Hey guys, what's going on?
It's Seth here from retipster.com.
And in this video, we're going to talk about the difference between
Class A, Class B, Class C, and Class D properties.
I remember years ago, when I was just getting started
in my real estate investing business,
when I was at a local networking event
and I was standing in a circle with a few other people,
and I heard one person say,
you just got a great deal on a class B property
And then the lady standing right next to me was saying
she only invests in C class neighborhoods
and I'm hearing all this and I just thought to myself,
"Huh?"
I mean, just by those names, I could make a pretty good guess
at what they were talking about,
but I didn't want to actually ask the question
and sound as clueless as I was.
So if you are somebody who is confused
about what a class A a or B or C or D property is,
I'm going to lay it all out for you right here in this video.
So when we're traveling to find one of these property types in relation to other property types,
I like to think of it sort of like a ladder.
At the very top rung you have class A
which represents the most expensive, most desirable,
beautiful homes and the best locations.
And because these are the best properties| that will sell and rent at a premium
they also tend to have the least amount of maintenance and issues
because chances are they've been taken care of pretty well in the past.
Class A properties are built in the most desirable parts of town.
And in a lot of cases, they've been built-in the past 10 years,
but sometimes you'll find older class A properties that are just really well-maintained.
Class A properties typically sell and rent to high-income renters and buyers
and experience positive property appreciation for well into the foreseeable future.
So why exactly would a real estate investor buy a class A property?
Well, there are a few reasons.
Class A properties earn the most in gross rents
because they can charge the highest amount of rent.
Ther are typically going to be less deferred maintenance than other types of properties.
And because these are renting out to higher-income earners,
there's generally a lower likelihood of late and non-payment,
and also the people who rent these properties tend to stay there for a longer period of time.
So there's lower tenant turnover, but on the flip side class A properties have their issues too,
as do any property type.
Obviously, they're more expensive. So there's a higher financial barrier to entry.
They may also have lower returns because with class A properties,
rents are already at a premium and the deferred maintenance is already pretty low,
which means it can be a little bit harder to increase the value of the property,
which ultimately leads to it being a less advantageous strategy for a lot of investors.
And when the maintenance costs do come up and they always do,
they tend to be a lot more expensive
because class A properties have a higher square footage,
more expensive amenities.
And also, when the vacancies do happen, there's a higher likelihood
the property is going to sit vacant for a longer period of time because in most markets,
there's just a smaller demand for the super extravagant luxury
that class A properties have to offer.
Now, as we move on down to the next rung of class B properties,
so class B properties are upper middle-class homes that aren't perfect in every regard
and don't have every luxury, no demand
but they're still pretty nice and a lot of people aspire to live in these types of properties
because they still offer a pretty high standard of living
without being so extravagant that they're completely out of the average person's reach.
Class B neighborhoods or areas are where the homes are a little bit older
in the 10- to 30 year-old range
Residents are typically in that middle to upper-middle-income bracket
and class B properties appreciate fairly well,
but they may not appreciate as well as class A properties do
The deferred maintenance in a Class B property
usually isn't anything atrocious, but it's usually going to be
something that needs tending to right after you buy one of these properties.
Now, some of the pros of buying class B properties is that
they're just a lot less expensive than class A properties.
They typically rent out to middle income families,
which provides a pretty steady tenant base where turnover is a bit lower
and these residents will take pretty good care of their homes
because there's just a higher expectation of the tenants.
Class B properties will also hold their value for a long period of time.
Now, some of the cons of investing in a class B property is that
this property type isn't the most deal for a brand new investor
who has limited cash and liquidity to invest
and class B properties may have less opportunity to improve
and increase the value of the property than say a class C property would,
but would most likely have even less headaches and issues as well.
So there's kind of two sides of the same coin there.
All right. Now, if we take another step down the ladder, we have class C properties.
For a lot of investors, this is their go-to property type
because they don't cost a fortune and they're within reach,
especially for beginners and the rent sell pretty quickly in most markets.
Most cities around the country have the largest percentage of their housing
dedicated to class C neighborhoods because
it's something that the highest percentage of people have access to just financially speaking.
