Without a doubt, everyone has heard that real estate is all about “location, location, location.” I’ve bought in every class of real estate. I’ve bought A-class condos that I flipped, and I’ve bought D-class homes that I’m stuck with to this day. I’ve made money in every class.
Even though I’ve made money in every class of properties, I will no longer buy D-class properties. I will no longer buy properties based on price alone. This isn’t a new rule for me, but every now and again, I get reminders of why I have this rule.
Criminal Records, Evictions & Low Credit Scores, Oh My
Most recently, the reminder has been a vacancy. We had a tenant move out end of October in one of the few properties I still own in a D-class neighborhood. The property was left in decent shape. We needed to go in, clean it up and paint it. It was a very minor turnover. The unit went back on the market five days later.
We got some leads on the property and some applications, but they were terrible. Criminal records, evictions, extremely low credit scores — you name it, and it was probably on one of the applications. So the property continued to sit on the market. The cost of getting a bad tenant is much higher than the cost to let the property sit, so it continues to sit until we can find the right tenant.
This isn’t uncommon for these few properties that I have. Tenant moves in, stays for a couple years, then moves out, and it takes me a couple months to fill it. The vacancy rate of property management companies and individual properties can be very different, especially if the properties are spread over different classes.
For instance, our vacancy rate has been sub 3% for a number of years. Our turnovers each year have been minimal. But this handful of properties always has high vacancy rates, and the economic cost has always been high. That’s why it is important to ensure that you understand the difference of vacancies in certain neighborhoods.
D-Class Properties Require Twice the Management Work
Vacancy is just one of the issues we deal with in these D-class properties. They also require a different level of management. I don’t have hard data to back this up, but I would venture to say D-class properties require almost twice the work as compared to other properties.
D-class tenants tend to be high maintenance, and that high maintenance comes at a cost. So, if you are buying a D-class property and have a property manager, don’t be surprised if your returns are not as good as you thought they would be. I can still make money on D-class properties because I have everything in-house. I have my own leasing agents. I have my own maintenance crew. I have my own property manager. So, my expenses are not the same as someone else’s property who is managing everything on his/her own.
Too many people make a decision about buying property solely on the price level and the rents. Most of them don’t realize until it is too late that the expected returns aren’t going to be there.
Why I’d Still Buy Them
Apart from all this, I would still like to buy D-class properties in comparison to non-performing notes. Sure, you can make a lot of money out of it, but you’ll need the help of a professional and experienced team to do that. The risks need to be spread over a large portfolio. But if you are planning to do everything on your own or buying your first investment property, don’t get caught up in the low price point properties. The headaches are not going to be worth the returns that you get.