Asset Classes Defined

[Kent Ritter]

I got this question through a DM, but after I went off on my tangent, I felt like others could hopefully benefit from the info too.

Are asset classes graded somewhere or just people's estimates?

There is no hard and fast rule for assigning an asset class. 

There are general rules I've learned by comparing a lot of properties. None are bad in their own right. Each fits for certain investors and their strategy. 

I personally stay away from the outliers A+ and D. Not enough current cashflow or too much of a headache to manage in reality.

Classes

A+: hearing more about this as developers try to differentiate from the competion. This is the top 1% in any market. Brand new with best amenities - smart apartments, pet amenities, etc. Also, intangible amenities like location (i.e., right in the best restaurant area). Lowest cash flow, but the highest organic appreciation potential in a bull market. Typically $90K+ MHI

A: built in the past 10 years, great locations, usual in downtowns, top amenities and a lot of them, nicest finishes (think stainless and granite, highest rents - low cash flow, but high organic appreciation potential. Typically $90K+ MHI

B: Built 10-30 years ago, typically more suburban, many more standard amenities like pools and fitness centers. The best balance of cash flow and appreciation. Typically tenants with $60k-90K MHI. Entry-level white-collar tenants. Better insulated from work disruptions for hourly tenants as many are salaried.My person sweet spot

C: Built 30-60+ years ago, Can be suburban or urban, many run-of-the-mill garden apartments. Limited amenities. Common laundry rooms. Typically tenants with $30K-60K MHI. Lower per-unit costs mean better value (cashflow), but lower organic appreciation potential. Need to watch for deferred maintenance especially plumbing issues due to age.

D: This is a C/C- in a bad neighborhood. Typically urban. High risk of delinquency and turnover. These look great on paper, but owners have issues hitting proformas due to the reality of the tenant base and the age and deferred maintenance on these buildings. Cash on cash return can be great if managed aggressively. This requires a unique skill set and a local presence. Limited organic appreciation. 

My last piece of advice is there are property managers that specialize in each of these asset types. Just like people, certain property managers are good at different things. if you try to bring in a B Class property manager who is used to deal with white-collar accountant tenants and want them to manage a D class, they are going to struggle to collect rent and maintain order.

[Evan Polaski]

@Kent Ritter great break down.  The thing I was thinking about was this is a lot like ski-runs. A black diamond in the grand tetons is not the same as a black diamond in the midwest.

The "class A" properties in Cincinnati might barely be B's, if not C's in terms of amenities in the 24 hour cities like Manhattan, LA, SF, etc.  So while it is relative to your area, and you mention that, it does give you good guidance, especially when comparing say Indy to Cincy.