how to evalute properties and neighborhoods

im new to commercial investing and eagerly learning. i keep hearing its a good idea to buy for example a “C” property in an “B” neighboorhood, or a “B” property in an “A” neighborhood, etc, so that there is potential to bring the value of the property to the neighboorhood and increase potential equity/rents. my question is how do you actually determine whats an A, B, C, D property and neighboorhood. the info i have is that D=warzone/crackzone, B&C=blue collar, A=upscale but is there ratings on like loopnet, mls, etc that will give you ideas in neighboorhoods your not familiar with? what determines C, B, etc

You may want to look over our previous discussion in regards to how to evaluate properties. Forget A, B, C, D. A commercial property is only as good as its tenants. If you have a commercial property in a “D” neighborhood but Wal-Mart is your tennant I’d say it’s a good property. The whole concept of buying the worst house in the best neighborhood generally pertains to residential investing. And that investment strategy is highly dependent on appreciation, which is not a sound strategy in this market. The good thing about commercial properties is that you can ‘force’ the appreciation. Income-producing properties are only worth what they’re producing. So if you can ‘force’ that number in an upward fashion you have raised the value of the property. You may want to define what you mean by commercial investing. You’re talking about commercial investing but mentioning neighborhoods. Either way you should learn as much as you can about cash flow, cap rates, gross rent multiplier, yield, cash on cash return, internal rate of return, and any other valuation method out there. Hope this helps, good luck.

i guess i forgot to mention, i was thinking more along the lines of apartment buildings.

You actually need to kind of narrow that down also. Anything 1-4 units will be considered residential by the bank and is going to receive different terms. Stick to 1-4 units and you can put them on a 30 yr note and get a lower rate, generally speaking. Whereas commercial deals are usually on 20 yr. notes and tied to prime. Here’s another difference. Residential underwriters are looking at YOU as a borrower. Meaning your DTI, credit, blah blah blah will be analyzed in making a decision about whether to fund your project. Commercial deals are more concerned with how the PROPERTY itself will perform. Now of course they’re gonna look at you too but it’s more about the property. The downside is you usually gotta have 20% down and when you start getting into larger deals that’s alot of money so you have to raise equity and take in partners, etc. Good luck.

thanks for the advice! i guess what im driving at is if im on loonet and i see an apartment complex that has potential, how do i know what kind of neighborhood im in, crackzone, blue collar, etc. i looked at demographics but im not sure how to paint the real picture with that only resource. id like to buy apartment rehabs 10-30 units, and fix them up to the class of the neighborhood, but i dont want to spend time fixing up apartments in crackzones because they’ll just get trashed again and they wont be able to afford the rent increase after i fix it up.

I suspect you will have to go see for yourself!

To evaluate the neighborhood in an area you don’t know, you go and look at it. I wouldn’t suggest investing that much money based upon the evaluattion of the guy who is trying to sell it to you.

Drive around. Look at everything for several blocks in any directions. See what is located near to it. See what condition of buildings are around it.

Then you go back about 5 PM and spend a couple of hours sitting near the building and watching. Then go back about 10 PM and do it again.

If you are still interested, you go to the local police station and ask the dispatcher how many calls they get you your address, and how many calls to the neighborhood. You also want to know what kind of calls they are.

Next you go to the planning commission and find out if there are any major changes planned for the area. I once looked at a nice mobile home park, only to find out that there was a new sewage treatment plant about to start construction right across the street. Neither seller nor listing agent had disclised that.

You are sure better off buying in an area that you are familiar with.

If you buy residential rentals outside your area, you are going to have to rely on property management and good management is hard to come by and even harder for small properties.

One more thing to check if you do not know the area. The city engineer will have maps of the flood plains and the local fire marshall can tell you about any unusual fire danger, and he probably knows about earthquakes and tornados, too, because his people have to respond in those situations.

thanks for all the feedback

Hello tatertot,

Thanks for the helpful info on the planning commission and police station. In regards to fire and flood zones, don’t most commercial buyers purchase a JCP report, or environmental report that typically discloses that type of info? On the resi side here in California, that is pretty typical but I don’t have experience on the commercial side.

Just curious as the report is only $120…


Always drive the neighborhood. In my opinion this is CRUCIAL. Someone is bound to follow me and tell me they buy property 1000 miles away sight unseen and it’s been ok so far for them. I can tell you right now that I couldn’t even think about that. There are arguments to either side but for my own self I think seeing what you are buying is a major thing. You looked at your $20k car and test drove it first right? Would you buy something for $100k without seeing it?

Pick out what seems like it might be of interest to you on Loopnet or wherever and narrow it down to a few suspects, then drive the areas if you don’t know them.