All properties are not created equal. What do property classes mean? And what does each property class mean for investors? Keep reading!
All properties are not created equal. Some are of higher quality – and are more highly sought than others. Some come with more risks. Others are representative of a greater return. To communicate the traits of a particular property, class ratings are used – referred to as classes A, B, and C. And this classification system is used across all property classes:
- And so forth
Keep in mind that there are no formal defining characteristics or qualifications for each property class, but rather an industry-wide understanding of what each type refers to. So, what do these property classes mean? And what does each property type mean for investors? We’re going to talk about it.
Class A Properties
Class A properties are often considered the cream of the crop. They are high-quality and highly desired properties. They are usually constructed with the best materials and the finest craftsmanship – and they are often newly built (at least within the last 10 to 15 years or so). You will usually find these class-A properties in an ideal location with lots of fantastic and convenient amenities.
Class A properties often catch the eye of investors because they are popular among tenants, often leading to low vacancy rates. Investors know that these are the properties most often sought by high-quality, high-income tenants – and that they are subject to premium rental rates. And, because they are of newer, quality construction, they don’t often come with any heavy maintenance or repair issues.
Class B Properties
You will find class B properties taking a step down. Although they are older, these properties tend to be reasonably pleasant and require some maintenance and repair. They also usually have fewer amenities, a more general, ordinary design, and they may or may not be in an ideal location. Class B properties are often considered suitable in working order and structurally sound, but they may not have any impressive features.
With class B properties, you will find that the tenants are usually of lower-income, resulting in a rental income that is less than class A. Depending on several factors, vacancy rates can be slightly higher with this property type, which investors may want to consider.
Class C Properties
Taking yet another step down, we come to class C properties. These are often old properties – at least 20 years old or older. And they are usually found in undesirable areas. Depending on how well they have been maintained over the years, these properties often need renovation and severe repair. This may even involve the foundation itself.
Class C properties often have the highest vacancy rates – and the lowest quality tenants. As expected, they also have the lowest rental rates. These properties often require a lot of work by the investor to keep cash flow steady – or to acquire cash flow at all.
Why Property Classes Matter
A property class matters to investors. Each type can impact the risk and return of investment differently. So, understanding what that means for each is essential. For instance, class A properties may be the properties that attract high-income tenants, have minimal repair or maintenance issues, and allow you to charge a premium rental rate. But, they are also the properties that will suffer the most should the economy take a down-turn.
Class C properties may be cheaper investments, but they could require a lot of work before they are ready to rent – with no guarantee you will get a renter. Though, if upgraded and many amenities are added, they could very well prove to be a positive investment. It would help if you considered a few things, including the purchase cost, your desired rate of return, and how much risk you are willing to take.
- Purchase cost: Class A properties often come with the highest price tag and the highest competition to purchase. As you move down in classes, the cost and the competition is often reduced.
- ROI: Class B and C properties usually provide investors a more significant ROI, but the cap rate you get with class-A properties can make up for that.
- Risk level: Class A properties are the least risky to purchase, as they can be sold quickly if they need to be. Due to their age and less-desirable traits, Class B and C properties are often riskier in finding tenants, dealing with maintenance and repairs, and selling if it comes down to it.
Investors need to take a good look at properties at all angles before making a decision. Having an investment strategy in mind can determine which class type is the best option to meet investment goals. After all, some may do very well in working with class-A properties, while others find great success with class B or C.
How a Property Management Company Can Help
Property management companies know how to manage properties – it’s what they do, including everything from finding (and keeping) tenants to maintaining the property’s health. See, property managers know how to market a property and screen tenants. For instance, finding class B or class C property that has been cared for by a property manager is usually a better-quality investment than one that was not. In the future, for investors looking to purchase real estate, having a property manager can keep the property cared for and provide the greatest return.
Regardless of the property class, they can find quality tenants to fill the space, never questioning cash flow. Further, an excellent property management team will have a network of people who can successfully handle maintenance and repair. For those properties requiring work, they can take it – and for those that don’t, they can maintain it. The takeaway? Buying and managing rental properties can best be done with a solid investment strategy and an experienced property management team.