When you are investing in real estate, one of the first questions you need to ask is— What is property class? It is important to differentiate between quality of properties and know what to expect.
These classes are briefly explained by Grant Cardone in his book, How to Create Wealth Investing in Real Estate, and will be broken down in-detail in this article.
If you want to figure out the pros and cons of each property class, you read further.
The 4 Different Property Classifications
Given simple names, these property classes should be easy to remember:
- D Class
- C Class
- B Class
- A Class
D Class Properties
It would be safe to assume that A is best, meaning D is worst, right?
That assumption would be correct, because D Class is typically avoided by real estate investors unless the investor is:
- Looking for a great price
- Looking for a Fix & Flip
- Doesn’t mind excessive trouble
D Class properties are typically old properties, requiring a lot of hands-on investing, repair, maintenance, and managing. These properties are not recommended for new inevstors.
D Class properties arguably have more cons than pros. Let’s roll through some of them:
Highly Management Intensive
There is a phrase often associated with rental properties— tenants, termites, and toilets.
This phrase was based off of the troubles that an investor faces with complaining tenants and problems with the property. This phrase holds true above all others in D Class properties.
There are typically things breaking more often, tenants typically don’t take as much care of the place as they should, and you will generally be responding more often to a D Class property than anything else.
Hard to Sell
You bought it for a great price, and you’d better sell it for a great price.
D Class properties are rarely ever sought after, and most investors are lured in with the extremely low price before realizing that they got more than they bargained for.
Higher Crime Rates
Typically, D Class properties are D Class for a reason. Normally these properties are in the worst neighborhoods of each city, where crime is higher than most neighborhoods.
This contributes to the “hard to sell” and the “highly management intensive” factor.
Typically, these areas come with higher unemployment rates, meaning that you monthly rent check is at risk.
C Class Properties
C Class properties are one step above from D Class.
C Class properties are typically for the investor who is looking for:
- Cheap Deals
- High Cash Flow
C Class properties are typically over twenty years old, and in less-than desirable locations. However, they can be great investments for certain investors, with certain goals. Let’s go over some pros and cons.
Pro: Cheap Deals
You can get cheap deals with c-class properties, and all it takes to bring the value up is some TLC.
However, you really need to watch the surrounding area in these neighborhoods, because sometimes the areas around will keep the value down.
Pro: Cash Flow
The primary reason that investors may target C Class properties is because they are typically high in cash flow. This means that your monthly income to buying price will be larger than if you would compare it to a B or A Class property.
The extra cash flow gives you more power to buy more properties.
Con: Needs Renovating
Most C Class properties are outdated, and need renovations.
The extent of these renovations depends on the property, but expect a good rehab job to be needed with these C Class properties.
C Class properties may be known for higher cash flow, but there is little-to-no appreciation involved with these properties. There is normally little growth in the area of the C-Class properties, meaning that the value of the properties stay relatively the same.
While much better than D Class, a lot of C Class tenants work minimum wage, or low wage jobs and will be very tight on money. This means that in the chance of an economic downturn, they may not be able to pay the rent. This means that you will need to build up some cash reserves to cover the mortgage yourself if you need to.
Also, since these tenants are being paid low wages, there is typically a lot of moving and vacancy associated with C Class properties.
B Class Properties
B Class properties are one step below A class, and this is the investment that starts catching peoples attention.
B Class properties are typically popular for investors who are looking for:
- Good Properties
- Good Tenants
- Good Deals
- May Not Be Able to Afford A Class
B Class properties are typically over 10 years old, and are still in good condition. They may need a light rehab, unless the property wasn’t taken care of and needs a full renovation.
B Class properties are typically rented by middle-class tenants, or blue collar workers living paycheck-to-paycheck. Let’s discuss some pros and cons:
Pro: Good Properties
These properties are typically in good shape, and require minimal fixing, unless you want to increase the value in the property.
Pro: Good Locations
The locations of B Class properties are typically far better than we discussed before, generally being in normal, middle-class neighborhoods appealing to families that desire safety and security.
This makes B Class a popular choice for good families that are also focused on saving money.
Pro: Good Tenants
With good locations comes good tenants. Obviously, do your own due diligence and make sure you get a good tenant, but most tenants you come across will be good.
These tenants will typically pay their rent on time, not complain about everything, and be reasonable when there is something to complain about.
Pro: Cash Flow & Appreciation
B Class properties combine a good amount of cash flow and appreciation, improving equity and monthly income.
While these properties may not have the income-to-buying price percentage that C Class properties do, Class B makes up for it with appreciation and consistency.
Con: Worse Deals
You can still find great deals with Class B properties, but not as many as with Class D and C. Perhaps it is for good reason…
A Class Properties
A Class properties are one step below… nothing.
A Class properties are the cream of the crop, and are desired by real estate moguls like Ben Mallah, Grant Cardone, and Donald Trump.
Investors interested in A Class properties are typically looking for:
- High-Quality Tenants
A Class properties cost a lot more than any other property, but generally yield many benefits to offset the cost.
Most real estate investors aspire to engage in A Class properties, where there is more luxury, more money, and seemingly more everything! Let’s discuss the pros and cons:
It is far easier to scale in A Class properties than other properties, because of the amount of units that are in A Class multifamily properties. Sell a 120 unit apartment, grab a 240 unit apartment.
Pro: High-Quality Tenants
Most tenants in A Class properties are in great financial situations, and either 1. don’t want the hassle of being a homeowner. Or 2. Will only be in town for a few months to a year.
These tenants should be able to pay their rent every month with no problem, and it is not often that a tenant can’t.
These properties are highly sought after, and will only be sought after more in the future.
It is bad for the buyer because it is competitive, but is it really bad? Competition means you have a winner. If you get the property, the property will remain competitive as long as you can take care of it, and let it appreciate over time.
A Class properties have the greatest combination of cash flow and appreciation, making it ideal for investors that can afford it. This leads us to our con:
A Class properties are by far the most expensive. This is because they are the nicest, newest, and overall the best for those who can afford it.
What is Property Class? The 4 Different Property Classifications
Different people get different results from each property class. Investors like Ben Mallah started out fixing D Class properties, where investors like Donald Trump started out in A Class properties.
Grant Cardone’s book, How to Create Wealth Investing in Real Estate, discusses a multitude of different ways to create wealth in real estate, and is where the foundation of this article came from.
Grant Cardone began with the lesser property classes, and moved up to buy and sell A Class properties, such as luxury apartments.