Hi Richard, this question comes up from time to time.
Here is a collection of definitions I've found over time and find helpful. Don't remember exactly where so am not able to credit the authors.
ABCD
1.
Most would consider A class properties to be higher end rentals in nice suburbs.
B class to be suburbs with mostly white collar or similar type of people.
C class properties are blue collar workers or similar.
D class properties would be in low income areas and ghetto's.
Opinions will vary but this is how I class properties.
2.
Class A properties are newer and have the highest quality tenants. They have great amenities and are in the best locations. They will cost more and have lower cash flow, but will be stable, need little maintenance/repair and tenants will be fantastic. There will likely be appreciation in property value. These properties can be nice apartments in dense cities or planned communities in suburban areas, for example.
Class B properties are in similar areas to class A, but are a little older and will need a little more maintenance, command less rent and will have tenants with stable careers but not high class professionals. This could be a house built in the 1990's in a suburban neighborhood, or a moderate sized apartment with decent carpet and a dishwasher in a nice downtown neighborhood. Cash flow will be better than class A properties, but appreciation will be less.
Class C properties are older, have deferred maintenance and are not in prime neighborhoods. Tenants will be working class people with lower incomes or subsidized rents. Cash flow will be good, but ongoing maintenance and repairs will cost money, too.
Class D properties are the run down properties in the crappy neighborhoods. Tenants will have bad credit and often criminal records. Properties will need work at purchase and ongoing. There will be a lot of turnover and finding qualified tenants will be more difficult. The tradeoff is great cash flow. Some people think the cashflow is not worth the headaches. I have a property I would classify as C-/D+ and there are days when I wish I hadn't bought it, but then I remember that one property pays my mortgage. These are the cheapest properties and easy to buy, but come with the most risk. I went to replace a rusty bathtub and had to gut the bathroom down to the studs, even replacing the subfloor due to deferred maintenance and a leaky bathtub drain. Fun times.
3.
It seems like the classes are determined by community opinion.
So, is there like some guide chart to know what type of fico score to expect for each class?
For example:
Class:
A: fico of 720+
B: 670+
C: 580 and below
D: 520 and below
4.
https://www.biggerpockets.com/blogs/4445/36354-041...
Recently someone asked me what neighborhood class my properties are. I’m never sure if they are class C or class D. I decided to do some research on neighborhoods which brought me back to forum posts on Bigger Pockets.
I learned that the letter grades vary by area, can sometimes be more of an art than a science, and are easier to nail down for multifamilies.
But here’s some characteristics:
“A” Class properties are in newer growth areas, are in nice neighborhoods, are newer properties built within the last 15 years with the most amenities. They command the highest income earning tenants, lowest vacancies, and highest rents with no deferred maintenance. They generally have the most appreciation potential, but lowest cash flow starting out.
“B” Class properties consist of properties in older stable areas, are in a slightly less desirable neighborhood, are built in the last 15-30 years, still nice, with some amenities. Rents will be a bit lower than the A Class properties with low deferred maintenance. Some feel this is a blue collar neighborhood, some call it a mix of white collar workers and more skilled blue collar workers. Class B properties are typically owned by Institutional investors and private investment groups, or very high net worth individuals. They make great rentals because they usually have appreciation potential with decent cash flow on acquisition.
"C" Class properties are in older, declining, or stable neighborhoods, are not the most desirable areas, are typically older properties, built 30+ years ago with much fewer amenities, if any. Rents are lower than B Class buildings and usually have more deferred maintenance and a lower occupancy rate. The neighborhood has some boarded up properties, low rate of home ownership, and a vibrant neighborhood (think lots of people out on their porches during the day). The tenant base is blue collar service employees and government-subsidized tenants. These are considered the bread and butter for rentals, with higher cash flow and CAP rates, but normally much lower appreciation. Landlords disagree on whether these are desirable properties to own.
"D" Class properties are older, declining, potentially rapidly declining areas, characterized as bad/challenging neighborhoods, are older run down properties and potentially dangerous areas (war zones). Properties are older, with no amenities, have high deferred maintenance, functional obsolescence (small, one bathroom), and the tenant base can be very challenging and very management intensive. These properties will usually have double digit CAP rates, but will not have appreciation potential. D Class properties are the most challenging, and definitely are not recommended for most investors, especially new investors.
While some of the D class characteristics resonate, I think my investment neighborhood would be considered a C by most investors.