And while there may be some deferred maintenance on class C properties,
they are usually not in terrible teardowns shape,
and there's enough there that can be salvaged and improved.
And sometimes you can make a property a lot more valuable than when you bought it.
So what are the basic characteristics of class C properties?
Class C properties act typically in older mature areas.
Most of the time, these properties are 30 years old or older,
and they typically rent up to the lower to middle income demographic.
The future value of class C properties may or may not increase a lot over time.
And there can be some costly improvements required
if there's a lot of deferred maintenance
when you buy a property like this.
Now some of the pros and advantages of class C properties is that
first of all they have a lower appraised value.
And the reason that's an advantage is because it is a lower barrier to entry
and a lot more investors can have access to it,
even if they have less liquidity.
And there are a lot of class C properties out there that
can be purchased at a discount
And some class C properties may require some minor cosmetic repairs
in order to make them market-ready, but it's usually not like a complete overhaul
and class C properties really are the most in-demand type of housing in a lot of markets.
And unless the economy as a whole falling apart and people are leaving the area in droves,
then in most cases, when you do have a vacancy,
it's not that hard to find new tenants for a class C property.
Because again, this is the type of property that the most people out there are looking for.
Classy properties typically have the highest upside potential with the least amount of relative risk
and C class properties can be a pretty good strategy
for diversifying an investor's portfolio too.
Now on the flip side, some of the cons of class C properties is that
because of the potentially wavering income level,
the tenant base for class C properties may be more short-term than long-term.
And like I mentioned, a lot of class C properties may require more repairs
because of the higher deferred maintenance.
So moving on down to the very bottom rung of the ladder, we have class D properties.
And these are the polar opposite of class A properties
because they're the least expensive in the worst locations.
And they come with the most amount of maintenance and issues.
Some people even refer to these neighborhoods as war zone neighborhoods,
because as the name implies,
there are a lot of problems going out with these properties
and they may actually look like they're in the middle of a war zone.
So what are some of the common characters of class D properties?
Well, class D properties have been lived in for a lot of decades.
There's usually a lot of crime reported in these areas.
And usually, these properties are going to need a lot of help.
Now, many residences in these areas are going to be very old homes,
decades, sometimes even centuries old.
And the tenant base who rents class D properties is going to have the lowest income level.
And in normal economic cycles, there usually won't be much appreciation from these properties
unless significant gentrification occurs in the surrounding neighborhood.
And gentrification is just a fancy word for saying that
everybody else in the neighborhood is improving their properties at the same time.
So it's not just a single property, yours, that's getting improved.
Everybody else is on the same bandwagon with you.
So why exactly do investors buy class D properties in the first place
if they have so many problems?
Well, first of all, class D properties can often be purchased at a huge discount
and provide a note where the amount of equity without a huge investment.
A lot of investors intentionally seek out class D properties as their first investment,
simply because of the lower acquisition cost.
And their prospective buyer or renter| who seeks out a class D property
typically won't expect the highest standard of living
And while repairs will almost certainly be necessary
the total cost of these repairs may not be as expensive
or as extensive as some other property classes
For example, at rehabbing, an entire class D property may actually be less expensive
than rehabbing only the kitchen in some class A properties.
Now, some of the obvious downsides about investing in class D properties
is that first of all, there's a higher likelihood of having inconsistent income
with the more frequent tenant turnover.
And crime levels can also prevent some people
from wanting to live in these properties, neighborhoods
And class D properties often require significantly more repairs
just because of the deferred maintenance and older age of this property type.
So now that we've covered the basics of these four property types,
it's important to understand that
there's a lot of different physical and financial characteristics that come into play
when we're trying to classify a property like this.
One key to remember is that everything is relative.
A property should be evaluated in the context of the other properties in the same general vicinity.
A class B property in one market should only be compared
to other class B properties in the same area.
It wouldn't be fair to compare the class B properties of New York City
with the class B properties of, I don't know, Grand Rapids, Michigan.
It's just not a fair apples to apples comparison.
So I hope you found this video helpful.
And if you did, you'll probably want to check out this next one,
all about something called gentrification,
which has a lot to do with taking certain class properties
and actually changing it to a different class level over time.
I think you'll find it pretty interesting.
Be sure to check it out.