Class C Property: What is it and Why Invest? – Video
Kathy Fettke: Okay, investing in C areas. There are investors who like each and every one of these grades. There’s people who will only do A properties and that’s what they love and know. There are people who love B neighborhoods and they won’t touch anything else, and there’s people who love C neighborhoods. Let’s talk about why they like it.
Well, there’s very little chance of appreciation so they’re not buying for that, but there is a chance for a high cash flow, if managed well. Most of the people I know who invest in C neighborhoods do it for the cash flow. They’re like little cash cows because the values never go up because these neighborhoods that are in very low-income areas.
Again these are people that have minimum wage jobs, and because they’re minimum wage jobs they have a lot of them. Oftentimes, the people living in these homes just can’t save a penny. They just can’t do it. There are just too many bills and they’re working too much and it could be difficult. The chance of them ever buying and owning is pretty tough.
There’s not really a retail market for the C neighborhood which means you’re really going to be in areas with mostly renters. When it’s an area of mostly renters the values are just never going to go up. On the other hand, the rents may go up. They tend to be much higher than the value of the property. Again, C class neighborhoods tend to be a place for very high cash flow.
You’ve got to increase your maintenance reserves in these C areas because these are not as nice home, and they might have all this stuff that breaks. There can be higher crime areas so you might have your air conditioner unit stolen or anything stolen.
You need to have a really good insurance too, because if your tenant does get robbed, it can come back on the landlord. You need good asset protection and good insurance, for sure, in the C neighborhoods.
Vacancy reserves, you’ve got to increase that as well. You’ve got to count on there being more vacancies, because unfortunately the people that live and work in these areas have jobs that may make them move a lot. They may lose their job and have to transition and change neighborhoods.
There tends to be a lot more moving around, they’re not going to stay as long necessarily,however, that’s not always the case. Sometimes, they’ll stay forever, if they’re on section eight or they just have a steady job that they’ve had forever. If that’s the case, you don’t have to worry so much about that. I still like having the vacancy reserve there because traditionally and historically, these C neighborhoods tend to be areas where people move more often.
Strategy number one, buy and hold for cash flow because it’s not going to be an appreciation area. You can accelerate that payoff with the extra cash flow, so if you get a loan on the property, you just take all that cash flow and you could pay it off and like I said now you’ve got a little cash cow there paying you for the rest of your life.
Strategy number two is to lease-option to these folks. Again let’s say you’ve got this working family that is making minimum wage and just not getting ahead and you say, “Well listen, let’s work out a lease option scenario. I’m going to help you buy this house. You’ve got to clean up your credit, you’ve got to start saving, you’ve got to have $2,000 to $5,000 to put down, but you know you keep working towards this and you’re going to own this house.”
Now, that’s a total win-win because that tenant can now have the hope of home ownership over time. Meanwhile, you as the landlord can, number one, have done a good thing for somebody, but also have a tenant that stays there a long time and treats the property like it’s their own. You can put aside a little bit of the lease that they’re paying to go towards their down payment. There’s lots of ways that you can do the contract, but this is a very good way to help somebody and to help yourself, so win-win.