Class B Property: What is it and Why Invest? – Video
Kathy Fettke: Okay, let’s talk about the strategies for investing in a B area. There’s also a potential for appreciation and that’s a good thing because again, it’s a desirable area for the middle class. There’s potential for cash flow too and this is what makes investing in B areas twice as good. You could have the hope for appreciation, but you also get the cash flow in the meantime. While it’s very desirable for the middle class, I think these B properties are also highly desirable for us as investors.
Longer term tenants, because it tends to be people with stable jobs. They tend to be people who want their kids to stay in the school system that they’re in, without moving around a lot. If you rent to a family who has pets, that’s wonderful because not everybody will take pets. If you do, you can have a pet deposit and a pet policy for that property, but families with pets, they’re going to stay longer.
This is a nice thing. You probably won’t have a really high turnover, hopefully, in a B neighborhood. Here’s the key, when you are buying for the middle class, you are talking about most of America, right? It’s like what? 80%, I don’t know what it is, so I’m just throwing it out there, but I’m going to guess it’s about 80% of the population is middle class. You’ve got more people in this category who can afford what you have whether they’re renters or buyers.
In other words, if you were buying that lovely house in the A neighborhood, the rent on that to make it cash flow needs to be higher. Let’s say it’s a $300,000 house, let’s just assume it’s somewhere in Middle America. I like the 1% rule, which means the rent would come in at 1% of the price of the home. I would want to see $3,000 on that fancy A property, to get the kind of cash flow I like. Well, how many people in Middle America are going to pay $3,000 for rent? They’re just not, they’re going to buy.
If you can afford $3,000 for rent, you probably can afford to buy the place. There are less people out there that can afford to rent in the A neighborhoods. Whereas in B, let’s say this house is a $100,000 somewhere in Middle America and that’s totally doable. You want $1,000 rent, that 1% rule. There’s a lot of people that can afford $1,000 rent for a three-bedroom home. You’re really tapping into the highest population group in the US that can afford what you have to offer. I really love the B area.
Again, I’m talking for rent or for buy and hold, but let’s say you want to sell it. Let’s say that over time, this property is now worth $120,000 and you want to sell it. Well, there’s a very good chance that a buyer in that neighborhood can qualify for that house even if interest rates go up. Right now, if somebody tried to buy this rather than rent it from you, they certainly could afford it because it would be much cheaper with today’s interest rates for someone to buy rather than rent. Unfortunately, a lot of people have bad credit now from all the foreclosures and short sales that happened that they’re not going to be able to buy.
You have a pool of renters that aren’t going to be able to qualify for loans, or just maybe are tired of being homeowners are going to be renters. But eventually, they will come back in the market and they will want to buy again. When they do, and when the loans come back, these prices are going to go up on these homes. Again, what would a $120,000 house be at a 6% interest rate, it would still almost be cheaper to own than rent or very close.
It’s still this price range and this B area, this is the way to go. Tenants feel safe because, as I said, it tends to be low crime. You could buy the worst house in the neighborhood, fix it up and sell it on the retail market for a profit. By the way, I really don’t recommend doing this from a distance. I don’t recommend you saying, “Hey, I live in California. I’m going to buy a house in Texas. I am going to buy the worst property in a B neighborhood and fix it up.”
Well, now you got to account for all the travel and the staying in hotels and the time it takes to find your teams and all that. I don’t recommend that unless you have an excellent, excellent team in place that you can trust to do that for you. If you’re living there and you do this and you want a quick sale, this is a way to do it. As I mentioned before, not every B tenant or buyer is going to have the money to fix up a house. They might be able to get a FHA loan and put three and a half percent down, but they’re not going to have maybe the $10,000 or $20,000 to fix that place up.
If you do and sell it to them, they’re willing to pay a little more, because they don’t have the cash, but they’ll have the 3.5% down. 3.5% of $100,000 or $120,000 or $140,000 is not that different. If you can come up with the money, if you can borrow the money, even if it’s hard money, fix up the house, make it real nice for a retail buyer, there is profit to be made there.
Now strategy number two, and this is my favorite, buy a nice house, get it all fixed up nice whether you have someone else do it, or you do it yourself, or you have a team that does it for you. Of course, we have all those resources for you at RealWealth.
You would buy this and now as I said before, it’s cheaper to own than to rent right now in many parts of the country. That goes for whether you live in the house or are the landlord of the house. As a landlord, you could buy this house as a rental, still get very low interest rates, have very, very low monthly payments and rent it for maybe twice what your mortgage is.
You’re getting all this extra cash flow every month. You can accelerate the payoff of your loan by using all that cash flow to pay off the loan faster. We’re happy to help you at RealWealth with a strategy for how quickly you can pay off a house based on this. Basically, it’s the idea that if you have a $100,000 loan and you put $5,000 extra toward that loan every year, in addition to what your payments already are, you could pay it off in 12 years.
You could pay off your 30-year loan in 12 years if you put an extra $5,000 a year. Where you’re going to get that $5,000? Well, from the cash flow potentially because like I said, if the cash flow is still really great. That wouldn’t be the worst thing in the world to buy this house, $100,000 house, put $20,000 down, use all the cash flow to pay off the $80,000 loan and now you own it free and clear. That’s a great strategy.