For the disciplined Buy-Rehab-Rent-Refiance-Repeat (BRRRR) strategy investor, location is king in real estate. Where you invest can have a major impact on your investment future. It is important to understand the good and bad of the various classes, though semi-informal and inexact science, of property grading. We will talk you through it.
When investors are searching for new investment properties, they will often see different homes and buildings referenced as being in a Class A, Class B or Class C location. If you are new to investing, you may wonder what these classes mean and whether they are important or not. They can work well as a way to communicate the quality and rating of a property for investment quickly and efficiently. The classes represent different levels of risk, challenges and potential financial returns, which is always essential for the investor to consider when buying a property.
Investors can find the class designations very helpful to quickly learn whether the property they are considering fits into their investment strategy. They will have an instant understanding of the sorts of return potential, along with the risks associated with investing in the property. They can then decide whether they can accept the risks to get the returns, or if they should start looking at another property instead.
Having an understanding of what each of these different classes means and the pros and cons associated with each of them is essential. Fortunately for you the investor, it is also easy to gain this knowledge, as you will see below.
Class A Properties
When you see a property that is defined as being Class A, it means that it is the best quality for its market and area. In most cases, this also means that the property will have been built within the last 15 years. These properties will often have high-quality construction and interiors. Because they were more recently built than other properties, they will also have a modern design and appearance. They will often include new technologies and mechanical systems, as well.
Class A properties will have a great location in the market and strong appreciation in value is likely. When they are located in larger multifamily properties, such as condo complexes, they will also have different types of amenities. Some might have valet parking, a fitness center, restaurants, cafés, and other benefits. They will sometimes have resort-style settings and landscaping, as well.
If a property has gone through a substantial renovation and it is slightly more than 15 years old, it can often be considered a Class A property, as well. However, it does need to still have all of the other factors that are expected of a Class A property.
The benefits of these properties are that they can command a very high rent, and there is typically not much maintenance that will need to be done given the newness of the property. They also tend to have lower vacancy rates as the demand for these properties can be quite high. Because they are in good areas and because they have so many amenities and features for the residents to enjoy, it means that many people will want to live there, driving appreciation. Having fewer vacancies is always important, as it will affect the bottom line of the investor.
These properties also tend to come with the least number of headaches from a management perspective. The tenants, because of the high cost of entry, are often more careful with the property and have the financial means to qualify to rent the property and meet their monthly rental commitments. These properties can be much less hands-on for the investor (or property manager if one is being used).
There are only a few potential cons with Class A properties. These properties tend to be far more expensive because they are in high demand. This means that some investors may not have the capital to invest in them. Also, because the properties tend to be profitable, it will mean that not only are they more expensive, but they may not come up for sale as often. People who have invested in the properties and who are hanging onto them for the rent will often want to keep them for the income they can provide. This lack of inventory could impact your scalability if deals you are looking for that you can rehab and build equity are not readily available, which could be the case here with Class As.
That’s not to say that they can’t be found, or that they can’t be found at a good price. It will just take more work to find the right deal that will work with the investor’s goals and finances.
Class B Properties
Class B buildings, as you have probably surmised, are older than the Class A properties. They will generally be greater than 15 years old. Most will have been built in the last 20 years. It is important to remember that the age of the property does not always equate to the class. The overall quality and potential of the property will play a large role, as obviously there are plenty of older properties that have been rehabbed and would now fit in Class A in terms of quality and cost. Everyone has seen the old warehouses being converted into downtown lofts with high monthly rental rates in burgeoning parts of cities that are experiencing massive population increases and correspondingly higher rental prices.
With a Class B property, the construction quality will still be good, but the exterior and the interior features and amenities will typically be more dated. Some might have lower ceilings than newer properties, or they might have single-pane windows rather than double-pane. They will not have as many amenities as a Class A property will have. The rent and the property value of these properties can still be considered good, but they will not be the same as a Class A building.
You will find that these properties can often be found for much less than a Class A property, which means that they will be easier to afford for many investors. Investors often like these properties because they are already in good shape, and they can provide rental income quickly if the rehab required is limited to primarily cosmetic repairs (paint, new flooring, updates). They will often have a higher CAP rate (i.e., rate of return on investment) than a similar Class A property because they are considered to be somewhat riskier and thus purchased for a lower price versus income.
However, some investors will take the initiative to make upgrades and improvements to the property. This can help to elevate those properties. Earlier, we mentioned that some older properties could still be considered Class A. This often happens when someone takes a Class B property and then rehabs and improves it to the point where it is a Class A property, or at least considered a B+ property. This means you can get more rent from the units at the property, and it means that if you were to sell the property, you could get hopefully much more than what you initially paid for it. There are often more opportunities to buy Class B properties in distress (i.e., eager sellers) than you would find in the case of a Class A property owner. We like B properties because of the ability to force value through your rehab efforts and by buying right without lesser risk of the headaches that can come with Class C properties, which we will discuss now.
Class C Properties
Class C properties are generally characterized by being well over 20 years old, and they tend to be located in areas that are not very desirable to buyers or potentially even renters that you would wish to manage. The properties will need to have a substantial amount of renovation for them to be brought up-to-date and to be in good condition. These buildings will have a shorter life left of being economically viable without serious upgrades and repairs. There are not usually many – or any – amenities offered with the buildings. The quality of construction tends to be lower quality, as well. This could be due to the original poor construction, or it could be due to the age of the building.
These tend to be the least desirable of the buildings because they will have the most amount of work that will have to go into them, and they will carry the highest risk. They have a lower rental range, and there tends to be far more turnover in properties of this class. We all want to avoid vacancies, of course, as investors.
Unless an investor in a Class C property is willing to put in the time and money to rehab the property, they will need to find ways that they can minimize their operating costs to make money on the building.
That said, it does not mean that these are always off the table. Class C properties do have the potential for high return on investment given the often low acquisition costs. There may be cases where a property is quite affordable, and it is in an area that is starting to turn around. Investing in and upgrading the building has the potential to provide a higher return. However, investors will have to consider the serious risks involved with them – don’t get blinded by low costs of acquisition and high rental rates…vacancies in these properties or major repairs that arise while rented can wipe out those good rents in an instant. We have heard of many people losing several years worth of rental income because of repairs that need to be made due to tenant negligence while at the same time watching a property never appreciate because it is located in an undesirable location.
Find the Right Help Regardless of the Property Class You Choose
As you can see, there are pros and cons to each of the different types of property classes. Different investors may want to focus on one area over another. Some might have the money to invest in Class A properties, while others might prefer a Class C property for the potential of higher income and the feeling of finding the property that is the diamond in the rough. Just know where you are going. Investors should have criteria and should invest in a manner that suits them. Be disciplined always. Check out this additional blog from us for helping you set your criteria. What risk tolerance do you have? What kinds of properties do you want in your portfolio? What amount of work do you want to take on as an investor and property owner?
Regardless of whether you are choosing Class A, Class B, or Class C properties, though, you must have the right help along the way when you are investing to properly analyze your deals and hire the right team.
Fortunately, BRRRRInvest.com has the tools that will help to make your life as an investor much easier.
You will be able to more efficiently and more accurately analyze deals to ensure you are making the right choice for your investment portfolio. You can make a decision and an offer easily since the service automatically generates offer letters to agents and sellers. You can even electronically sign them. Also, you can edit and sign contracts that have been pre-prepared by professional attorneys who are also BRRRR investors. These include contracts with contractors, property managers, and tenants. Our solution will give you the confidence that you need as a BRRRR investor, while saving you a ton of money and time in the process. Get your free trial and learn more!