When it comes to real estate, there’s a set of terminologies used by real estate agents, moguls, and investors to denote a value to a specific property. You might have heard these terms before if you’ve ever had to deal with real estate agents, investors, brokers, or lenders. Some properties are marked Class A, others are marked Class B, whereas some get Class C and Class D ranking.
Where does this come from, and what are the differences between these classes?
These terms have been created by investors, lenders, and brokers to make it easier for them to communicate the value and quality of a property. That way, with all of the nitty-gritty aside, one can talk about the class of a property, and others will get the idea.
It is a critical classification because each class represents a different level of risk and return. When investing in something, investors want to balance their return objectives with the amount of risk they’re able to run.
With that said, each property classification comes from a grading that pertains to a place’s geographical and physical characteristics. For example, the property’s age, its location, the income levels of the tenants, growth prospects, possible appreciation, the available amenities, and the rental income.
Class A Property
Class A properties are newer and better-maintained buildings and homes on the most expensive end of the property price spectrum within a local market. Class A properties are for tenants and buyers who are all about that luxury lifestyle. Since they are luxurious, these properties have a high chance for future appreciation. These properties possess the best amenities and have unique attractions that a market can offer. Furthermore, these properties are professionally managed. They have little to no maintenance issues.
When investors think about investing in a Class A property, they’re thinking about financial security. There’s little in the way of risk and more in the way of reward. Note, however, that properties in Class A tend to suffer when it comes to recession or when high earners suffer from increased unemployment.
Characteristics and Guidelines
Even though there’s not any official and set way to determine the class of a property, there are some general guidelines that experienced investors can follow to ascertain the property’s value.
- Location: The location of these properties is usually in a desirable part of town where there’s minor crime, and all the amenities and local attractions and facilities are close by.
- Age: Most Class A properties are new. By new, it means that they were built within the last ten years.
- Income Level: People who reside in these properties or want to buy them are usually high-income earners. Think lawyers, successful doctors, local celebrities, tech people, and so on.
- Appreciation: These properties tend to increase their values into the foreseeable future.
- Condition: Mostly, these properties are well-maintained and have very few physical issues.
Rule of thumb, think of the nicest houses in the nicest neighborhoods, and you have Class A properties.
Advantages of Investing in Class A Properties
The first thing you have to understand is that high-income tenants are more likely to become permanent tenants, staying longer at the property than low-income tenants. This means more consistent cash flow for the landlord.
As mentioned before, Class A properties have a greater potential for appreciation. A Class A neighborhood will tend to stay a Class A neighborhood for the foreseeable future.
These properties are almost always well-maintained, well-managed, and do not require extensive overhaul or tons of repair work.
These properties attract the highest paying clients, meaning the highest potential for earning from them.