When evaluating real estate investments, you’ll often run into properties marked as Class A through Class C. What are these real estate classes and why do they matter?
These classes are an industry shorthand for the quality of a property, which can communicate the potential risk and return. These letter grades are derived based on property market, location, tenant income levels, potential growth, price appreciation, amenities, finish quality, and revenue.
It’s important to note, there’s no board or government agency issuing these classes. The classes do not have clear lines and are meant to act as a general suggestion. You may also see classes used to describe a location as well (e.g., It is a C property in an A area), and a + or – may be added to the class, much like grades in school for more granular delineation.
So what are the classes and what can they tell me about a property?
Class A properties are typically the highest quality buildings in their market and area with top of the line amenities. These buildings are often located in the most desirable areas, featuring buildings constructed within the last 15 years, top ranked schools, retaining the wealthiest residents, and the most expensive real estate. These properties demand the highest rent/sale prices. Since these can often be considered “desirable investments,” there is more competition to purchase, meaning a tighter profit margin.
Class B properties are a step down. They tend to be a little older with some small ongoing investments in the property that are needed. The neighborhood would generally have nice restaurants, moderately rated schools, and is well kept, but won’t compare to Class A. There is decent infrastructure and career opportunities available for residents.
These properties can be viewed as “value-add.” Often renovations to the property can boost them to a B+ or A Class. Since these properties are regarded as higher risk than Class A, properties can be acquired at more competitive rates. Well-chosen investments can command a higher profit margin. Many regard Class B as the “bread and butter” for real estate investing.
Class C properties are older properties, usually 30 years or older. Often properties require more renovations than a Class B. These properties command the lowest prices and due to disrepair can risky, especially when making renovations. However, done well, these investments can have the potential be lucrative.
Properties that are in great condition and in good areas can help reduce risk, but may not offer high enough yields as no improvements . Conversely, investors are paid a premium for taking on the additional risks associated with older properties in less desirable neighborhoods, but there are real risks associated with these investments.
There are no right and wrong answers — only balancing risk and reward.
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