Owning Affordable Rentals (AKA C and D Level Properties) Isn't As Scary As You Think!

[Stephen Marshall]

Let's get all of the stereotypes out of the way.  Yes, owning affordable/low income housing is more challenging than your typical A or B class property, you will experience more repairs, turnover and maintenance.  However, if you have the right partner, the right property, the right rehab, reasonable expectations and a seasoned manager, the returns are fantastic. Here are 6 simple rules to follow when buying "C Class" property which should help sleep better at night...

Rule #1:  Find a Local Joint Venture Partner

Nothing beats boots on the ground, especially if you are investing in place where you do not live. In my opinion, having a local joint venture partner is worth its weight in gold. If you are buying a C class property, the JV approach is much better than working with a Turnkey provider because their financial interests are aligned perfectly with yours.

Rule #2:  Avoid The War Zones

All lower income neighborhoods are not the same.  In many cases they change street by street.  This is where your local Joint Venture Partner and Professional Property Manager can come in handy.  They can keep you away from the worst neighborhoods.  Keep in mind that there is generally some crime in lower income areas, it comes with the territory.  The trick is to stay away from the really scary stuff.

Rule #3:  Never Overpay

Let's face it, you buy affordable rentals for cash flow, not appreciation. So it is very important that you buy right on the front end. If you get into a fully rehabbed property at $30-$40k, I would never expect that property to appreciate more than 1 or 2% per year. With that said, always try to buy at a 10% or higher CAP Rate (Annual Rent - Annual Expenses / Purchase Price). Make sure you fully load the expenses! Don't forget to account for debt service, taxes, insurance, management fees, repairs and vacancies.

Don't get too hung up on comp based valuations because there aren't generally many retail sales to compare to.  Just make sure the investment has a good rate of return.  If you can enhance your returns using leverage, all the better.  Just be prepared to have a higher than usual down payment and a shorter term loan.   

Rule #4:  Buy a Fixer-Upper--Not a Property That Should Be Torn Down

Don't buy a property that isn't worth fixing.  The house you select doesn't need to be perfect, but try to buy one that only has deferred maintenance issues like paint, roofing and maybe a new HVAC system.  Stay away from major plumbing, electrical issues, etc.  

Rule #5:  Don't Over Improve

You want the house to be safe, clean and functional.  You shouldn't buy the most expensive finishes or spend too much on landscaping.  There is limited appreciation upside and you should keep that in mind when contemplating what improvements to make to the property.  Remember, the only reason you buy this class of house is to generate monthly cash flow and provide lower income families a decent to live.

Rule #6:  Hire a Seasoned Property Manager

I think this one speaks for itself.  The most important step when renting a property in any asset class (especially C) is to make sure you have a manager that appropriately screens prospective tenants and has the resources to manage the day-to-day needs of your customers.  I would also recommend finding a manager that is comfortable working with the local housing authority and understands all of the rules and regulations.  Many of your tenants may be on some kind of government subsidised program and this knowledge is critical. 

About the Author:  Steve Marshall is a Memphis based HomeVestors franchisee and has been investing in Memphis area real estate for more than 10 years.  Mr. Marshall's email address is [email protected].