Why C Class Neighborhoods Are The Best Investments

When I was getting started investing in rental properties back in 2019 I had a very specific time-sensitive goal. I knew I had to make the most of my time and money.

And I was ok taking on some extra risk to make my goal a reality.

So instead of simply buying rental properties that made me comfortable I had to go against the grain.

Not only did I decide to invest in the city of Detroit, but I took it one step further and focused on C Class neighborhoods in Detroit.

It was a very deliberate decision and I’m going to tell you exactly why I honed in on C Class areas. But first, let’s talk briefly about what different class neighborhoods mean.

Neighborhood Class Definitions

Neighborhoods are generally classified in one of four buckets: A, B, C, and D Class neighborhoods. And while there is no widely accepted definition of these classes, you can generally get a good idea of where different areas fall.

Here’s how I view the different neighborhood classes:

Class A Neighborhoods

When you think of new construction, luxury apartments, the best location, and top schools… that’s when you’re thinking about Class A neighborhoods. And while these areas may be the most desirable that doesn’t necessarily mean they make the best investments.

But they are perceived as less risky and you will likely attract a better tenant. In the end, that means fewer headaches and more stability overall.

Class B Neighborhoods

Homes and housing stock in B Class areas might be a bit older but still quite nice. Think, built 30-50 years ago.

Location is still generally great, schools solid, etc. but it’s more budget conscious buyers. Or it’s those that would love to be in A Class areas but can’t quite afford it. It might also be those just able to get out of C Class areas.

At least that’s my experience. And these are my people!

I personally tend to gravitate toward B Class areas for my primary residence because I’d rather not play the “keeping up with the Jones'” game. That seems all too prevalent in A Class neighborhoods.

No thanks.

Class C Neighborhoods

Much like grades in school, C Class areas tend to be hovering right around or a bit below average. It’s not that these areas are terrible, they just happen to be less desirable.

Schools are generally average or lower, crime isn’t great but it’s tolerable, and Class C neighborhoods tend to be more working class folks. You see a higher density of renters in these areas as well.

Class D Neighborhoods

When people talk about “war zones” they are referring to D Class areas. Crime is generally high in these neighborhoods, homes are in disrepair, and it’s generally not an attractive place to live.

You might say D Class areas aren’t ones you choose to live but rather are forced to.

You have no other options.

What Class Neighborhood Should You Invest In?

Obviously, this is a highly individual question. But generally speaking, neighborhood class tends to be inversely correlated with cash flow.

So if your goal is to build cash flow, you’re probably not going to want to start investing in Class A neighborhoods. Conversely, if your primary reason for investing in real estate is appreciation, you’re probably going to stay out of D Class neighborhoods.

Let’s take a look at each neighborhood class and characterize them based on investment goals. Then I’ll tell you why I was so focused on C Class areas.

A is For Appreciation

If you’re investing in real estate in A Class neighborhoods you’re essentially prioritizing stability over all else. You want exposure to real estate but you want to ensure it’s as headache free as possible.

You’re also far less concerned about cash flow. It’s highly likely that, on a cash flow basis, you’re losing money on your property. Either that, you’re putting far more than 25% down so that you’re at least breaking even.

And you are likely completely ok with that.

Again, everyone has different goals. And the person targeting A Class neighborhoods is expecting to make money over time on appreciation with a hope that cash flow will also come… or not.

This type of investing is hard for many to understand. But recognize that everyone is at a different stage in their life, different financial position, etc. The things that are important to you don’t hold the same weight to someone else.

B is For Balance

If I had to guess I would say B Class neighborhoods are where most people invest. This is where you’re starting to see more balance between cash flow and appreciation.

Folks investing in B Class areas are probably happy breaking even on cash flow or making a modest monthly dollar amount.

Like A Class areas, you should see consistent appreciation in B Class neighborhoods. So if you can find the right deal that nets a little bit of money each month while you wait for appreciation, that’s quite attractive!

C is For Caution

When you start moving away from A and B Class neighborhoods it’s when you need to really start being cautious.

It’s no longer about working from a list of best neighborhoods, surfing the MLS, and plucking out a deal that appears attractive.

