Which Real Estate Property Class Is Right for You?
A, B, C, D… no, you are not back in high school looking at your report card. (Thankfully!) These four letters represent four different real estate property classes. When you are interested in investing and growing a strong portfolio, it is essential that you understand these classes. Which is best for you? Let’s take a look so you can make the smart calls.
A Quick Intro to Property Classes
A property class is, essentially, a grade. So, in many ways, it is like a report card. These classifications were designed to help investors, lenders, and brokers indicate the quality of a property, as well as of the potential return. It’s a sort of shorthand rating system.
Class A: These are considered the highest quality, most desirable properties in their market/location. They are typically new (i.e. built within 15 years), fully stocked with amenities, require low levels of maintenance (no deferred maintenance), and feature high-income tenants and low vacancy rates. In these buildings, you’re likely to encounter luxury touches, like granite countertops, hardwood floors, and other sought-after features.
You’ll also find terrific schools, restaurants, shops, and other services, as well as a wealthier demographic and higher priced real estate.
These are considered very low risk properties, and because of this and the above mentioned factors, you’ll find they are more expensive.
Class B: If A is great, B is a solid good. These properties are a bit older (15-30 years) but they are well-maintained. You will see more deferred maintenance issues, and, of course routine maintenance on older buildings is generally more costly. There will be good restaurants, schools, and shops in the area, and it skews towards middle class and some blue collar workers.
Less expensive than class A properties, B’s can be a great investment even if they are considered more risky than A’s as you can upgrade and remodel to achieve a B+ or A rating.
Class C: Older (20+ years), these properties often need renovations and rehab, as well as more intensive ongoing maintenance. Rental rates tend to be lower than with A and B properties, and it can be a challenge to attract and retain tenants. C’s are seen as more risky because of these factors. Again, though, you can lean on turnkey property investment partners to market the space and help build a consistent occupancy rate.
Class D: These properties are not recommended by most investment experts. They are often located in dangerous neighborhoods with few, if any, amenities. They will also need extensive rehabilitation.
Which is Best?
“Better” and “Best” are subjective terms. Rather, look at what’s best for you. For example, A class property are undoubtedly desirable. But you’ll pay more, and demand is high. This tends to translate into lower cash flow. And class C’s may seem like a non-starter, but because of their lower rent rates (and, remember, lower purchase price), they can attract a more stable tenant supply.
Each class has its own set of risks and returns. It is important to consider how different classes align with your investing strategy. Need help? We’re here to help you make the best decisions to enhance your results.