Class A vs Class B vs Class C Properties - Pros & Cons

[Vasundhara Ranjani]

As the title suggests, what are the pros and cons of investing Class A vs. B vs. C properties?

I understand that A properties might be less 'headache' due to better tenants but if it's all about the cash-flow, wouldn't a majority of people go for C or even C-/D+ properties?

I'd like to get some perspectives from both newer as well as seasoned investors on the pros and cons of each type of rental property.

An example I'd like to give is a commercial deal that came across my desk - a NNN lease for a very well-known nationwide business for 10 years with two five year extensions (so approx. 20 year lease). The price was ~ $2.5M and assuming a "regular" commercial loan, after the debt-service, the cash flow was just ~ $3K per month.

Now why on earth would anyone put $625K down for something that returns $3K/month? That's a 5.76% return and I can get that all day in the market without risking much. 

Whereas if there is a large Class-C apartment building for a similar price (~ $2.5M), the return could be ~ 20% (or more in many cases) which definitely would beat the market most years. All these figures are 'net' by the way.

Can someone explain the logic of dumping $625K into something that gives 5.76% vs. something that gives > 20% for the same amount?

[Russell Brazil]

Its just a matter of risk, assessing it and deciding on your risk tolerance. Class A is low risk, Class D high risk and everything in between. This is clearly illustrated in the yield of the assets and market. Yield across all asset types is really a measure of risk, whether in real estate, bonds, divideneds etc. Most people mistake yield as a measure of return, which it is not.