What is a Class 'D' Property?

In the real estate world, investors will many times use property classes to quickly characterize the value/quality of a property. There are four major classes named with the letters A, B, C, and D. The way the classes work is very much like the game of Monopoly.

Each of the sides of the Monopoly board has different properties ranging in price to purchase from low to high. So, as you begin at the GO square and travel around the board it is akin to traveling through D class properties all the way up to A class properties. Park Place which everyone one identifies as the prime piece of Monopoly real estate is a class A property that costs more to own and can bring in $200 rent when an opposing player lands there; whereas Baltic Avenue at the beginning of the board is cheaper and will only bring in $20 rent.

There is no solid set of definitions or parameters that investors or Turnkey providers are required by law to use when they classify a property. You may find that each person has their very own loose interpretation on the classes. There are some defining characteristics of each class, however, that are standard. In this article, we are looking at the definition of a class D property.

Class D properties are usually distressed properties. They are older and in need of care and repair. Most of the time you will find D class properties in declining communities that are not the most desirable or sought after neighborhoods. Some investors will describe a D class property as located in a “war zone.” Most tenants will have low income and some may have bad credit.

[Read more:  Real Estate Agents Can Sell - But There is a Cost]

From a management perspective, tenants of D class properties are the most challenging to work with and can be very time consuming to collect rent from. While class D properties are in rough shape or in a rough part of town they do have the highest rent-to-purchase price ratios on paper. Class D properties are the cheapest to acquire, many would expect that a class D property would have the best cash-on-cash returns.

The lower the property class of the building the higher the rent ratio. There are higher capitalization rates with lower class properties: the ratio of net operating income to the value of the property. Though this may seem like a Class D would be the best investment to make money, it is still risky.

Before ruling a property out on just its property class you need to remember that the definition of the classes are loose ones. It is always best to check out a property for yourself before taking the seller’s word on class rating. Especially in the middle B and C ratings. You may find a property is better or worse than its description depending on how badly the owner wants to unload it or make a profit.

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