The ABC's of Real Estate Asset Classes

Real estate experts and investors share different perceptions when it comes to ranking property and area classes.

Most will rank them on a general scale from Class A to Class C with others going as far as from Class A to Class F. Including lower subcategories of each class such as A-, B-, and C-, etc… Different states and cities can also offer variations on how the “classes” are ranked.

I prefer to stick with the KISS (Keep It Simple Stupid) approach and will only rank a particular area/property as either “A, B, or C”.

Please see below how I distinguish the different area and property classes in Toledo, Ohio- a market we are heavily active in.

The Class “A”

These properties are top of the line.

They are newer built homes with the majority of them situated on large river front lots. The properties are very well-maintained and posses a “WOW” factor, when driving past you can’t stop the thought of wishing you lived in one of them.

Class A properties in Toledo are located in sought after school districts, are within a short commute of medical/shopping facilities and have ease of access to all major highways.

Owner-occupiers mostly reside in these properties with only a minority being tenanted. The cashflow tends to be low with a high potential for growth due to a high demand from home owners who’s decisions tend to be emotion based.

The Class “B”

I believe that Class B properties should be the bread and butter for every hands-off investor.

They can range to be anywhere from 30 – 60 years old and are mostly occupied by blue-collar working class people. While driving around you might find the odd vacant home with an overgrown yard but in general the area is very well kept.

The school zones tend be slightly less prestigious but the close proximity to all amenities makes the area very similar to Class A. The residents equal out to 50% owner occupied with the other 50% investor owned and tenanted.

Due to the cashflow, growth potential and exit strategy offered, Class B properties should be the foundation for every investor looking at building a substantial property portfolio.

The Class “C”

These properties fall into the highest risk category but can also be very lucrative investments with a right strategy and system is in place.

WARNING: Unless you have an armored vehicle I don’t suggest you drive in this area after 5pm.

All joking aside, most of the Class C homes are much older than the higher ranked areas with some dating back as far as the 1880s. Some of them show visible deterioration and a higher portion of them are bordered up.

These properties are predominantly investor owned and are occupied by lower income tenants. They offer by far the highest cashflow out of all the classes, but require full time monitoring and management.

The property manager needs to specialize in this particular area in order for the numbers to work. In my opinion this Class should only be considered once a solid portfolio has already been built with Class B properties that are performing and generating a decent monthly cashflow.

Conclusion

A great portfolio needs to be built on strong foundations by acquiring B Class properties with the lowest amount of debt possible.

Once a strong foundation has been established and a decent amount of cashflow is generated each month, you can then consider to take on more risk. By using leverage and diversifying into the Class C area you will further increase monthly cashflow which will enable you to grow your portfolio at a quicker rate.

One of the most vital components, no matter what class you decide to invest in, is to have the right property management in place looking after your best interests.

Smart investors base their decisions on the numbers in the deal and focus on building a team that can make those numbers work. Capital growth is a prediction and if it occurs should only be considered as a bonus.

As far as Class A properties go- they should just stay as the “WOW” factor and instead of telling yourself “I wish I lived there” —once you have built a grand portfolio, you can!

What class do you primarily invest in?

Be sure to leave your comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.