WHAT'S BEST: Class A, B, or C Properties... or even War Zones? | Episode 143 - a podcast by Bryan Ellis - SelfDirected.org

You ever heard things like “only buy class A or class B rental property”?  Or what about… “stay away from Class C properties” or “never go into a war zone!” or “Section 8 tenants are a problem waiting to happen”?  Every one of these… a generalization.  But are they facts… or just marketing hype?  I’m Bryan Ellis.  As always, I’ll help you separate propaganda from truth RIGHT NOW in episode #143.

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Greetings, SDI Nation!  You people are the ABSOLUTE BEST and I’m so grateful for you!  Welcome to the podcast of record for savvy self-directed investors like you!

Folks, generalizations in real estate are almost never true.

May I give you an example?  Of course I can, it’s my show!  So here goes:

This, by the way, is a true story.  Totally true, no detail is embellished.

This past Friday, I had a meeting with a guy who was soliciting me for access to YOU, my dear friends.  You people are a very hot commodity!

Anyway, the man I was sitting with has done many hundreds of real estate deals.  He’s basically a high-volume rehabber and has built a good-sized portfolio of rental properties as well.  And what he told me was this:  “Nobody ever makes money from those Class C properties.  They’re trouble waiting to happen.”  The fact is this:  He told me that because his business is based around class B properties.  So, of course, anything that’s not class B doesn’t make sense to him.

And you know… this guy is credible.  Like I’ve said, he’s done hundreds of rehabs and has a rental portfolio that’s much larger than most people will ever have.  And if I was anybody else, I’d probably just take that advice to heart and go with it for reasons I’ll tell you in just a moment.

But that’s not the whole story.  The rest of the story is that this past Monday – 4 days before the meeting I just described to you – I had a meeting with another guy.  This guys is also a high-volume rehabber who has done a huge number of deals – over 1,000 in his case – and who has amassed an impressive portfolio of rentals.

He told me something interesting… without any prompting from me about the “classes” of properties, he said this:  “You know, I love these class C houses.  The cash flow is so much higher, and the tenants stay so much longer.  I wouldn’t do anything else.”

So what we have is ANOTHER investor with overwhelming credentials who wholly endorses class C properties and wants nothing to do with anything else.

So who’s right?

We’ll come back to that.  But first, let’s get clear about what these categories mean.  Generally speaking, properties fit into one of four categories:  Class A-C and then War Zones.

Class A is the part of town you’d be happy to live.  Nice, newer properties.  Very safe.  High credit quality.  High income.  But also generally speaking, high price and relatively low cash flow, usually in the mid single digits.  This is the domain of middle and upper-middle class folks.

Class B is a lot like Class A, only older.  These properties may have a bit of deferred maintenance and certainly don’t have all of the latest amenities.  This is where the lower-middle class tier lives.  These properties are a bit less expensive than Class A’s, and usually generate a cash return of somewhere in the mid to high single digits.

Class C is the older property that might need a fair amount of work to be habitable.  These areas are generally safe to be in, but you certainly would lock your doors at night driving through.  In these areas, the vast majority of the houses are livable but old, but there are a few houses that are abandoned and in a wholly uninhabitable state of repair.  This is where the lowest income-earners and some folks on government assistance live.  These properties are, relative to Class A, very inexpensive and the cash return on investment is pretty much always in the double digits.

And then there are the war zones.  These are the areas where it’s literally not safe to visit due to crime.  Most people don’t want to be here during the night or day.  Property is dirt cheap and returns on investment can be very, very high on a percentage basis… but unlike the other property classes, the risk you’re taking in war zones is risk to your physical safety as much as it is that you’ll experience financial loss.

And here’s what I know to be true:  Anyone who says that it’s impossible to do well in any one of these categories is someone whose opinion is either uninformed or tainted.  Particularly when you hear a turnkey rental property company suggest that it’s foolish to do deals in a class below the one where they’re selling.  What that really means is:  They can make more money selling you more expensive properties, so they want you to buy from them only.  Sad, but true.

Which one is right for you?  That’s probably the wrong question.  I suspect there’s room for a bit of all them – other than the war zone properties – in most portfolios.  Here are some good guidelines for you:

If your objective is capital preservation, Class A properties are the right place for you.  This is where foreign investors who just want a safe place for their capital tend to dump their money.

Class B is where many newer investors start because they think that the lower prices of Class B versus Class A means they’re getting a better deal.  That’s probably not true, but the returns on rents in Class B are certainly better than Class A, generally speaking.  Most Class B properties are occupied by tenants who are not on Section 8, which is a government assistance program to help low income people with rent.

Class C is where the rent to price ratio starts to go strongly in favor of the investor.  It’s easy to lose money in Class C properties if you’re new to investing in these areas, but there’s huge opportunity in Class C if you’re able to acquire very old properties for next to nothing, bring them up to Class B standards, and rent them out to the right kind of tenant.  A lot of Class C properties tend to have Section 8 – in other words, government assistance – types of tenants.  I’ll say more about that in just a moment.

And War Zones – well, I’m not going to make the mistake I just told you to watch out for by telling you that it’s impossible to make money in war zones, because it’s not.  But I don’t understand that business and prefer to avoid it.  I’ll tell you this much, though:  It’s amazing how much money can be made by the people who understand how to monetize those properties.  But that person isn’t me.

So, back to Section 8.  If you’re not familiar with it, Section 8 is a government assistance program for low income people that helps them pay their rent.  It is a national program, but it varies somewhat from market to market in terms of how it’s implemented and managed.  But the bottom line is this:  People on Section 8 are given a voucher, and that voucher is good for payment of either part or, very frequently, 100% of the rent due on a property.  The tenant gets a place to live for either nothing or very little, and the landlord gets a huge benefit, too – the rent gets paid, each and every month, without question, and it’s never, ever late.  That’s because it’s being paid directly by the local housing authority, and not by the tenant.

Now I had a HUGE, MASSIVE, OVERWHELMING bias where Section 8 was concerned.  I was absolutely convinced I was right, and I acted on this bias for many, many years.

I was dead, dead wrong.

I’ll tell you all about that bias in tomorrow’s episode of Self Directed Investor Radio, because I’ve got to tell you… it was enlightening for me to realize the error of my ways.  Had I understood some things a little better, I’d have made much better decisions.  If you think you know the truth about Section 8 – positive or negative – be sure to listen in tomorrow, because you’ll hear a perspective that’s unique and, fortunately, much more informed than in the past.

Folks, speaking of rental property… if you’d like to generate some JAW-DROPPING cash-on-cash returns from rental property investing, I can tell you HOW and WHERE to do exactly that.  Just stop by at SDIRadio.com/cashflow to learn all about it.  There’s a great webinar there that’s not going to waste your time with the THEORY of rental property investing.  Rather, I’ll tell you exactly where to buy into great cash-flowing properties, and I’ll even tell you about a few specific properties that have strong double-digit returns and that are – as of this particular moment – available for purchase!  So remember – visit SDIRadio.com/cashflow right now to check that out!

My friends, that’s all for now.  Remember:  Invest wisely today, and live well forever!

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