It’s more hands on than that.

You REALLY have to understand the market or be working with a team that does (like mine). Class C neighborhoods can be extremely rewarding, and it’s where I love to invest.

You tend to find more cash flow in these areas and, historically, less appreciation. But I’d argue you can do even better on the appreciation front if you know what you’re doing (more on that below).

Ultimately, C Class neighborhoods are nothing to be afraid of. You just need to recognize that it isn’t as hands off as A and B Class investing.

D is For Don’t Touch

The subheading here says it all. But let me tell you a story about a past friend I had in Detroit.

We’ll call him Jack.

Jack was always grumpy and generally pretty fired up and angry about something. I suppose this was for good reason, but I think he is simply one of those people that just enjoys being miserable.

So it makes sense that he owned 100+ doors in D Class areas of Detroit.

Jack and I would hang out a lot. We were an unlikely pair but ultimately seemed to enjoy the fact that we both felt alive shlepping around Detroit, hunting for deals, and breaking into random houses to assess their condition.

And I enjoyed observing Jack’s daily headaches. It was like watching a reality TV show that you couldn’t possibly script.

To give you a taste of this daily shit show just know that Jack was ALWAYS chasing people down for rent, yelling at someone on the phone, kicking someone’s door down and throwing their stuff out, etc.

I mean it was NON stop.

Jack was sued probably a couple times a year, was on the local news segment “Hall of Shame” at least once, and in trouble for assault at least a few times.

The thing is, Jack did very well for himself.

He had purchased his properties dirt cheap when Detroit was really at its low. And he did little in terms of improvements.

He is essentially a slumlord and he enjoys it.

So if any of that sounds appealing to you, by all means devise a strategy for investing in Class D areas. But it’s just not for me on many levels.

To be successful with it you most definitely need to be local and enjoy the chaos that comes with investing in those areas.

Why I Love Class C Neighborhoods

To me, Class C neighborhoods make the most sense. It’s not the conventional way to get started, but it was clearly the only path for me. There were three big factors that pushed me to investing in Class C neighborhoods:

It Best Aligned with My Goals

I started investing in real estate because I had a huge goal. I wanted to create enough passive income so that our family could move back to California without changing our lifestyle in the next 3-5 years.

That meant my wife could continue being full-time with our two young boys.

I initially thought I was going to invest in the Detroit suburbs, but when I ran my numbers I quickly realized it would take me far longer to hit my goal than I was willing to wait.

The stronger cash flow numbers in Class C neighborhoods in Detroit proper made far more sense for what I was trying to accomplish.

So I jumped in and didn’t look back.

Strongest Cash Flow to Stability Ratio

I could have gotten even better cash flow if I wanted to invest in D Class neighborhoods.

But I knew I never wanted to have that lifestyle. Meeting and regularly hanging out with Jack was more than enough to confirm I made the right decision.

Class C areas provide the best balance between stability and cash flow. Better yet, I had the potential to see some fantastic appreciation if things went my way.

Potential for Gentrification

What happens when a Class C neighborhood transitions to a Class B neighborhood?

In short, people want to live there. More homebuyers flock to the area and push real estate prices higher.

Rents also move higher.

If you deeply understand your market you can potentially set yourself up for outsized appreciation by investing in C Class areas.

By understanding local trends, investment, and redevelopment efforts you have a huge advantage!

And yes, a B Class area can become an A Class area. But it’s less likely than a C Class area moving to B Class. And there’s less of a pricing gap between A and B Class areas than there is between B and C Class ones.

When I look for new rentals to buy I don’t just want a strong block in a C Class area.

That’s a great starting point, but I also want to make sure there are some potential catalysts that might bring that area to B Class status in the coming years.

And I’ve been extremely successful doing that. While my portfolio generates fantastic cash flow, it’s also increased in value 2-3x since buying most of my properties between 2019-2021.

For all these reasons I continue to favor C Class neighborhoods for my real estate investments.

That might change in the future as my goals and priorities change. But if you’re looking to build cash flow quickly I’m convinced there’s no better way then starting in C Class areas.