One of the biggest fallacies that I hear many new investors talk about is how much money they are going to make by buying a C-class property in a B-class area and then reposition the property and cash out. Or it could be a B-class in an A-area. Regardless, they never understand what repositioning really means because the most important part of repositioning is never explained properly to them.
Just like with fixing and flipping single family homes, any problem can be fixed with money. You can take a C-class property and drop $6,000 per unit in rehab expenses and make it absolutely gorgeous with granite countertops and hardwood floors but that does not make it a B-class property. Remember what brings value to a multi-value business – the contracts.
The only way to get more valuable contracts is to get higher-paying customers/residents. The fact that a unit has been completely rehabbed and is absolutely beautiful does not mean that a new tenant base is set to move in.
Repositioning an asset has two components. First, you must turn the units so that a new class of residents will want to move in and then you have to reposition the tenant base so that you begin receiving the larger valued contracts. The first part is easy. If you have the rehab money, you can have a parade of contractors lining up to rehab your property.
But the second part of repositioning is the hardest part and the one that the “gurus” never tell you about. Repositioning will fail if you rehab every unit and then re-rent to the exact same clientele that you had living there before.
Here’s the success formula for repositioning. For repositioning to succeed, you must purchase a property that, once rehabbed, will be the type of place that a higher level of clientele will want to move into. It’s that simple but believe me, that task is not all that simple.
When you hear yourself saying the words, or hearing the words, “it’s a C-property in a B area”, stop for a moment and think like a B-class resident. Let’s say you are a newlywed couple looking for your first apartment. You have entry-level jobs and you are looking to save money to buy a starter home. Or you just graduated from nursing school and you and your college roommate are looking for a place to live. These are your B-class residents. You know these people. You may have been one yourself. Your children may be in this position right now. What you need to do now is to think like them.
When the broker takes you to look at the property and tells you that this is a great repositioning opportunity; think like a newlywed, think like a new nurse. Would you want to walk down the street late at night with your new puppy or is the neighborhood not the kind of place you would want to be found dead in? Is it the type of location that you would want to have the new in-laws over for Sunday dinner or would you be afraid they would have to step over police tape from the night before to enjoy your yams?
You can change the property. That is within your control. You cannot change the neighborhood. Leave that to ACORN (and we know how successful they have been).
Once I purchased a property that the broker told me was on the edge of a neighborhood that was very desirable. Let’s say for the sake of this discussion, the area within this city was called Eggtown. This property was on the line of Eggtown and North Eggtown. North Eggtown was very desirable. It was going through a period of re-gentrification and all the young people were moving there. The property that I was looking at was located in Eggtown but one street away from North Eggtown. The broker described this property as being in North Eggtown when he was trying to sell it to me.
The residents were less disingenuous. They said they lived in Eggtown.
Where do you think the newlywed and the nursing school graduates thought the property was located? They saw the property as being solidly located in Eggtown and were not interested in the refinished hardwood floors and new bathrooms that I had put in all the units. They would not be want to tell their other roommates or their new in-laws that they have achieved such great success in their young lives and now live in Eggtown.
It wasn’t happening. The repositioning was a bust.