Investors, real estate agents, and brokers use a classification system for different properties based on several characteristics. These are Class A, Class B, Class C, and Class D properties. While there is no single way to ascertain the value of a property, the general guidelines allow investors to establish a reasonable estimate to secure their investment and invest wisely based on the ratio of risk and reward.
Class A properties, for example, are considered to be the most expensive ones because of their location, their features, and the neighborhood they are in. Other factors that go into deciding the class of a property are:
- Its age.
- The income level of the tenants.
- The amount of crime in the neighborhood.
Class D Properties
Class D properties are mostly older homes located in neighborhoods with a high rate of crime and violence. This alone is not enough to earn the title of Class D properties. Other benchmarks include the need for a significant number of repairs and a lot of code violations. We’re talking about real fixer-uppers located in locations quite distant from basic amenities like shopping areas.
As with other classifications, Class D properties also rely upon some guidelines. These include the location, age, income level of residents, the appreciation, and property conditions.
Sometimes, these neighborhoods are known as “war zone” neighborhoods. Class D neighborhoods have the least-expensive homes in the market. You’ll be more than likely to find abandoned and dilapidated houses in these neighborhoods. The stigma of crime in the vicinity negatively affects the price of these properties. They also require a ton of repairs.
With all of that said, it paints quite the bleak picture and makes investors wary about investing in such properties. However, there’s a silver lining when investing in these properties.
You can invest in these properties at a very high discount, and these properties provide a considerable amount of equity.
Many investors search for these investments because of the low acquisition cost.
Gentrification is also a very likely possibility, which means that these properties will appreciate considerably in the scenario that the neighborhood is gentrified.
The people looking for Class D properties do not expect a very high standard of living, thereby saving the investor a lot of money in terms of repairs and renovations. The landlord will be required to make repairs, but they won’t have to be very extensive as other property classes.
There are some considerable disadvantages in investing in Class D properties.
There is a higher rate of tenant turnover because of the inconsistent and low incomes of the tenants.
There’s a lot of crime in the area that would prevent people from wanting to live there.
Class D properties often require a lot of general repairs because of their older age and deferred maintenance.
That’s a good question. Why would people think about investing in Class D properties, to begin with? If you’re concerned with big-picture thinking, this might be your cup of tea. Class D investors sometimes acquire multiple properties in the same neighborhood to gradually gentrify the area as a whole. When that happens, the property prices soar in the long run and result in massive ROIs for the investors.
Moreover, suppose you are starting in the investing business and do not have much money to invest in more expensive properties. In that case, you can get started by investing in Class D properties to get the game’s feel and establish a broader portfolio that will help you in the long run.