The Truth about Investing in D-Rated Neighborhoods

D neighborhood gradeLike a moth to a burning flame, investors can be fervently attracted to D-ranked neighborhoods. The “D” grade itself might make them rethink their decision, but the high yield projections are what typically drives investors into considering buying an investment property located in a D neighborhood. D neighborhoods tend to have higher yield projections than A neighborhoods due to their typically lower home prices, but still competitive rents.

Don’t be Deceived by the Higher Yield

Not only do D neighborhoods come with higher returns, D neighborhoods generally come with the highest risk. In our experience, D neighborhoods present too many unpredictable risks to our investors that are difficult to project at the beginning, so we don’t show any on our platform. Our goal is to best assist investors in helping them accomplish their financial goals, and we do this by showing solid and stable neighborhoods where risk-and-reward can be more accurately evaluated.

The Risks

There are multiple risks that incur when you own a property in a D neighborhood that are hard to assess from the start; particularly, repairs and vacancy. Properties in these neighborhoods tend to have more renter turnover, which means there is higher risk for vacancy as you need to find tenants each time one leaves. This means that as you look for tenants, your property is left vacant and not generating any revenue for you, and this normally happens multiple times through the lifecycle of the asset. Repetitive vacancy can really hurt your bottomline, especially if you didn’t plan for it.

Additionally, as each tenant moves out, you will need to make repairs to your property to attract new renters. Depending on the condition that the previous renters left the property in, this could be more costly than the deposit covers and you may have to put down additional money to complete the repairs. These repairs are an added expense that many investors forget to include in their initial calculations when evaluating an investment property. If you decide to purchase a D neighborhood property, remember to use a conservative number to evaluate the cost of repairs before you purchase the asset; that way you’ll be less surprised by your returns.

How to Combat the Risks

One way you can combat the risks of owning a property in a D neighborhood is by conducting a thorough tenant screening for your applicants. Your goal is to find long-term tenants who will treat the home like it was their own. Also, you should set aside additional funds to cover you during times of vacancies and major repairs; this way your returns will remain relatively the same to what you originally projected.

But the typically safer way to combat the risks of a D neighborhood is to avoid purchasing an investment property in this type of neighborhood altogether. Many investors’ portfolios cannot take the risk of a D neighborhood investment. For example, if you are only years before retirement, unplanned and costly repairs could put you in the red for your investment and take a large chunk of your retirement fund; without your fund being where it should be, you would have to then delay retirement or not live the retirement lifestyle you wanted.

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Protect Your Portfolio

Instead of D neighborhoods, look to those that offer more balanced risk-versus-reward for your financial situation. For instance, if your retirement horizon is short, you will want to look towards A neighborhoods to ensure it’s best protected as you get closer to retirement; whereas those with a longer time horizon can risk C neighborhoods that have the potential to generate higher returns at more risk than A graded.

Not sure which neighborhood you should be investing in? Call us 888-276-0232 or schedule a consultation with one of our Solutions Managers who will build you a custom portfolio of properties that will help you achieve your financial goals.

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