Real Estate Deal Analysis & Advice

How to Evaluate A-Class, B-Class, and C-Class Properties

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One thing is for certain—everyone has an opinion and everyone has a different perception when it comes to evaluating asset classes. I’m proud to tell you that I’m a blue-collar, working class guy, so my perception of a certain asset class is different than someone else’s perception. I’m not here to tell you that I’m right, and I’m not here to tell that I’m wrong. I’m just happy to share my experience, my opinion, and my perception of the different types of asset classes and how to evaluate them.

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A-Class Properties

So, we've got three asset classes: A, B, and C. Now, an A-class property should have about a 4-6% net cap rate. What I mean by net cap rate is that after you take out all of your costs—like your property management fees, your insurance, taxes, and a calculation for maintenance and vacancies—you should arrive at about a 4-6% net return investment. If you are investing in A-class real estate and you are not getting that return on investment, I would forget about investing in those areas because you're not even keeping up with inflation, and in my opinion, it just doesn't make any sense. Now, these properties tend to be located in areas where properties are newer and have 1,500+ square feet, the school districts are fantastic, amenities are plentiful, and neighborhoods have curb appeal. The homes in these areas are predominantly owner-occupied.

B-Class Properties

The B-class area, in my opinion, should offer a cap rate of around 8-10%—once again, net, after you take all of your costs into consideration. These neighborhoods usually consist of a mix of 50 percent investor-owned properties and 50 percent owner-occupied properties. The areas would also be very well kept, with few distressed homes and fairly low crime rates. I would like to refer to these areas as nothing sexy, nothing flashy, but very fundamental, full of blue collar working people. Here in Ohio, I live in one of these B-class areas. They tend to also be in close proximity to infrastructure, amenities, and good school districts. Ultimately, B-class areas represent a very solid asset class.

C-Class Properties

Last but not least would be the C-class area, which is predominantly investor-owned, with few owner-occupied properties. The crime rates are usually higher, with older homes, worse school districts, and no amenities within close proximity. Now, what a C-class area can get you as an ROI is beyond me. In my opinion, these areas tend to be very volatile. They tend to have 12, 15, or 18% net cap rates—but honestly, I think those are just paper figures. I don't see you achieving those returns in real life. It might happen, but every year would be different. I also don't see any potential for appreciation there. You are pretty much just buying for cash flow—if you manage to get that desired cash flow.

Related: Why the Vast Majority of Investors Should Stay Far, Far Away From D-Class Properties

What Asset Class Should You Invest in?

Backtracking a little bit here, in a B-class area, you might see a little bit of appreciation, but it will predominantly be a solid kind of cash flow investment, providing a steady income. The A-class areas would not provide much cashflow, but potential for appreciation because they are desirable. Homeowners want to live in these properties, and we all know that homeowners base their decisions on emotion. And when you base your decision on emotion, you are buying a house not based on the numbers, but on everything else that makes it look pretty, places it in a good school district, or whatever else. Plus, you tend to spend more money.

So that’s a quick summary guys on the different types of asset classes. I know I have written a ton of blog posts on this before so feel free to check those out. I would also love to get a detailed correspondence going below in the comments section. I want to hear what your perception is of the different types of asset classes. How you evaluate your deals when you’re looking to invest in a particular area?

I want to end by saying I speak to a lot of investors, and one thing that everyone gets very wrong is this—they all talk about the stats and demographics, asset classes, vacancy statistics, employment rates, and capital growth projections. But it never comes down to the asset class or demographics, in my opinion; it always comes down to the people. The team that you are investing with out of state, out of the country, or even in your own backyard will either make or break your investment. I've got a little quote and it goes like this: "If you buy the best house on the best street in the best neighborhood with the best capital growth projections, but your property manager is incompetent or a cheat, you're going to lose money because they are going to steal your rent."

So focus on the people rather than the stats and demographics of the particular area. That’s pretty much it.

What kind of asset class do you prefer? Why?

Comment below. I’d love to hear from you.

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
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    David M. Investor from Torrance, California
    Replied almost 3 years ago
    I think different regions may have different definitions, at least for multi-family (maybe you were just talking SFH). Personally, I’m used to seeing properties classified as A, B, C, and D here in Los Angeles and the southwest in general. We have similar definitions at the REIT where I work. My C is more of a blue collar neighborhood (like your B), while D is a war-zone. A-class properties tend to be new development or massively remodeled with high-end finishes, and (if the building is big enough) significant amenities like office space, workout room, laundry service, social spaces, e-vehicle charging, etc. B is usually upper-middle class, with expectations for good finishes. In my experience, very few individuals can play in the A-class multi-family space out here. B-class isn’t seeing much more than a 2-3% cap rate, at least near the beaches where I am. Appreciation is the play for A and B, and it’ll happen… at least until the Big One hits.
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 3 years ago
    Thanks David, I was more referring to SFH but use the same criteria for multifamily. B class cap rates in the Midwest tend to be very solid cashflow investments without too much upside for appreciation. Much success
    Katie
    Replied almost 3 years ago
    My market is about 30% owner-occupied and 70% renters, but the crime rate is low, the schools are considered good,and the location is considered excellent. The condition of rental tends to be pretty bad. the agents around here say that no one invests for cash flow, only for appreciation. However, not too long ago buying for appreciation here killed a lot of investors. Investors are staring to pay too much again. Average cap rate is about 4%.
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 3 years ago
    Thanks Katie, 4% is very low I wouldn’t get out of bed for anything less than 15% net lol Much success
    Andrew Ziebro Investor from Cleveland, Ohio
    Replied almost 2 years ago
    I think you’re missing a tier. A, B, C and D. In Cleveland, east side for example, A would be Shaker Heights, Beachwood, etc. B is Euclid, Bedford, etc. C is North Collinwood, Maple Heights, etc. and D is the inner city, the ghetto. This makes it easier to qualify.
    Greg Parker Contractor from Montgomery, AL
    Replied almost 2 years ago
    I agree with Andrew. We have some serious D— areas here in Montgomery. Where can I get some info on the ICO that will decentralize the real estate industry? Sounds interesting.
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 2 years ago
    Thanks Greg, We decided to pivot on the ICO and look into other options. There are too many CEO’s going to jail that raised money through an ICO. I don’t want to be one of them lol STO’s are big now and there is nothing wrong with traditional VC either. Have a great day.
    Greg Parker Contractor from Montgomery, AL
    Replied almost 2 years ago
    I don’t know what all of those acronyms mean, but I am going to look them up now. thanks
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 2 years ago
    My apologies ICO = initial Coin Offering STO = Security Token Offering VC = Venture Capital Thanks