B properties

[Jim Chung]

I'm interested in doing out of state turnkey investment and looking in class 'B' properties. Besides turnkey operator saying it is class'B"..How do we vertify the property is indeed class 'B"?

appreciate any advice

[Clayton Mobley]

Hey @Jim Chung, while I would agree with @Steven Gesis that the letter system lacks some necessary nuance (and you are certainly not the first to be a bit confused about how to define a property tier), there are a couple key things you can look for to determine the type of property you are looking at:

1. Property and neighborhood condition - B properties are typically decently maintained and in areas that seem comfortable but not necessarily affluent. When you drive down the street, you should feel safe. A B property is not one that has been let go - not to say that they don't often need rehab work, but B properties are well-built. A turnkey operator may find a property with B-class bones and in a B-class area that needs a lot of work (so it may look like a C superficially) and then put in the refurb necessary to bring it up to speed, but if you are investing in turnkey and you are shown a property with uncut lawn, mold, unclean or old carpet, peeling paint etc, then it is not a real B. B properties look like family homes. 

Bear in mind that the type of rehab work a TK operator does will have a huge bearing on your maintenance and capex expenses down the line. So even if a property looks great, you need to ask what was done to ensure that a provider didn't just 'put lipstick on a pig'. Our rehabs typically include new tin roofs, new like-wood vinyl flooring, new HVAC systems, new paint/fixtures, granite countertops, etc. This means our properties attract home-minded tenants and our maintenance rates are the best in the business (currently 2.6% for the past 52-week rolling period). Just remember to ask questions about any property you are shown, even if it looks like a class A jewel in a B area - make sure you know what you are buying.

2. The tenancy and neighbors - B areas attract a wider swath of tenants than A or C/D areas, because there can be both blue and white collar workers living there (though blue is more common). A B- area may attract more factory workers or contractors and nurses while a B+ area may include younger professionals (who may later move to an A area) or  middle-management types. In either case, B areas are typically populated by people with full-time work which is what makes them so great for turnkey - there are always good tenants available that won't have trouble paying rent.

3. Schools - while the best schools are almost always in A areas because of the tax base, the schools in B areas should still be decent. I'm actually working on a write up of the B area school zones in Birmingham right now to help investors select the properties they feel are most likely to attract tenants with children. Ask about what school zone a given property is in and how those schools perform - young families often need to rent and school zone can be a hugely important factor.

4. Crime Rate - B areas typically have low crime. Again, the neighborhood should feel safe for families and children. There should be no visible signs of gang or other criminal activity - no people hanging out on corners, no graffiti, etc.

It is important to note, however, that many areas are street-to-street, meaning that one street can have rows of lovely B properties, while one street over is a War Zone, so you need to look at properties within that context. People that can afford to rent a good B property will be more likely to choose one that is not very close to a lower-tier area. Similarly, B properties that are near A areas may be in more demand, as people like to feel that they live in an affluent area and the safety, schools and neighborhood amenities are likely better.

In terms of rent and property value, it will depend on the market you are in. In Birmingham, we invest only in high-quality B properties and they typically sell for between $80-130k. Our average rent is $950. In less popular markets, B properties may sell for less, but you may also have a lower chance of appreciation and/or more difficulty placing tenants. 

The truth is, there are great investment opportunities in any number of markets, but I would agree that focusing on B properties is going to give you the best combination of cash flow and capital preservation/appreciation. The most important aspect of successful turnkey is not picking a market, it's picking a provider you can trust to be upfront and transparent. Once you've done your due diligence on that and selected a partner, the rest is pretty simple.

If you have any other questions, feel free to drop me a line any time.

Best of luck!

Clayton