Next Friday I am breaking with tradition of buying houses only in C & D neighborhoods where my rent to value ratios are phenomenal.

Next Friday I am closing on a 1900 sq. ft. 4/2/1 house that is in Mint Condition and it is located in a Class B hood. The homeowner is leaving all of her stainless steel kitchen appliances behind which are included with the house sale.

Okay, now for financial details. House is being bought for $160,000. To achieve a 1 % rent to value ratio, this house would need to rent for at least $1,600.00/month. However, since I am not familiar with this Class B hood, I have no idea of what the rental market will bear here. In every neighborhood where I have houses, there is a 'sweet spot' in which the average tenant(s) will pay in rent for a given house.

I plan to advertise this house on Zillow within one week of closing on it. If this was your house, how would you go about finding the 'sweet spot' for what this house is likely to rent for? If this house was in one of my good Class C hoods, the most it would rent for is $1,000/month.

Ken,

There is no mortgage here. I have two LOC's which have zero balances on them. Those will pay 2/3 the cost of this house. I have cash on hand from a house I sold last October to complete the sale with.

I am looking at this house purchase as a learning experience for me. If I can't get at least a 1% rent to value ratio ($1,600.00) then I may decide it is not worth the extra expense to have a rental house in a Class B neighborhood. Another thing I want to learn is,...does the quality of the tenant pool get better in the better quality neighborhoods? I have waited 17 years to find the definitive answer to this question!

WMH,

I have class A tenants in my class C houses. They exist!

Sold my one and only B house because it was worth $160K but I struggled to find someone to rent it for $1250.

My class C houses are worth about $110K and rent for $950-$1000.

Thanks Robin! I can tell you think like I do. It is all about the numbers. A 1% RTV ratio translates into a 12% annual return and that is my personal minimum if I am going to be someone else's landlord. I refuse to be someone's LL for chump change.

I found this house by browsing on Zillow only about a week ago. And this house sits on a 2 acre lot with vacant lots on both sides of the house. This house is still listed on Zillow at this address: 726 Riverside Drive, Gadsden, AL 35903.

How exciting!

I noticed 1 bedroom looks like it has an outside door. If this doesn't pan out as you had hoped, maybe you could split this into a duplex and get more rent for the two smaller places than you would for the 1 larger place.

Our smaller 1 bed 1 bath properties have a great return and we have no problems renting them out.

Hmmmm, I hope you got a good deal, Roy. But, you really should have figured this out before buying it.

By going to all the websites tenants go to, and seeing what rent amount comparable houses are being advertised for.

In my experience, any house that is in mint condition / move-in ready never sells for a low enough price to have a positive cash flow, if it even breaks even.

While I believe it is possible to find a quality tenant for a lower-class neighborhood, it is easier in a safer neighborhood. And, you deal with the "drama" of the neighborhood all the time, in addition to the tenant.

This is why I have moved to a better neighborhood over the last few years. Less headaches.

I saw with my own eyes how easy it was for my parents to purchase, own and operate properties in "A" locations, but this was costly and often not profitable for the first decade.

Then I began to crawl buying single family homes is "B" locations with working class families. I was only 18 but still managed to work part time and attend college.

Then I contracted a bug, flu or ailment. With experience under my skin I examined the Cost of Real Estate, the Rent it Could Produce and Net Returns. I compared:

West Los Angeles

The San Fernando Valley

Korea town

Downtown Los Angeles

South Central

And the City of Burbank

And so I learned there are good neighborhoods that don't require a Bullet Proof Vest, a 50 round magazine and a vehicle that can do a 1/4 mile under six seconds.

The best bang for your buck. For $100,000 per unit I could buy a single unit in West Los Angeles. Or for the same 100K, three units in the San Fernando Valley.

Roy, what kind of interest rates are you getting on your LOC? If you don’t mind sharing.

I don’t see the numbers working as a rental. What’s your pro-forma ?

What are the taxes and insurance?

Possibly as a flip but as rates continue to increase those will become more challenging.

Hey Roy... good to "see" you again. It's been awhile.

Since you found this house browsing on Zillow, you already have the knowledge and skill to figure out the rents. Do the exact same thing, but this time search for "for rents" instead of "for sale".

Just type in all your criteria (# beds, baths, sq footage), and zoom in to within about 1/4 to 1/2 mile around where your property sits. You should see all properties for rent with those same stats. Boom... you just found your competition. Then spend a few minutes clicking through the ads to visually compare the condition based on interior photos. You should be able--with some time and experience--to get within a 3% range +/- of where you should price yours.

Btw, save your search and you'll get emails as properties with those criteria come on the market. That way you are continually getting educated about the price trends for the market / house type. That's how I keep up to date on my unit pricing with minimal effort.

I just sold a SFH that was in a class B neighborhood that I had improved significantly but couldn't get rented. I wouldn't claim my experience would be anyone else's, but I just think that I'm going to stick with MFH for the fact that I'm more familiar with that type of housing. If I did class B, I would go with the MFH limited to 1 or 2 bedrooms.

My problem is this was a large 3/2 SFH and few need to rent that much space and those who do generally have larger families and that almost always means excessive wear and tear. In addition, I agree with DJ that they almost never cash flow. I had owned my place for 20 years and am not highly leveraged on the place, but cash flow was going to be marginal compared to my MFHs. I was looking at the option of mid-term rental and it was too big for that as well, so the highest and best use was to cash out and redeploy.

Dave,

OTC

Thanks for your kind words. In the last 17 years, I have made a small fortune off buying/rehabbing/renting out small 2/1 houses in Class C and some D neighborhoods. Yes, the returns are great but the downside is the hassle factor of dealing with working class or government dole/entitlement type tenants.

I have always wondered whether the grass is any greener in the Class A & B hoods. Yes, the houses do cost more but are the management hassles any less than Class C ? I hope to have this answer in the next 12 months.

That’s a pretty good rate for the times. I also have 2 LOC’s one is 6.5 % and the other is 9%, ouch.

Dave,

I applaud the shift in quality. You will see your rates of return increase typically as the turn over cost drop dramatically as they don't happen nearly as often. Typically I like doing that upshift in an upward market cycle and right now things are coming in mixed - so please don't get discouraged.

That 1% ratio is a great deal harder to achieve where we are at in the market place and market cycle.

I just asked someone of 11 years to leave as I really need to put the property in for phased maintenance overhaul.