Top 6 Tips for Managing Class C or D Rentals

As a DIY landlord, the responsibility of managing your properties falls to you, and the type of management that your rentals will require depends largely on the property class. So if you want to manage effectively and prepare yourself for potential issues, the best way to start is by understanding what type of tenant you’re dealing with.

Class C or D tenants can be tricky, but there are tips and tricks to help landlords manage them effectively. Understand that many of these tenants will not have good credit, make on-time payments, or take care of the property as well as a higher-class tenant would. For this reason, we’ve created this list of tips for you to manage your Class C or D rentals and still come out profitable.

After all, theoretically, Class C and D rentals have the most potential for high cash flow compared to Class A and B. While they carry high risks and require more time and effort to manage properly, their rent-to-price ratios make them very appealing to rental investors, particularly those who are just starting out and want to get onto the property ladder at the ground floor.

But new landlords also have little experience when it comes to navigating tenant issues, so there can be a steep learning curve when you’re managing a Class C or D rental for the first time.

That’s why we’ve put together this guide, filled with all the tips we’ve picked up over the years as a property management company in the Metro Detroit area—the well-known investment hot spot that’s packed with Class C and D rentals.

NOTE: we strongly advise against buying Class D rentals - unless you’re going to be a hands-on, local, DIY landlord. Not many property management companies, including us, will manage Class D rentals.

Maintain to the Neighborhood—not personal standards

Some landlords tend to maintain their rental properties according to their own personal standards. It’s only human nature—what you find attractive is what you think others will, too.

However, Class C and D rentals don’t need to be maintained or upgraded to the same standard as what you’d like to live in yourself. In fact, doing so could seriously eat into your profits. With these types of properties, you’ll be serving a tenant pool that will prioritize things such as safety and lower rent—not the thread count of curtains or the latest garbage disposal technology.

Here are the essential things to maintain in a Class C or D rental:

• 1. Smoke alarms
• 2. Handrails
• 3. Secure doors and windows
• 4. Heating system
• 5. Plumbing
• 6. Electrical, including GFCI outlets near water sources
• Pests

The list is not exhaustive, but the rule of thumb is to avoid spending too much time and money beautifying the rental when it’s going to be rented out cheaply (and may not be cared for impeccably by your tenants). This leads us to our next point...

Tenant-proof everything you can!

Statistically, lower demographic tenants won’t maintain a rental, as well as a Class A or B tenant, would.

Because of this, it’s best that you tenant-proof the rental to minimize the cost of future repairs:

• 1. Avoid carpeting, which is easily ruined, and instead refinish hardwood or install hard surfaces like VCT tile or vinyl planking. It may cost more upfront but won’t need to be replaced as often.
• 2. Choose a simple paint color for all the walls—preferably a color that you can easily repurchase. Also, use semi-gloss, which is easier to clean, so you won’t have to repaint as often.3. Remove garbage disposals that you’d need to repair and maintain constantly.4. Use spring-type door stoppers with a plate on the corresponding wall for protecting walls from door handle holes.
• 5. Glue rubber mats under sink cabinets to prevent water damage.
• 6. Install aluminum sheets on the walls surrounding stovetops for easy grease removal.
• 7. Since towel racks seem to always be pulled out of drywall anchors, screw a 1x3 board to the wall studs and then mount a towel rack to this board.
• 9. On the outside, install low-profile downspout extensions. The aluminum ones always 10. get knocked off, destroyed, or tend to “disappear”.
• 11. Clean gutters and leaves during the fall season (as tenants tend to skip this - you can charge them for it).
• 12. Steer clear of automatic garage door openers.

These are some of the most useful tips we’ve found with Class C and D rentals, and they’ve proven to minimize the need to repair your rentals both during and after a tenancy.

