Guide to Property Classes in Investment Real Estate
What is a Property Class?
When it comes to making the decision to purchase or sell an investment property, real estate investors need to evaluate things like risk, return, and what they’re long-term investment strategy will be.
Property classes are one way to organize and evaluate property types and rental markets based on characteristics that affect the risk level and potential returns investors can make.
While property class is subjective - it’s not an official label that you’ll see on a listing - there are a few things you can look for in order to help you determine whether or not a purchase is right for you, or how to manage the property you already own.
Class A Property
Class A Properties are relatively low-risk properties in nice neighborhoods or relatively secluded locations where most of the people own the houses in which they live. This means that most Class A neighborhoods are well maintained, higher-income areas, since the residents are usually taking care of their own homes. Class A’s typically have very few maintenance issues and come with higher-end amenities such as elaborate swimming pools, modern appliances, sport courts, custom stonework, etc.
Quite often, these will be newer houses in neighborhoods with low-crime rates with good community schools, parks, and businesses nearby. If you’re a property investor that wants to minimize your need for hiring out for maintenance or doing much of it yourself, then a Class A property investment is likely your best bet for low-maintenance cash flow.
Investors that benefit from buying Class A Property are typically those that can afford paying the higher prices for these properties and then stick to a “buy-and-hold” tactic. The strategy here is to hold long-term, realizing lower monthly profits made from charging rent, since the rental income is offset by higher property costs, but benefiting from steady rental demand and growing equity.
Class A property is perhaps the easiest to sell when the time comes, and investors often make most of their profit off of the appreciation when they sell the property. Renting may be just enough to get the mortgage paid or a little extra until you’re ready to sell. Of course, there is always risk in every property investment, and even a Class A could be a poor investment if you haven’t done your research and don’t have a plan!
Class B Property
Class B properties are not dramatically different from Class A, but they typically have a few more maintenance needs, less high-end finishes and amenities, and are usually older than Class A properties (usually more than 10 years old). They are still in relatively nice neighborhoods and are in very livable condition. Neighborhoods with Class B properties are home to middle-class residents, many of which are renting, but not all. Property prices in these areas are affordable for more investors than Class A would be.
Renting out Class B property can provide some good cash flow; rental rates are lower than those in Class A areas, but so are the mortgages. Vacancy rates are usually low. Class B’s provide an opportunity to generate some decent revenue through renting and then also make a profit from appreciation when selling.
One thing that motivated investors should be aware of is that some high-quality Class B properties can be turned into Class A’s through renovations or extensive improvements. Though rarely would it move up in class because of growth or improvement of the location in which it is found.
Class C Property
Class C properties are older than Class B’s, need more repairs and upkeep, and are found in low-income, high-crime neighborhoods. Many of the tenants renting Class C properties are on government assistance.
It’s important to note how wide the gap is between Class B and Class C properties. The difference is substantial, and Class C’s are an investment we only recommend for experienced property investors who know what it will take to maintain positive cash flow without pulling all your hair out.
While Class C property might sound rough compared to the A’s and B’s, they can still be a worthwhile investment if you know what you’re doing. Obviously, they carry a high degree of risk, and you need to be serious about the time and energy that will be required. But the upsides: low cost to purchase and relatively consistent demand. Although rental rates are lower compared to Class B property, most markets still support rental rates that put a good amount of money in landlord pockets in light of the low acquisition costs for Class C’s.
While Class C property owners are less likely to retain the same tenants long term, there is often another low-income renter ready to move in once a place becomes available (research your market!). Be sure to have a good property maintenance partner in place if you’re considering Class C investments.
Class D Property
To get a good idea of what constitutes a Class D property, picture an old property that has been pretty much neglected. Many Class D’s are currently uninhabitable without extensive repairs and renovations being made.
This class of property is usually in the roughest part of a community, where crime is a serious problem. Tenants looking to rent in these neighborhoods are very high risk.
In most markets, Class D property is not a very wise investment. However, a knowledgeable (and brave) investor who is able to improve a Class D property and effectively screen tenants may have some success in generating cash flow or flipping the property for a small profit. First-time investors may be attracted to the low purchase price of Class D property, but this is not the type of investment for learning the ropes and minimizing risk.
Property Classes in the Utah Market
An important thing that property investors need to remember: Property classes are relative to their market. When it comes to Utah markets, which is our specialty at Joseph Thomas, a Class A property in Vernal could be a Class B in somewhere like Park City, for example.
As always, it’s important to know your market if you want to be successful with real estate investing. Check out our list of the best places to buy investment property in Utah right now.
Different Property Classes, Different Tenants
When deciding where to purchase property or your strategy for generating revenue (renting vs appreciation), you should keep in mind that each class of property will attract its own type of renter. This may or may not make it a worthwhile investment to you, depending on your risk tolerance or how involved you want to be with tenant management.
Get Expert Property Management for Your Utah Investment Property
Utah rental property owners can rely on the professional insight and experience of the Joseph Thomas Property Management team when it comes to deciding which property class is right for you, or how to strategically manage your current investments.
The Utah property market is a unique beast to navigate, but our team has been successfully managing our own properties as well as our client properties in Utah for many years now.