer

I think @Lane Kawaoka provides a very helpful guide, but I will caution that the "property classes" breakdown, especially based on the age of the property, will absolutely vary by your market. Here in Cleveland, we have such a disproportionate number of old properties, that have been rehabbed so extensively, that age is just one of the factors in determining class. There are many 70-100 year old properties that have been rehabbed and upgraded to have top-level amenities.

Nam Trang · Answer

@Kalki S. Thank you! And I agree Class B seems to be a steady cash flow combined with a balanced mix of risk and reward.

How to determine what class a neighborhood is?

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