Classes of Property in Real Estate

Classes Of Property In Real Estate: Knowing Where To Invest

One of the most important steps in building your portfolio, is selecting which classes of property in real estate you want to work with. In some cases, I’ve seen real estate investors who don’t even understand the distinction. Arguably, it’s a topic that doesn’t have clearly formed boundaries and is left to interpretation. After all, there’s no committee in charge of assigning grades to properties.

Basically, properties are categorized by a scale or grade (much like school) — either A, B or C. There are investors who use a scale from A-F but for our purposes, we’ll stick with the simple 3-letter approach.

This is a subjective scale. That means you might consider a property is an A while another investor thinks it’s a B. And not just the house is given a grade, the location is as well. So you could see an A house in a B neighborhood, whereas another investor might see a B house in a C+ neighborhood (yep, some investors use +/- as well).

A Rose By Any Other Name

Label them however you want, the bottom line is that each class brings with it different risks and rewards. That’s why it’s important to make a decision about what classes of property in real estate fit your investment portfolio.

For the sake of today’s discussion, we’re going to keep it simple and combine the property and location to come up with a single class designation. So next up, let’s define what these classes are intended to mean.

Class A Properties

Classes of property in real estate include A

Class A properties are the top of the rung. They’re in a great location, and the house itself is fairly new (less than 10 years). There are several other new buildings in the area, terrific restaurants, the schools are well funded — and as a result, real estate prices are the highest in the area.

The house itself will have fewer maintenance requirements because of its age. It will have nicer amenities like solid-surface countertops (including granite) and hardwood flooring. In addition, it may have a pool or enclosed sunroom. It will also be in a prime location like a suburb with a view, or on the water.

While class A properties will demand the highest rent, you’re probably going to find that they offer tight cash flow. With real estate prices being so high, the acquisition costs make cash flow tight — so most investors don’t go looking for class A properties to rent out (although they might flip one).

Class B Properties

Classes of property in real estate include B

While class A properties are reserved for folks with big bank accounts, class B properties are more middle-class. They still offer great dining options and retail establishments. Half the properties in a class B area will be inhabited by the homeowner — the other half are rented out.

Class B properties are typically 15-30 years old — so maintenance is going to be a regular concern. Of course, with an older home also comes a lower rental price but it’s relatively easy to add value to class B homes. Even moderate upgrades and renovations can add real value to these properties — affecting both ARV and maximum rental rates.

Since class B properties have a huge potential for higher cash flow (and attractive exit strategies), investors often focus on them.

Class C Properties

As you can probably guess, class C properties are another step down on the real estate totem pole. But don’t let that discourage you because for some investors, they’re a perfect fit.

These homes are usually over 30 years old. They may have subpar plumbing and electrical — meaning you will likely need to upgrade those systems at significant cost. If you’re planning for a quick flip, class C offers low acquisition costs — but also rent for less. The upside to that is, they’re easy to find tenants for.

By far, most class C properties are in neighborhoods predominantly owned by investor/landlords. They offer high cash flow (due to low acquisition costs) but will require the best property managers to keep an eye on things.

Classes of Property in Real Estate: Which Class Is Best For Me?

Most investors will find that the safest entry into real estate investing is in class B properties. While class A yields low (albiet steady) cash flow, it’s typically more trouble than it’s worth. Class C on the other hand, can have a high turnover rate which may cut into profits if not managed properly — but the higher cash flow is often worth the extra effort.

You may want to build up a solid class B portfolio, and then venture out into class C to test the waters. Another great option is to diversify with multi-family units in either class B or C areas.

Classes of property in real estate aren’t clearly defined and vary from investor to investor, but the important thing to take home is that you clearly define what YOUR portfolio will hold. This saves you time and effort because you won’t be wasting hours looking at classes of properties that don’t fit your portfolio.

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