A common question in the real estate investment world is, “What do properties marketed as Class A, Class B, and Class C mean, and why does it matter?
For starters, investors, lenders, and brokers have developed property classifications to make it easier to communicate amongst themselves about the quality and rating of a property. For the investors, property class is important to consider because each class represents a different level of risk and return. Investors use these differences within property class types to consider how each property fits within their strategy of investing.
Each classification reflects a different risk and return because the properties are graded according to a combination of geographical and physical characteristics. These letter grades are assigned to properties after considering a combination of factors such as the age of the property, the location of the property, tenant income levels, future growth prospects, appreciation, amenities, and rental income. There is no formula by which properties are placed into classes.
Class A represents the highest quality buildings in the market and area. Generally, they are newer properties built within the last 15 years with low vacancy rates, top amenities, and high-income earning tenants. Class A buildings are well-located in the market and are typically professionally managed. Additionally, Class A demands the highest rent with little or no deferred maintenance issues.
These properties are just one step down from Class A. They are generally older, they tend to have lower-income tenants, and may or may not be professionally managed. The rental income is typically lower than those in Class A. These buildings are well-maintained and many investors see these as “value-add” investment opportunities.
Class C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of renovation. As a result, Class C buildings tend to have the lowest rental rates in a market. Some Class C properties need significant reposting to get to steady cash flows for investors.
What Does This Mean For Investors
It’s important for investors to understand that each property class represents a different level of risk and reward. Class A provides investors with more security by knowing that they are investing in top tier properties, with little or no outstanding issues requiring further capital expenditures.
Class B and C properties tend to be bought and sold at higher rates than Class A, as investors are paid for taking on the additional risk of an investment in an older property with low-income tenants, or a property in a low-income neighborhood.
The property class investors choose can have a great deal of influence on the stability of an investment over time, as well as its growth appreciation. For investors looking for capital preservation, Class A may be the right investment. For investors looking for capital appreciation, Class B and C may be better investments for that specific risk profile.
If you’re looking for a company that can help you decide between classes, check out Mindful Capital! They are waiting to hear from you and to take the reigns over for your property.
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