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What are the A, B, C, and D Real Estate Asset Classes?

If you’re a real estate investor, you know how crucial it is to carefully evaluate your investments and diversify your portfolio. Before you settle on one investment property, consider what type of property it is. In addition, investors need to pay attention to real estate classes since each class represents a different level of risk and return. If you’re unfamiliar with the various real estate asset classes and what they mean for your investment, just keep reading. 

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What Does “Class” Mean In Real Estate?

You may be confused when you first hear the word “class” paired with real estate. How does real estate fit into classes? It’s not as complicated as you may think. Investors use property class types to consider how each asset fits into their investment strategy. For instance, some investments have greater returns, while others have significant risk factors. 

Each property classification has different risks and returns since the properties are graded according to a number of characteristics. A, B, C, and D grades are given to properties after considering their characteristics. For example, some of the main factors include: 

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  • Age of the property
  • Location of the property
  • Tenant income levels
  • Growth prospects
  • Appreciation
  • Amenities
  • Rental income

Next, let’s go over the different real estate asset classes and what they mean for investors.  

What Are the Real Estate Asset Classes?

When you place real estate into classes, you can better predict how well the property will do and what type of tenants might be interested in living there. Here are the different real estate asset classes and the main characteristics of each. 

  1. A
  2. B
  3. C
  4. D

Class A Real Estate

These properties are typically the highest quality buildings in the area. They are commonly newer, higher-end homes with top amenities, parks, and schools in the area. Class A properties commonly have high-income earning tenants and low vacancy rates. As a result, these properties also have high rental rates with professional management to maintain them well. 

Real estate in Class A neighborhoods is typically more expensive, so rentals don’t provide great cash flow. However, investors will buy properties in these areas if they predict significant appreciation rates. That said, that strategy is quite risky since appreciation isn’t guaranteed. 

Class B Real Estate

B-Class properties are a step down from A-Class properties, as you might imagine. They are generally older, have lower-income tenants, and may not be professionally managed. In Class B neighborhoods, you’ll find working-class people, like teachers, nurses, and firefighters. Typically, rentals in Class B areas experience the lowest vacancy rates. 

These properties are more affordable for investors, have higher rental rates, and attract longer-term tenants. Furthermore, these properties offer excellent amenities, including good schools and jobs. Like Class A properties, the crime rate is low in Class B areas. 

Class C Real Estate

Generally, the properties in Class C areas are older and in less desirable locations. Many Class C properties need work and more maintenance than Class A and B properties. Rents in these areas are low to moderate, attracting lower-income tenants. However, investors can generate decent monthly cash flow in these areas since properties are generally priced low compared to rental rates. 

Access to good schools, jobs, and amenities is not guaranteed in Class C areas. However, you’ll typically see more grocery stores, thrift shops, and mid-ranked schools in these areas. The crime rate is generally higher in Class C areas but typically involves non-violent crimes. 

Class D Real Estate

Class D is commonly referred to as a “war zone.” As you can imagine, properties in Class D areas are old, deteriorated, and often in disrepair. Although properties are cheap, they require tons of maintenance, renovations, and other expenses that make them not worth the investment. 

In Class D areas, there is almost no access to schools, jobs, or other desirable amenities. Additionally, these areas attract mostly low-income renters and typically have higher crime rates, often violent. As such, most investors stray away from Class D properties.

Which Real Estate Class Is Best for Investors?

best-class-for-investors

Each real estate asset class has its pros and cons. Although Class D properties aren’t best for investors, Class A, B, and C properties are all solid options, depending on your investment goals. Here’s a little investor’s rule of thumb: 

  • A = Appreciation
  • B = Both appreciation and cash-flow opportunities
  • C = Cash-flow

Buying Class B properties is an excellent option for investors who can afford it. Since it provides strong cash-flow and appreciation rates, there are great opportunities to expand your rental business. Additionally, properties in these areas often require little maintenance and attract long-term tenants. 

Why Are These Classes Important When Evaluating an Investment?

It’s essential to evaluate each investment opportunity. After all, you want to weigh the risks and rewards of each investment. For example, class A properties offer more security, less maintenance, and more tenants willing to pay higher rental rates for high-end rentals. However, it’s important to note that Class A properties can be sensitive in times of a recession if high-income earners face high unemployment rates. 

Class B properties are generally safe for investors who want low vacancy rates and excellent returns. In addition, since these properties are usually less expensive than Class A rentals, more people are willing to live there long-term since these areas still offer great amenities. 

Class B and C properties can be bought and sold at higher CAP rates than Class A. Since investors risk investing in an older property in a lower-income neighborhood, strong cash flow, and capital appreciation become a reward. 

It’s important to carefully evaluate your investment opportunities to see what’s right for you. For example, consider investing in B- or C-class properties if you’re looking to achieve strong cash flow. However, if you’re looking to invest in high-end neighborhoods and work with high-end tenants, you’ll want to look at Class A properties. That said, it’s essential to diversify your rental portfolio. Here’s why. 

diverse-rental-portfolio

Importance of a Diversified Real Estate Portfolio

Diversifying your rental portfolio is a huge part of running a successful rental business. After all, you don’t want to put all your time, money, and effort into one investment type. As we’ve seen over the past couple of years, you never know what will happen with the real estate market. So, sticking with one type of property to invest in may not be the smartest choice. 

Instead, consider investing in Class A, B, and C properties to diversify your rental portfolio. Depending on your investment goals, each asset class can add value to your portfolio. For instance, an investment in each category could be beneficial if you’re looking for a mix of capital preservation and capital appreciation. Ultimately, you want to consider your goals for your investments and weigh the risks and rewards for each possibility. If you’re looking for ways to diversify your rental portfolio, reach out to your trusted property managers in Northern Virginia to help you find your next investment opportunity. 

What’s Next Once You’ve Found a Solid Investment Property?

Once you’ve determined your investment goals and which real estate asset class you’re most interested in, you can develop a management plan. Then, whether you own one property or 100, you don’t have to stress about property management alone. Instead, reach out to a trusted property management team, like Bay Property Management Group. 

BMG offers comprehensive rental management services, including tenant screening, maintenance, rent collection, eviction services, and more. So don’t stress about the day-to-day management of one or more rentals. Instead, contact BMG today if you need services in Baltimore, Philadelphia, Northern Virginia, or Washington DC.