A, B, C Class Property

[Jason Davis]

I see a lot of references to different classes of properties and was curious if there was some objective measure to make this determination or if it's more subjective 

[Russell Holmes]

It is quite a subjective measure and can vary in every market. I'll give you my thoughts on these as I've had several investors ask me how I classify. Being in Central Florida, my opinions of the classes may vary wildly from someone in San Francisco. I'll mention median price near me so hopefully you can adjust my descriptions for your markets. For clarity sake, I'll talk about single family, but the same types of things go into multi family classes.  There are A/B/C/D class multis too, but sometimes you have more control in bumping up the class when buying a large multi, where single family homes are sort of stuck in their neighborhood class so to speak.  Maybe someone else will have more objective measures, but here's how I see it:

In my opinion, A class properties are the highest end homes in a market. Often gated communities with a staffed guardhouse at the gate plus other amenities (pools, clubhouse, tennis courts, golf courses, etc). They have staff to attend to residents needs, extremely strict HOAs, luxury homes. These will often be well above median priced homes. If median price is $250k like it is where I'm at, A-class homes/neighborhoods likely start about $450k and up. The only real investment play in A class neighborhoods would be high-end flips or buying to park money for appreciation. It would be tough to cash flow at all with leverage.

B class homes, in general, start somewhere around median price and go up to just below A class. In the example of my market's approx. $250k median price, B class may be from about $240-450k homes, but it really is more neighborhood dependent than price since some neighborhoods have a broad range of home sizes. B class neighborhoods (in my area at least) are often still HOA communities with lighter amenities (playgrounds, parks, basketball courts). They may have an automatic gated entrance, but no guard on duty or staff on site. Often no clubhouse, golf course, etc., just passive amenities and an off-site management company. This class of homes won't cash flow like C class rentals, but the tenants are often the best tenants around because they could be homeowners if they chose to. They could afford to buy a house, but don't by choice (or by credit issues, job that moves around, etc). They will often care for the house as if it is their own. They'll call a plumber when their kid flushes legos down the toilet or fix a lightbulb when it burns out without nagging you or your PM to do so. Instead of evicting, you'll likely lose more tenants to those who buy houses of their own. Many investors swear by B class properties for the fewer headaches they bring and higher appreciation gains in strong markets.

C class homes are where most rental property investors are looking to buy since they are a nice balance of cash flow and somewhat financially stable tenants. These are the 'working class' neighborhoods with what most would call 'starter homes' that don't have as much 'fancy' to them. Often no HOA, no gated entrance. Homes would almost always be below median price. If median is $250k, C class homes may be $150-240k homes. These neighborhoods are typically somewhere that is relatively safe and quiet still, maybe nearby to some nicer B class neighborhoods. No major gang/drug/assault issues. No awfully dilapidated buildings. Just good solid affordable neighborhoods of smaller homes. These folks are most often gainfully employed with jobs, lives, and families. Drive through a C class neighborhood during the weekdays and most people are at work. They often drive decent used cars or cheap newer cars and do their own repairs of them in their driveways. Treat them right and there's a good chance they will be long time tenants and can care for the homes very well. They don't make quite enough to buy a home or maybe they do but choose not to.

D class homes, also known as 'war zones' are best to be avoided unless you really know what you're doing. Sometimes C/D is a fine line and really goes block by block in certain areas.  D class properties often pencil out very well on paper so some new investors get suckered in to buying awful deals. Homes are dirt cheap, so the rent to price ratio may be great....on paper. However, tenants in these type areas are more likely to stop paying rent, force you to evict, and tear up everything in the house on their way out. Not saying they all do, but many stable people who live in D class neighborhoods own their homes. Renters in these neighborhoods are notoriously a pain in the ***. Typically as soon as they get on their feet financially, they'll choose to rent in a C class neighborhood nearby instead.  If you drive through a D-class neighborhood on a weekday, it seems everyone has nowhere better to be than chilling in their front yards or thumping music from their cars. Get a few of those rough evictions a year and it kills any profit you may have 'made' on paper when running the numbers. Many homes in the community are run down or vacant. Higher rates of property crime, violent crime, etc. In a D class neighborhood, you'll often see customized cars on huge wheels that might cost more than what your B-class tenants drive and definitely more than your C class tenants....their priorities are often not focused on long term financial stability or paying their landlord in a timely manner....  

Long story short, it is very very subjective from market to market, but there are some things you can look for in making that call on what 'class' it is in. Every investor's idea of the fine line between each will be different, but hopefully this gave you somewhat of an idea of what's being discussed when you see A/B/C/D tossed around.  There are investors who make money in D class markets, and if you buy and rehab enough homes in an area you can be a force of positive change.  But that is not a move to make as a beginner unless you've got money to burn.