Buy in "C" neighborhoods; pass to a PM?

Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes

Regarding the investors with +100 units, are they basically doing it buy buying cheaper properties (<$100k) in "c" and "d" properties and then handing off to a property manager? I've been buying in solid middle class "B" neighborhoods to avoid problem tenants. Zillow shows schools 5 or above. I'm buying for 150k and renting for about $1,400. Putting down 20%. After all expenses, PM fees, I'm getting about $130 cash flow. Learning a lot and investments seem solid, but process seems slow and running out of cash for 20% deposits. Is there anything you would do differently? Buy cheaper houses and let PM deal with problematic tenants? BRRR method seems to only work if you buy in worse neighborhoods?

1 Reply

7 views

Most Popular Reply

Kevin Siedlecki

Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes

@Philip Hy - the $130/mo cash flow per unit is on the low side, but I don't think the answer is to go to worse neighborhoods. I don't have 100+ units, but my cash flow per unit is significantly higher. My strategy is to find places with underutilized space so you can add rental value to them. A storage room you can turn into a bathroom, a closet you can turn into a laundry room, a shed you can charge for storage, or an unfinished basement/attic you can add a lot to are all ways I've increased the rent on places to create higher cashflow.

But remember real estate is a get-rich slow world. Sounds like you're doing fine.

3 Reply

See this reply in the discussion

15 Replies

Jump to latestLatest

Sort by

Kevin Siedlecki
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y
@Philip Hy - the $130/mo cash flow per unit is on the low side, but I don't think the answer is to go to worse neighborhoods. I don't have 100+ units, but my cash flow per unit is significantly higher. My strategy is to find places with underutilized space so you can add rental value to them. A storage room you can turn into a bathroom, a closet you can turn into a laundry room, a shed you can charge for storage, or an unfinished basement/attic you can add a lot to are all ways I've increased the rent on places to create higher cashflow.
But remember real estate is a get-rich slow world. Sounds like you're doing fine.
3 Reply
Kevin Coggins
Spring, TX · Member since 2016 · 243 posts · 203 votes
9y
I would look at your initial investment, then see what your annual return is for the money. If you're not making above 10%, there are more liquid ways to invest your money and assuming you put in 30k, you could easily be getting the equivalent cash flow by simply buying a stock with dividends.
Nothing wrong with 100+ units, but if the opportunities to get your numbers that you're looking for, I think you could always look elsewhere (different market, or different investment completely)
1 Reply
Philip Hy
OP
Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
9y
Kevin Siedlecki and Kevin Coggins all great points. I try to load my spreadsheet models with PM fees and 1% of purchase price as estimated operating expenses and renovation costs...cash on cash is 3.5%. Much lower than what I'm hearing others get. However, my total ROI is about 20% when I accounted for appreciation and mortgage pay down, etc. When you say I should aim for 10% returns, you mean first year cash on cash? I hear the podcast hosts aim for at least $100 cash flow per deal...does seem razor thin though. Are you guys picking up deals from MLS, or wholesalers? My next step was perhaps picking up wholesale deals, hard money to renovate, refinance, repeat. Thanks for the feedback, just hearing what others are doing is a great help.
0 Reply
Kevin Siedlecki
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y
@Philip Hy - what is the etc in that statement? I don't see how mortgage paydown and reasonable appreciation could bump add 16.5% to your return. What type of loans are you working with?
Also, appreciation is best kept off the initial analysis. Make the numbers work without it, and if you get it, that's a bonus. You can't pay bills with equity (at least not without a refi), and at 3.5% COC, there's just not a lot of cash for cushion.
1 Reply
Kevin Coggins
Spring, TX · Member since 2016 · 243 posts · 203 votes
9y
@Philip Hy Yes cash on cash return. I just said 10% because that's around what you could get if you instead of invested in the stock market. But there is also the value in diversifying, so for that purpose it wouldn't be too bad to get lesser returns. It seems to just aim for $100 in cash flow, because what if you put in $100,000, that would be a terrible investment as far as cash flow is concerned.
I wish I had better advice as far as finding better deals, but I'm new to the real estate world. Still looking for the right opportunity to get in this. Have money in the stock market, but considering I have retirement + savings (except emergency), I decided to attempt to get into real estate.
1 Reply
Darren Budahn
Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
9y
I would steer clear of buying in a bad area and thinking you will just be able to transfer the headache of managing these kinds of tenants and properties on to a property manager. If you want to make a go of it in those areas plan on doing it yourself and know what you are getting into. I would just use the BRRR method and add value to each property you purchase. Otherwise, as you stated, you will soon be low on cash if you just keep plunking down 20-25% down payments on each property.
1 Reply
Jeff Wallenius
Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
9y
Philip Hy with the numbers you stated you could and should be getting better returns. My advice is to never dip down into the cheaper asset classes as any return gains will be offset by turnover and difficult tenant bases. PM me if you need assistance identifying more profitable areas to invest. Best of luck!
1 Reply
Paul Ewing
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
9y
What are you calling C class? I consider it to be solid blue collar and service worker homes. I might not choose to live there, but would if needed and have no concern going there after dark to check on something. Crack houses and lots of crime is D class to me and where I won't invest or go personally.
As far as finding cash flow, look outside North Dallas. There are lots of working class areas where you can find good cash flows without worrying about your tenant shooting you. ;)
Personally I invest in sub $80k (usually sub $60k) solid B to C properties. And rent them for $700 to $1200. I want at least $200 cash flow after expenses and paying myself a $100 PM fee. I invest mostly outside city limits where you have a $40k property next to a $300k place. There are a few pockets of C- to D neighborhoods, but they are pretty obvious.
1 Reply
Philip Hy
OP
Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
9y
Everyone, thanks for the great advice. I hope you won't mind if I PM some of you to pick your brains about some of your feedback. The reason I mentioned C neighborhoods is because when I listen to the podcast, Josh and Brandon seem to mention that's how they started and over time they transitioned their portfolio to better neighborhoods. I would consider a C neighborhood a place that's not exactly a high crime area, but you wou
ldn't feel comfortable sending your wife at night to collect the rent.
Agree with @Jeff Wallenius and @Kevin Coggins about the stock market providing better cash flow, I'm in it for the long haul and my total returns are still better than what I could realistically expect in the stock market.
FYI, here is a screenshot of my most recent deal I've worked on.
0 Reply
Daren H.
Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes
9y
I would also caution you on the thinking that higher end properties do not come with tenant problems, although I would agree that lower end tend to come with "more" problems. I have two particular rentals that rent for $1400 and $1625 respectively. These tenants are professional types and their expectations are through the roof. They become headaches through their expectations. We take good care of all of our rentals, but they have to be reminded the house is not new construction.
1 Reply
Ryan K.
Investor · Richmond, VA · Member since 2015 · 139 posts · 43 votes
9y
If someone is counting appreciation to their returns it alone can bump up the numbers a huge amount if the property is leveraged. For example historical appreciation is 3.5% (every market is different but this is historical average). If leveraged with only 25% down then the appreciation can alone add 14% to returns. Say $100k property, $25k down payment, appreciation first year is 3.5%, so at end of first year property has increased in equity $3500. $25k/$3500 = 14%. This is why many folks have earned more returns in appreciation than total cash flow over the life of holding the property, especially in places with high appreciation - think CA, HI, NY, Seattle.

