What Property Class Do You Invest In?

[Gino Barbaro]

Hi everyone,

I wanted to find out what property class  investors were targeting. This question comes up often in the discussions and I wanted to post a quick description from one of my blogs:

A-properties are the most recently constructed units, those that contain top amenities, require low maintenance, and are inhabited by young white-collar workers. These assets tend to be more stable, have less risk, and charge higher rents, all of which are the reasons they trade at lower cap rates. This type of property will appreciate more, but cash flow will be harder to come by. My view is that an A property is excellent for wealth management, and large institutions such as REITS focus on this asset class. If your objective is to create wealth, look elsewhere.

B-properties have typically been built within the last 20 years, and it usually has a mix of white-collar and blue-collar workers. The property will show its age by a bit of deferred maintenance or functional obsolescence. You may also see older heating and cooling systems, roofs that have a bit of wear and tear and parking lots that need repair. B-properties have a good mix of appreciation as well as cash flow.

C-properties tend to be at least 30-years-old and contain mostly blue-collar workers and section 8 tenants. They contain a fair amount of deferred maintenance, and these properties are poised for cash flow. There's less appreciation potential unless the investor repositions the property and improves operations. This is our favorite type of property class to invest in because these tenants are less likely to purchase homes and will become long-term tenants if treated properly. Our broker in Knoxville refers to C properties as “crap” properties, but loves to invest in this type of asset because of ability to cash flow and reposition to a higher class. Investors are always on the lookout to buy a C property and reposition it to a B property.

D-properties, the lowest class of property, are usually located in inner cities where it's difficult to collect the rent and vacancy rates are high. These properties are highly management intensive and the tenant base is often difficult to deal with. Investors get lured into investing in these properties due to the low prices, but soon realize they got more than they bargained for. Unless you can purchase a D-property and reposition it to become a C-property, you're better off staying away from them.  What is the sense of a 15 cap if you can't collect the rent.

Let me know what class you target and WHY!!

Thanks

Gino