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What They Don’t Tell You about Buying D-Class Properties | Columbus Property Investing

Mitch Deminski - Friday, August 26, 2022

What They Don’t Tell You about Buying D-Class Properties | Columbus Property Investing - Article Banner

Real estate investors in Columbus have a lot of options when they’re looking for investment opportunities. We have some long established neighborhoods with old homes and a high percentage of owners versus renters. We have new construction communities in HOA neighborhoods with amenities such as clubhouses and pools. 

There are condos and duplexes. Apartment buildings and units in multi-family properties like duplexes. Tenants love to live downtown and in the suburbs. They spread out across Columbus easily, giving investors a lot of potential when it comes to choosing a profitable rental investment. 

Depending on your investment goals, you’ll likely be looking for a specific type of property. 

Or, maybe you’re trying to diversify your real estate portfolio (a great idea), and you’re looking for a new mix of rental homes to include. 

Whatever your plans, the team at Solutions for Real Estate can help you find the property that matches your investment goals and brings you closer to achieving them. 

What we want to caution you against today is the D-Class property that might be attractive for its low price. 

We get it. The market is highly priced right now. Even in Columbus, where real estate prices remain reasonable compared to prices in other cities, the numbers are ticking up and interest rates are going higher, making your mortgage potentially more expensive. 

It’s tempting to look at those D-Class properties that you might not have considered before. 

These are not stable investments, and we strongly encourage you to turn your attention elsewhere. 

Here’s what they don’t tell you - or won’t tell you - about the D-Class properties that some investors think are a great idea. 

What is a D-Class Rental Property?

Assigning classes to properties can be pretty subjective. But, most real estate experts categorize investment properties by scale, with A-Class properties being the best. They’re in excellent condition, desirable locations, and they need very little work to be done to get them onto the rental market. Not surprisingly, these homes bring in the most rent. 

By the time we get to D-Class properties, a lot has been given up. 

Class D investments are often older homes, typically 30 years old or older. Their age isn’t necessarily the problem. The problem is that they’re often extremely neglected. These homes will usually need a lot of work and major repairs before they’re even habitable, let alone rentable. 

These investment properties are often located in undesirable neighborhoods, where there tends to be a lot of crime, drug activity, and poverty. It’s a class of properties that most investors find nearly impossible to work with. 

Why do they get purchased? Because these homes have the lowest acquisition costs compared to other property classes. They can also yield the highest price-to-rent ratios. At least some investors believe that.

Distressed Columbus Rental Properties Look Great on Paper

On a spreadsheet, these D-Class properties can look pretty attractive. You’re not spending a lot of money, and every dollar you invest seems like it will come right back to you when you’re able to fix up the home and rent it out. You don’t have to make expensive renovations. No one in these neighborhoods will insist on stainless appliances or hardwood floors. 

When you do the math, it looks like you can pay very little, invest very little, and still make a lot of money on rent and watch for appreciation as the neighborhood builds up around you. 

It’s not quite that simple, however. 

Those numbers aren’t showing everything. They cannot reflect the dynamics of the neighborhoods that house these D-Class properties. They also do not reflect the cost of leasing, managing, and maintaining these rental homes. 

In general, we don’t think it’s worth the investment of time or resources. 

Columbus Rental Property Neighborhoods 

If you’re thinking about investing in a D-Class property, spend some time in the neighborhood first. You’re going to get a sense of how it feels to be there physically, and that’s a lot different than the numbers you see on a spreadsheet. 

There is often poverty in these neighborhoods. High-needs neighborhoods with distressed properties tend to attract crime. You might find a lot of loitering in the streets where those properties are located. People will park and sit in their cars for no apparent reason. There are some people who seem to be aimlessly walking around. 

You might notice people watching you when you drive around the area. They might suspect you’re a police officer if they don’t know you, or they might consider you an opportunity or an easy target if they’re looking to rob someone or get away with something. 

Trash may gather in the streets, on the corners, and in the yards of the property you are thinking about buying. 

The feel of the neighborhood is rarely pleasant. 

What does this mean for you and your property if you do invest in a neighborhood like this? 

It means you might spend some time and money on the property, making it look like a nice rental that’s attractive to tenants. You’ll paint the exterior, maybe, and update the landscaping. These efforts will make the property look fantastic. 

Those upgrades could immediately make the property a target, especially if neighboring properties haven’t been able to keep up. We have heard about trucks getting broken into and tools being stolen.  

Even if you have good intentions - this is a neighborhood that will make it difficult for you to rent out your property. Potential tenants will pull up to the property, notice the other homes in the area all boarded up and the people hanging around outside and they’ll decide they don’t want to live there. Your marketing photos will likely not give an accurate picture of what the area looks like.

Attracting Tenants in Columbus

These properties, even after they have been renovated and improved, have a difficult time attracting the well-qualified Columbus tenants you want. 

There will be a longer vacancy period and a lot more turnover. The tenants you attract to a property like this will be more transient than the renters in other properties and other neighborhoods. The average vacancy time is around eight months, and that’s a lot of lost rental income. 

To fill the vacancy in a Class-D property, you will likely need to lower your standards when it comes to screening and tenant selection process. There’s a possibility you’ll attract a well-qualified tenant who likes the lower rental price and thinks they can handle living in a property like the one you’re offering. But, you shouldn’t be surprised if they decide they cannot stay there, and then break the lease agreement and move out early. 

Do you really want to rent to tenants who are willing to live in a Class-D property that’s not in the best neighborhood? There could be an increased risk of:

  • Late and missing rent.

  • Lease violations.

  • Property damage.

  • Eviction.

These are just some of the potential problems you could run into when you’re approving tenants who do not meet your general screening standards. 

Homes in this class make it difficult to find a good tenant. You know the reality of the property and the neighborhood. Think about whether you really want to enter into a relationship with a tenant who would find these conditions acceptable. 

Finding the Right Columbus Investment Property

Repairs and ImprovementsWe know that a number of investors are gravitating towards Class-D investment properties because they’re inexpensive and they offer an opportunity to make some repairs and improvements that seem cost-effective and attractive. 

At Solutions for Real Estate, we support improving neighborhoods and finding affordable housing for everyone who needs it. But we are also realists. We know that gentrification is not going to happen anytime soon in many of these neighborhoods where the most distressed properties are located. We know that the risk far outweighs the potential rewards, and we are not willing to direct our clients toward those properties. We think your money could be better spent elsewhere. 

Instead of the properties with super-cheap price tags, look for reasonably priced investments that will still allow you to earn some cash flow in the near future. Think about appreciation and how the rental homes in good neighborhoods will increase in value faster than those in high-needs neighborhoods. 

Instead of buying in a location that you would never live in yourself, buy in a neighborhood that is attractive, safe, and likely to bring in tenants who will stay in place for the long term. 

Instead of lowering your standards for tenants, look for those well-qualified individuals who will pay rent on time, take care of your home, and follow the terms of the lease agreement. 

Don’t settle for a bad property just because it’s cheap and you have been shown some numbers that make it look like a goldmine. A well-maintained property in a good neighborhood will earn you better money. 

If you’d like some help managing your Columbus investment property, please contact us at Solutions for Real Estate.