Which Property Class is Right for You?

“Property class” is a phrase you’ll hear a lot of once you start investing. But what is it? Basically, it’s a ranking system that rates properties based on criteria such as location and property quality. There are no exact rules about how grades are assigned, and a Class A property to one person might be a B property to another. However, it’s an extremely helpful guide to know and use when evaluating and discussing real estate.

Here’s a quick rundown of the different classes:

Class A - In terms of location, this is the best there is. These properties are in or near the hottest part of town, with the best schools and a low crime rate. All the higher-income people live here. In regards to property quality, these are new homes with high-end finishes and amenities. These properties go for a premium, so if you want to invest in Class A real estate, you better be willing to pay top dollar.

Class B - Class B is just a step down from A. The properties aren’t brand new, but they’re still in good shape, even if they are 10 to 30 years old. They’ve probably undergone some upgrades, but they don’t have the “wow” factor of a Class A property. Location-wise, these homes are located near good schools, restaurants, and other places, but there’s nothing “trendy” about it. They’re strictly middle class properties in a middle class location, and usually available a middle class cost.

Class C - The jump between B and C properties is bigger. Class C properties are usually older than 30 years, in need of repair, and not located in an ideal area. The crime rate in this part of town is higher, and you’ll see signs of poverty, like trash, buildings in disrepair, and payday loan places or pawn shops. Class C properties generally attract lower-income people who rely on government subsidies or work at low-wage jobs.

Class D - On the bottom tier, we have Class D properties. These are places that are suffering serious neglect, and may even be uninhabitable. You’ll see houses with broken or boarded up windows, sagging porches, or holes in roofs. The location is just as bad as the house quality, too. It’s the type of neighborhood where drug deals are happening in broad daylight, and even the cops don’t like to go there. Basically, you don’t want to drive through night OR day.

Of course, the big question is, which property class is right for your investment purposes? This depends largely on your strategy. Are you looking for a buy-and-hold investment, or do you want to flip the property? If you’re looking at a flip, then Class C or D is the best option. (A word of caution on Class D properties, though. These are not for the faint of heart. While you can nab them for just a few thousand bucks, you’ll likely spend tens of thousands making the place habitable, and it will likely be difficult to resell the property. I only recommend very experienced investors who know what they’re getting into go for a D property.)

For buy-and-holds, Classes A, B, and C are all good options. Of course, you’ll need to examine your ROI and cashflow very closely to see which one will net the biggest profits. Just because you can charge the most rent with a Class A property, doesn’t mean it will be the most profitable option. You may get better cashflow with a B or C property.

You’ll also want to factor in time and money spent over the long run. With a C class home, there will likely be a bigger time/money investment due to the age of the property and the quality of the tenants. With a Class A home, you’ll spend more on upgrades than you would with a B or C property in order to keep attracting tenants willing to spend a premium on rent.

Essentially, you need to ask yourself these questions:

1. How much can I spend to buy the property?
2. How much can I afford in the short- and long-term on maintenance/repairs?
3. How much time do I have to commit?
4. What is my ROI/cashflow going to look like?

Once you have ballpark answers to those, you can begin to search for a property in the appropriate class. And then, when you’ve found a prospective investment, you can plug in more exact figures to determine what sort of income and profit you’re looking at.

Don’t forget to factor in the time and stress that will be involved, too. All investments come with a certain degree of these, but remember, some will take a much bigger toll on you. Properties with lower rankings, either in location or quality, will require more time and effort, thereby increasing your stress level. While high-maintenance tenants can be found across the board, generally speaking, ones in lower-ranked properties will cause the most headaches. Of course, a great property manager can alleviate these issues immensely, and this is something I would definitely recommend to any investor.

When choosing a property class to target, you clearly have a lot to consider. Each has pros and cons, and the best advice I can give to you is the weigh each option carefully according to money spent and earned, as well as the time involved and stress likely to occur. And above all, KNOW WHAT YOU’RE GETTING INTO with any investment.