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Property grading is one where investors identify the quality of a property. Like other investments, most real estate investments are graded with a letter to identify what class they are. Properties are considered “lower risk and higher class,” while B, C, and D tend to slide down the scale in terms of risk, quality, and headaches. With that said, I’m going to describe below some of the most common traits and characteristics, as well as the pros and cons of each property type. Keep in mind that each different grade of property will come with its own set of pros and cons, and it’s up to you, the investor, to decide which type of investment property works best for you.
Class A - Class A property is a newer property that is in the most desirable areas. Generally, class-A properties will be of newer construction and offer amenities in their properties, such as fitness centers, clubhouses, pools, and things of that sort. Often, class A properties offer the least amount of rate of return from a cash-on-cash perspective; however, they do offer the highest level of appreciation and the least amount of headaches and issues in management. Usually, the buyers of these types of properties are more seasoned, larger syndication groups, and often, they have them built.
Class B - Class B property is one of the most desired classes of property because most class B properties used to be class A, but due to the age of the property or lack of new amenities, it is graded as a class B. A lot of owner-operators that start in lower-class property tend to sell and trade up into class B, and you can earn a very nice return in this space. Class B properties tend to fetch good rents and come with minimal headaches, thus making it a highly desired asset class for investors.
Class C - Class C property is one where most investors find themselves investing early on in their careers. Typically, these types of properties are in neighborhoods that are over fifty percent rental and with a portion of those renters being on some form of subsidized housing. They are generally older properties and do not have any amenities, and you will find them in need of updating and repair. Within the class C property, you find a varying degree from C- to C+, and a lot of investors tend to gravitate towards the C+ type of property because they come with a little more headache than, say a B property; however, the cost of entry to these properties are generally lower, and the rents are close to the B grade types making these properties desirable for cash flow and returns. You will hear a lot of investors say that the C property class is a “younger investors” game as they require more hands-on management and work but generally produce larger rates of returns and profits for the effort.
Class D - Class D property is a function of its condition. Most of the time, when a property is considered class D, it’s really a lower class C- to C property, but it has been neglected severely and needs repair; however, there are some instances in certain geographical areas that a property is truly class D because it is in a very bad neighborhood and no matter how much you improve its physical condition that it will always remain this class, but as a general rule most property of this class can easily be improved to class C with some capital investment.
Like with anything else, property grading can be very subjective and is often based largely on opinions. When evaluating an investment property, it is important to make sure that the property is a sound investment that fits your needs and portfolio. If you are searching for a long-term appreciation play, then you will look at the higher-grade B to low-grade A properties most likely, if it’s cash flow you seek, then chances are you will gravitate towards properties that are considered in the lower-to-mid-C class. No matter what your investment strategy or management needs are, C.A.P. can help you identify opportunities that suit your needs. For a free consultation, please email us using the form below.