One of the first things we all start to hear as we enter our real estate investing journey are terms like, “Class A” or “Class B” property. What does Class A, B, C, or D actually mean? Each class of real estate (A, B, C, D) represents a different level of overall property quality.
In this regard, the quality of the property is based on various factors, including its age, physical condition, amenities, location, income levels of the tenants, and ultimately its potential for growth and appreciation. For real estate investors, these qualities equate to different levels of potential return on the investment and various levels of risk.
While it is not an exact science, here are the basics of each class.
Class A Property:
This is the “high-rent district”. These are the high-end, luxury properties in upscale communities. They are generally no more than 10 years old, maybe up to 15 years old at the most. Class A apartments have numerous amenities, professional management, and sit in desirable neighborhoods. They demand the highest rent and therefore attract white-collar, high-income professional tenants who are “lifestyle” renters by choice. These are high quality properties that require very little or no deferred maintenance for the Buyers.
Class A properties will generally have high valuations and lower market Cap Rates. As such, the typical Class A investment is primarily purchased for appreciation rather than cash flow.
Class B Property:
A step down from Class A, Class B properties are in the 10 to 20 year-old range, and are mostly well maintained. They will sometimes have a few of the more common types of amenities, and may or may not be professionally managed. Class B properties are a solid middle-class mix of both white-collar and blue-collar tenants. Some are renting by choice, while just as many are renting by necessity. Depending on the actual age of the property, at least some level of deferred maintenance is not uncommon.
Class B properties can be great for investors because they can be improved and upgraded with minimal rehab. While they generally have higher market Cap Rates than Class A properties, it is still variable whether they will have good cash flow or be an appreciation play.
Class C Property:
Continuing down the scale, Class C properties are generally 20 to 30 years old, and pull in blue-collar and moderate-to-lower income tenants who will generally be renters for life. These properties will have very few or no upgraded amenities, and rents will be below market. While they may or may not be professionally managed, Class C properties will have deferred maintenance issues and need renovations and upgrades.
This is the primary swim lane for cash flow real estate investors, as they tend to have lower valuations and higher market Cap Rates, therefore making for some of the best cash-flowing rental properties.
Class D Property:
This is where we find many older properties of more than 30 to 40 years old, in need of major repairs. Many of these are low income, government subsidized housing units. Plenty of houses in these neighborhoods are boarded up, and retail plazas are vacant. They are in lower socioeconomic communities with higher than average crime rates.
While the valuations are low and Cap Rates high, these properties are only for highly experienced real estate investors who have basically made a niche for themselves with a proven investing strategy in this type of property. If that’s not you (and I’m guessing its not, since you’re reading this article to begin with), then its probably best to stay away from Class D.
One addition to the above is that some real estate professionals will also include a Class F on their scale. Obviously, these properties would be below even Class D. Enough said about that.
Our Investment Strategy should primarily direct which class of property we choose as Investors. As a value-add investor, our strategy is to invest in properties that will increase in value from physical upgrades and operational improvements. Notice the key phrase here is “increase in value.” This generally means finding those Class C gems located ideally in Class B (or soon-to-be Class B) neighborhoods, where there’s a clear runway for growth. Therefore, being able to identify the class of a property and neighborhood is critically important.
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