Originally posted by @Kevin Siedlecki:

@Philip Hy - what is the etc in that statement? I don't see how mortgage paydown and reasonable appreciation could bump add 16.5% to your return. What type of loans are you working with?
Also, appreciation is best kept off the initial analysis. Make the numbers work without it, and if you get it, that's a bonus. You can't pay bills with equity (at least not without a refi), and at 3.5% COC, there's just not a lot of cash for cushion.
1 Reply
Charles Worth
Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
9y
@Philip Hy
Not sure where you are buying but unless there is appreciation or built in equity on the buy (i.e. you bought it at 75% of equity value) it sounds like a low return for the many risks (tenants, liqudity etc,). If there is that is really your return and the cash flow is more a kicker. As you noted the appreciation saves you but that assumes the area is one where that would be a probable scenario.
In reference to the 100+ unit comment I would say its actually much harder with more units because you have more investments that need to be made and/or need to play in the midsize multi space where there is a lot of competition. As a small operator your advantage is you need to make fewer investments so you have wait longer and try and ensure a better deal on entry.
Have you considered that maybe you are too quick to buy? Maybe a better acquisition strategy (mailings, calling etc.) would yield higher returns?
0 Reply
Philip Hy
OP
Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
9y
@Charles Worth I think you hit a lot of good points and I agree with everything you said. I may be too quick to buy. DFW real estate is on fire (strong fundamentals, TONS of new companies moving here, and new house starts not keeping up with people moving here), and low interest rates. I'm admit I'm trying to buy quickly. The reason this thread started is because I'm rethinking how to get more cash flow.
My next step is how to do better on the acquisition end. Maybe mailing is the answer. Is it really as easy as just mailing postcards saying "I want to buy your property, call XXX"?
0 Reply
Paul Ewing
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
9y
It depends. There are a LOT of people mailing in DFW. My parents and I call occasionally to see what they are trying and occasionally laugh out load at the rediculous offers. But then DFW seems to be guru central and every one of the suckers that spent/wasted $500-$2000 on seminars thinks they will be millionaires in a year. Last week we had some wholesaler make us a "Great offer on our distressed property" of $21k on one of my parent's places. This place rents for $1000 a month and we have had legitimate buyers offer $80k+ for it.
0 Reply
Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
9y
Bad neighborhoods attract bad tenants and bad property managers. Think about it, if either had something to lose why would they want to deal in bad neighborhoods?
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.