How to Identify A, B & C-Class Areas (& How to Know Which You Should Invest in!)
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Engelo Rumora, your favorite Australian, here again. 🙂
My sincere apologies for not submitting a blog for you guys last week. It was an absolutely hectic schedule, and I was very caught up in a substantial amount of small day to day tasks. Let me ask you this: What small things are you doing every single day to get you a step closer to where you need to be? My belief is that doing the small things consistently will eventually allow the big things to just fall into place.
You have to trust me when I say this. There is no explanation to how it happens. It just does. Trust yourself and have faith in the process of what you’re doing. Find your purpose in life, and you will never again hit snooze on your alarm. Accept that every experience is a good experience. Good or bad. It just comes down to how you perceive it to be. Learn from the experience, even if it’s a negative one, and keep moving forward.
One of my favorite quotes is:
“If you can’t fly then run, if you can’t run then walk, if you can’t walk then crawl, but whatever you do you have to keep moving forward.” – Martin Luther King, Jr.
Come on, let’s do this guys! Pump the job Sunday, Monday, EVERYDAY.
Asset Classes in Real Estate
Today, I am revisiting a blog I wrote a while back about my perception of the different types of asset classes. This is a topic that regularly gets argued about on the BiggerPockets Forums, as there are many different opinions on how these asset classes should be categorized. My opinion is based on me considering myself to be a blue collar working class guy who doesn’t come from a rich family and wasn’t raised with a silver spoon in his mouth. With that being said, my perception of a Class B area might be someone else’s perception of a Class Z area, so I’m not here to argue if I’m right or wrong, but just to share my experiences from investing over the years in the many different markets across the US.
Real estate experts and investors share different perceptions when it comes to ranking property and area classes.
Most will rank them on a general scale from Class A to Class C, with others going as far as from Class A to Class F, and possibly including lower subcategories of each class, such as A-, B-, and C-, etc. Different states and cities can also offer variations on how the “classes” are ranked. People’s socioeconomic status can also dictate how they categorize the different asset classes.
I prefer to stick with the KISS (Keep It Simple Stupid) approach and will only rank a particular area/property as either A, B, or C.
Sometimes you might see me throw in the B- or A-, but those occasions tend to be rare.
Please see below how I distinguish the different area and property classes in Toledo, Ohio, a market I have been heavily active in for over 2 years now.
How I Rank Real Estate Asset Classes
These properties are top of the line.
They are more newly built homes, with the majority of them situated on large river front lots or acreage. The properties are very well-maintained and possess a “WOW” factor. When driving past, you can’t help but wish you lived in one of them.
Class A properties in Toledo are not actually located directly in Toledo, but more so in the suburbs, which are within a 20 minute drive away. These homes are situated in sought after school districts, are within a short commute of medical/shopping facilities and have ease of access to all major highways.
Owner-occupiers reside in these properties, with literally none of them being tenanted. The folks living in these homes are mostly white collar with jobs in finance or the medical industry. The cash flow is low, with a higher potential for growth due to a demand from homeowners whose decisions tend to be emotion based when purchasing.
I believe that Class B properties should be the bread and butter for every hands-off investor.
They can range to be anywhere from 30 to 60 years old and are mostly occupied by blue-collar working class people. While driving around you might find the odd vacant home with an overgrown yard, but in general the area is very well kept.
There is also a decent amount of infrastructure around to support jobs. For example, in Toledo, it would be steel and glass factories, the many hospitals, GM Powertrain and Jeep. Toledo University is another one of the big employers located in a Class B area.
The school zones tend be slightly less prestigious, but the close proximity to all amenities makes the area very similar to Class A. The residents equal out to 50% owner occupied, with the other 50% investor owned and tenanted.
Due to the cash flow, growth potential and exit strategy offered, Class B properties should be the foundation for every investor looking at building a substantial cash flowing property portfolio.
These properties fall into the highest risk category, but can also be very lucrative investments with a right strategy and a few “differently wired” characters to make it work.
WARNING: Unless you have an armored vehicle, I don’t suggest you drive in this area after 5 p.m.
All joking aside, most of the Class C homes are much older than the higher ranked areas, with some dating back as far as the 1880s. Many will show visible deterioration, and a higher portion of them are boarded up.
Higher than usual crime will also be present within the area.
These properties are predominantly investor owned and are occupied by tenants in lower socio-economic groups, usually dependent on government benefits. They offer by far the highest cashflow out of all the classes, but require very hands on and full time monitoring/management.
The property manager needs to specialize in this particular area in order for the numbers to work. This class should only be considered once a solid portfolio has already been built with Class B properties that are performing and generating a decent monthly cash flow.
In my opinion a great portfolio needs to be built on strong foundations by acquiring B Class properties with the lowest amount of debt possible.
Once a strong foundation has been established and a decent amount of cash flow is generated each month, you can then consider taking on more risk. By using leverage and diversifying into the Class C area, you will further increase monthly cash flow, which will enable you to grow your portfolio at a quicker rate.
Disclaimer: There are more horror stories than fairytales in this asset class, and it’s known to be a “hit or miss” type area. Make sure you conduct a ton of due diligence before investing. Don’t forget, it’s the people on the ground who will make the numbers work or not.
One of the most vital components, no matter what class you decide to invest in, is to have the right property management in place looking after your best interests.
Smart investors base their decisions on the numbers in the deal and focus on building a team that can make those numbers work. Capital growth is a prediction and if it occurs should only be considered as a bonus. Hoping a property will go up in value is not a sound strategy.
As far as Class A properties go, they should just stay as the “WOW” factor, and instead of telling yourself, “I wish I lived there,” once you have built a grand portfolio, you can!
What do you think? Do you agree with my assessment of different asset classes when it comes to real estate?
Let me know your opinions in the comments section below!