Have a Thorough Applicant Screening Process

Naturally, Class C and D rentals will attract tenants that are of the same class. Because of this, they need to be screened extra thoroughly during the application process. So, here are the key areas you need to focus on, as they contribute the most to your investment success:

• 1. Ignore their credit score: It’ll usually be under 600, so instead, focus on their rental history for the last 2 years. Check out all addresses on their credit report in the last two years to confirm they aren’t hiding a bad rental history. Use public records to confirm who owns their previous rentals before you do a rental verification, so you can make sure an applicant didn’t give you a friend to pose as their landlord.
• 2. Run a background check for evictions, judgments, and utility collections, which are all indicators of a possible problematic tenant.
• 3. Focus on how stable their employment & income is. Most Class C & D tenants live paycheck-to-paycheck, so it’s important to verify they have stable employment & income. Insist they supply their last 2 years of employment history with start & end dates, address, phone, and supervisor’s name. Require a year-to-date pay stub and last year’s W-2. Calculate their average monthly income using these, not from their hourly rate & 40 hours.
• 4. Require bank or debit card statements. You might be surprised by how they spend their money! Quality tenants will be smart with their expenditures—which indicates that they’ll pay rent responsibly (rather than blowing their paycheck on a new TV or rims for their car). You can also see how many NSFs they have, which are a bad sign. Finally, you can use bank deposits to verify their income, as most employers now deposit payroll directly to bank accounts or debit cards.
• 5. Deliberately put challenges in your screening process. Make it slightly more difficult for them to pass. This way, you can weed out the ones with “entitlement mentalities.”
• • - Ask for a detailed letter of explanation for evictions, collections, charge-offs, etc. - How they respond to this will show how they’ll respond to your calls about past due rent.
•      - Ask them to explain any unusual credits/debits on their bank statements. Many       Class C and D tenants have some type of ‘side hustle' to make extra money, so you may want to make sure it’s not drugs or other illegal activity that could lead to your property being damaged.
•    - Ask them to complete a budget form. They may disclose other sources of income or expenses. Ultimately, it’s a test of how compliant they’ll be. We use a form from FHLMC.
• 6. Make a surprise visit to their current home to see how they maintain it. How they treat their current home is precisely how they’ll treat your rental.

Allow Payment Plans with a Tracker System

We all want tenants who pay their rent on time, but there will be times when a Class C or D tenant will fall behind due to an unexpected financial event. When this happens, you need to be ready to offer them a payment plan, requiring specific payment dates & amounts, with a system to track when these payments are due. You’ll want to remind them a day or two before due dates, to keep them from spending their pay on something else and falling further behind on their rent.

Be prepared to give a firm no when they request for you to change rent due dates to “make it easier” for them to pay rent. Specifically, they might ask that you adjust based on their SSI or paycheck dates. However, this only shows that they are not good with budgeting and will likely fall further behind with more excuses in the future.

Know Your Eviction Process

Evictions can happen across all property classes; however, these are way more common in Class C and D rentals. This is because the tenant pool tends to struggle more with payments and property upkeep. Unfortunately, many problematic tenants are out there; they may even run illegal businesses on your property or steal your appliances.

Because of this, you need to have a well-defined eviction process ready to go when you’re dealing in these property classes.

Here are the common grounds for eviction that you might encounter:

• 1. Rent arrears or late rental payments
• 2. Breach of contract (like keeping a pet or additional tenants in the unit without approval)
• 3. Anti-social or erratic behavior (especially for multi-residential housing, such as apartments)
• 4. Property damages (especially when they will cost more than the security deposit can cover)
• 5. False information (e.g., fabricated employment history or fake references)

When you need to get rid of a tenant, you need to move efficiently and not lose more time & rent.

Use Handymen Corresponding to the Property Class

A well-prepared landlord should have go-to handymen they can contact for rental repairs. Our advice is to use handymen that live as close to your property as possible. You also want to use handymen familiar with the property class. So, for a Class C or D rental, you’d want to hire a Class C or D handyman.

You’ll only waste your money sending a Class A or B handyman to a Class C or D property. You don’t need that high of a quality repairman to fix up a Class C or D rental, and they likely will be considerably more expensive. There will also likely be “culture clash” issues with the tenants.

Conclusion

Class C and D properties aren’t impossible to manage if you know what to expect and what to do when issues arise. Expect a few setbacks here and there as they come with the territory. As long as you manage your expectations and manage Class C & D rentals correctly, you’ll increase your probability of success.

We hope these tips have opened your eyes and equipped you to succeed in your rental investment journey!

What other tips have we missed? Drop them in the comments section below to help others out.

Image Courtesy of Hisham Yahya