Are you getting ready to buy a home? You may even be putting together a checklist for buying. One thing to add to this list is the property class. When you are shopping around for a home, whether for investment or personal use, knowing how to distinguish between Class A, B, and C properties will help you to identify what you are looking at. The value of the property changes based on the classification even within the same location. In this article, we show you how to tell the difference between different classes of properties.
What are the property classes?##
Properties fall into three categories - Class A, Class B, and Class C properties. These are standards devised by marketers to rate the quality of the property based on several features. These features include location, infrastructure, tenant turnover, furnishing, building material, etc. This allows marketers to communicate amongst themselves easily and compare the properties on a basic level. Class A is the highest-rated and Class C is the lowest-rated category.
What are Class A properties?##
Class A is the best of the best properties; the cream of the crop. Let's look at what makes these properties the best.
They are most likely located in affluent areas or in a high-income neighborhood with good schools, responsible taxpayers, best medical facilities, and easy access to highways. The locality is usually close to, or right outside the city center. The crime rate of the location is low as well. This is why class A properties represent the least risk for the buyer or investor.
Class A properties are newly built, usually not older than 15 years. Note that we do not recommend classifying the property solely based on age - old properties in good locations are usually well kept the owners. They are built using the best building material and are well-maintained. All these factors contribute to the low maintenance cost for the owner in the long run. They are located in areas where there is a majority of owner-occupied properties. The area, in general, is better kept, and hence the rental rates of class A properties are quite high.
When it comes to repairs and worries about maintenance, the risks associated with class A properties are minimal because of high-quality material and proper maintenance. However, these properties are also the most expensive ones to buy, bring in higher rents, and can have the same challenges as investments in expensive markets.
A high-end building located in the city center will be a classic example of Class A property. It might have multiple floors with luxury apartments, offer fiber internet, lobby attendant, elevators, and high-income tenants. The flooring will be high-quality hardwood, kitchen cabinets will be made of plywood instead of MDF, you'll find tile or stone instead of vinyl in kitchen and bath. They'll feature natural materials and materials with a longer lifetime.
What are Class B properties?##
These properties are one step below the class A properties. Investors like to call them the value-added properties because they may or may not be well kept. However, they will always have room for improvement. With the help of renovations, they have the potential to be categorized as Class B+ or even Class A properties.
Class B properties are usually located in the middle class or working-class neighborhoods. In such locations, most of the people have an average income with jobs such as government officers or working managers. These are the people who will are likely to become your potential tenant as well. The area is mostly urban and is close to public transportation with easy access to entertainment facilities like restaurants and parks.
Class B property can either go up or go down - it has the potential to be converted into a class A or C property, depending on the neighborhood it is located. If the neighborhood dwellers belong to upper-middle-class income, it might eventually get converted to class A property, and vice versa.
Class B properties fall into the range of 15 to 25 years old. They are referred to as the simple or “plain vanilla” buildings. A class A category property may fall into the class B category if it is constructed in an area where there is frequent and significant new construction; you have to set rental rates accordingly. The building material varies from average to above-average quality. These properties are classified by fairly decent finishing and flooring. As an owner, take into account that the building may need some renovation after a couple of years to look presentable.
Class B properties have a higher percent of cash flow in comparison to the cost of purchase of the property. Class B properties are cheap as compared to Class A because some investors still view Class B properties as risky, which caps the rates. The overall yield of class B properties is higher, and hence they account for good cash flow.
A building located in the suburbs closer to the city center can be an example of Class B property. It might be a single or double story house in a middle-income neighborhood. It will offer all the basic necessities, plus a few extra perks. The floors may be made of laminate, the roofing might last 25 years instead of 50 years.
What are Class C properties?##
These properties are the lowest categorized ones and have the least amount of luxury factor. For the owner, these present maximum risk when it comes to maintenance. These properties are preferred by investors who want to diversify their risk as they work towards achieving long-term financial goals in real estate.
They are located in the least desirable neighborhoods and mostly in farther suburbs. The locality is known for low-income inhabitants and high crime rates. The area is likely to have more tenants than homeowners. Your potential tenants may be struggling with finances, so proper tenant screening is critical.
Class C properties are usually around 20 or more years old. They are likely to be in need of renovation every couple of years to look mildly presentable, as they are mostly in bad condition. They are usually made of low quality cheaper finishings. Kitchen cabinets will be MDF, bathroom floors will have vinyl, and they may have broken walls or non-functional appliances.
Class C properties are considered cash cows by the investors because of the high cash flow despite low rental rates. These properties are usually cheaper than Class A properties. The property is usually located in an area where the majority of people are renters as they can't afford to buy their own houses. Read our tips on how to grow your portfolio with class C properties. The value of the purchase will pay off well, and you can invest in building your portfolio.
An apartment complex or house in the outskirts of suburbs can be an example of a Class C property. It will be located in a low- to middle-income neighborhood and offer the basic necessities only. You'll likely have to update the kitchen and bathroom in the house.
There is no hard and fast demarcation between these classes, and with some upgrades in the property and general improvement in the locality, properties can move from one class to another. It is easy to find rundown new buildings in the city center and well maintained old buildings in the suburbs. Regardless of the property class you choose to invest in, learn the key skills to succeed in real estate.
Buying a house can be daunting. Add to this that some realtors are not forthcoming in educating their clients about the property or even the fact that these classes exist. At HomeKasa, we strive to provide you with the up to date information so that you can make an informed decision on your expensive purchase. HomeKasa offers the best property management software to manage all your properties from one place. You can collect rent, communicate with tenants, manage lease, schedule repair, renew insurance, and more. It's free - get started now.