This is the next post in my series on investing in Dayton area apartment buildings and multi-family units. My last article discussed ways to value multi-family dwellings. It is important to consider things such as the cap rate, as well as the condition of a building, when deciding what to pay for an investment property. When inquiring about a property your realtor can request records, such as profit and loss statements, in order to help you crunch the numbers. In this article I will go over a topic which can complicate one’s decision-making process. That topic is the differences between investing in “A” or “B” class properties vs. “C” or “D” properties. If you are considering investing in our area, then contact me today to speak with a real estate agent.
I provide an in-depth discussion of the topic below as well as in this video:
Dayton multi-family investors should understand the differences between neighborhoods which are “Class A,” “Class B,” etc.
Investors often discuss the classes of neighborhoods in broad terms. For the purposes of this article, I’ll refer to a description offered on Biggerpockets.com which does a good job of describing the different classes of areas. To put it simply, a “A” class area would likely be the most desirable to the average resident, while a “D” class area would be the least desirable. There is a sliding scale between these extremes, and that scale would encapsulate the “B” and “C” class neighborhoods. Consider these ideas in the following terms:
- “A” class neighborhoods tend to be the “hot” areas. Such areas tend to have newer construction, higher median income amongst residents, better performing schools, etc. These also tend to be areas in which an investor’s potential tenants are often willing to pay a higher rent. Such tenants may also have higher credit scores, etc.
- Class “B” neighborhoods are often not as trendy as A class areas, but they are still desirable. These areas often have homes that are not as new, but are still in relatively good condition. Such areas still contain hubs for activities, such as decent restaurants, perhaps a nearby movie theatre, etc. Such neighborhoods often command lower rents than their upper tier counterparts. Tenants for such areas still tend to include those with decent to good credit scores, a clean criminal record, etc.
- Class “C” areas often include structures that are older and in need of ongoing repair and/or regular maintenance. There is likely to be a higher percentage of renters versus homeowners in these areas. The tenants in such areas may work minimum wage or low wage jobs. Schools in such areas may be lower performing and there may be a shortage of nearby activities.
- Class “D” neighborhoods can be marked by blighted and boarded up buildings, higher crime rates, high levels of drug use, etc. In short these are the areas which are likely to be the least desirable to potential renters.Tenants may depend on government subsidies such as Section VIII, have poor credit, or have difficulty passing a background check.
For obvious reasons, apartment buildings or multi-family units in “A” class neighborhoods tend to have the highest purchase prices while “D” areas are on the other end of the spectrum. B and C areas will fall in between the two. Property taxes also tend to be the highest in A level neighborhoods, with a decline in tax rates for each type of neighborhood.
Those investing in Dayton and its surrounding areas should understand that neighborhoods can evolve from one type, to another, over time. If, for example, an area which has been struggling begins to see massive amounts of investment, then the desirability of the neighborhood can increase substantially. For example, I own multiple rental properties which are in an area that contained boarded up homes when I bought them. Such boarded up homes have seen renovation over time. The area has also seen the opening of a new library branch, a new coffee shop, and other amenities. Accordingly, I have been able to raise the monthly rental payment on my rental homes. I offer this experience to demonstrate the point that areas can change over time.
The return on a Dayton multi-family investment will, in part, depend on the type of neighborhood one is investing in
There are pros and cons to investing in any real estate class. While it may seem obvious that an investor would choose to invest in an “A” class first, this is not necessarily the case. Many “A” class areas are developed by large corporations. By the time an area is highly desirable, the margin of opportunity for other investors may be very small.
As with other types of investment, the rules of real estate tend to favor “high risk, high reward.” Those who choose to invest in a “B” class area should expect a smaller return on their investment. This is due to the fact that someone else has probably already invested the money into renovations and improvements on a property. It is also because property values are going to be higher in B class areas. An investor looking for a safe low maintenance property may wish to consider a B area, but understand that their cash on cash return will be lower.
On paper, C and D class areas will likely offer the highest cap rates. When evaluating a property, one must do their due diligence, and also consider how much maintenance the property needs, tenant turnover, eviction rates, etc. A good property manager can provide honest feedback regarding an area, and general vacancy rates. C and D class areas may take a long time to see meaningful appreciation, but they also may have potential to see significant appreciation over time. The same is true with rental rates in C or D areas – it is common for properties to be sold with rents that are below market value, providing a possible opportunity. Investing in a C or D property can provide a strong long term investment, or it can quickly turn into a money pit. Doing one’s due diligence and considering the entire property is important.
When making an investment decision, it is important to take the aforementioned considerations and weigh them against your overall goals, the purchase price of the property, the taxes associated with the purchase, etc. It is important that your real estate agent assist you in getting as much information as possible about the property. This is why, when dealing with investors, I work to obtain copies of existing leases, profit and loss statements, receipts showing all work that has been performed on the property, etc.
I am a realtor who assists investors with purchasing Dayton multi-family units as well as distressed properties & foreclosures. If you are considering investing in our area, then contact me today for assistance.
I also service the areas of Beavercreek, Centerville, Cincinnati, Clayton, Englewood, Oakwood, Fairborn, Harrison Township, Huber Heights, Kettering, Miami Township, Miamisburg, Riverside, Springboro, Trotwood, Vandalia, Washington Township, West Carrollton, and Xenia.
Note: Nothing in this article, or on this website should be construed as investment or financial advice. The opinions shared on this website are the personal, and not professional, opinion of the author and are not associated with Keller Williams Advisors. Any investment decisions should be made after consulting with a certified financial/investment professional.