Can Money Be Made in C class Properties?

By: Alex Craig

Recently we had an individual reach out to us asking us if the reason why we never have any cheap deals under $60,000 (also known as C class in our industry) was because there is no money to be made in that space. He was certainly surprised when I told him that money could certainly be made here, which only added to his confusion of why we don’t offer these properties when our competitors do. Basically, I told him that I owned a property in a $695 rental area, to which I have been successful. However, this property recently went vacant and this is the process for a vacancy for not only this area, but most low rental areas.

  1. The day before the tenant moves out, confirm what time she is vacating (we do this anyways, but it is vital to make sure this is accurate in this space)
  2. As she is moving out, pull A/C unit, Furnace, Hot Water Tank and board up the back windows (this will add $500 to your turn cost)
  3. Start getting the house ready for the next tenant at 8AM the next day—instruct my crews to get this house ready in 48 hours no matter what it took. This is hard to complete for out-of-state investing because we have to develop move out pictures and a quote
  4. Start marketing the home the day that rent ready is complete at a price below the market rent by $25 to $50. Make sure your home is the nicest in the area for the best price. Every day this property sits vacant, the chances for vandalism increases. After 45 days, it is almost a given that someone will vandalize the home
  5. Once the rent ready crews were done, I sent an employee by the house at least twice a week and my leasing agent was also over the house periodically during that time. I asked that the times they show up be different each time to create some randomness so that neighbors in the area (which often times are the thieves) don’t pick up on patterns.

While we do a lot of the items listed above anyways, the execution of the vacancy must be flawless, otherwise you could be looking at some massive losses due to vandalism alone. Also, keep in mind vacant homes typically are only insured for 2 months. Your chances of collecting a claim due to vandalism are very low. Because the management is so intense on these homes, I recommend they are bought at the local level. But if anything is an indicator of why not to buy these homes, this is it: local people do not want these homes, only out of state investors are buying here.

But, if you are brave and what I have said does not scare you, this is what is needed to be done to be successful in this space:

  • Buy right, I don’t think Turnkey is the route here, it has to be bought cheap so that you do not have to achieve a market rent to cash flow and you have an exit strategy that does not include selling at a loss
  • Make it the nicest home in the area for $25 to $50 less a month then your competition. Vacancy is your threat here — the longer your home is vacant, the % chance it will get vandalized goes up daily
  • Pay cash. No matter how enticing the ROI is, the cash flow is not enough to support the home
  • Renovate with understanding the tenant will likely be harder on the home.
  • Hire a Property Manager that only manages in these areas; I would go with a smaller company
  • Once vacant, secure it quickly
  • Screen well, but be realistic.  Time on job, ability to pay and past rental history is most important.  Having a credit score over 575 is gravy if you get it

The take away in my opinion is that out of state investing is supposed to be (for the most part) passive. These low priced, low rent deals present the high probability that you will be more involved than you wish. These types of homes present higher risk than you may anticipate. If you pay too much, then the risk is very hard to exit without massive losses. I have always said, if you want to take a risk, go buy some stocks under $10; the loss you would take on that is at least limited to the amount you put into the investment.

Remember and I have said this time and time again, you can fix the tenant, you can fix the house, you can fix the Property Manager, but you can’t fix the area.

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