Real Estate Investing Basics

Understanding Real Estate Property Class: How to Know Where to Invest

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aerial view of houses and culdesacs and tree-lined streets

As you begin investing in real estate, you'll likely hear people talk about a property being in an A, B, or C location. Just like in school, neighborhoods receive a grade—though the classification is a bit more subjective. There is no government organization, board, or company that outright defines a property management class.

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Property classes are, honestly, more of an unwritten rule accepted by most investors, and the lines are not incredibly clear. You might think a location is an A location (simply put, "the best"), while another investor might think it's a B location—or second best. But for the most part, investors do agree on the class distinctions. Different states and cities may offer variations on how the classifications are ranked.

With each class, there are different risks and rewards. You'll need to do your due diligence to find out which class is the right investment for you.

Learn More: How to Evaluate A-Class, B-Class, and C-Class Properties

The Differing Grading Scales

Some investors grade locations on an A-to-C scale, whereas others grade on A-to-F scale. In other words, you might say a location is a “C” location—or you think it’s the worst—but someone who grades on an A–F scale might think “C” means middle of the road. For the sake of clarity, we’ll use an A to C scale.

In addition to the location receiving a grade, the property itself can be classified as an A, B, or C property. So you might hear someone say, “I have an A property in a B area.” To add more specificity to the classification system, some even add a plus or minus to those grades. You might hear, “The property is a B-minus house in a B-plus area.” For now, we’ll omit the plus and minus designations, but feel free to use them if you want to add specificity when you start investing.

Property Class A

A class A location is an area with new buildings, hot restaurants, great schools… and expensive real estate. Tenants earn high incomes and properties have are rarely vacant. This is truly the best location you can find, and the highest-quality tenants want to rent here.

A class A building is generally newer—probably less than 10 years old—and thus has fewer maintenance issues. The building has modern amenities, such as granite countertops and hardwood floors. Properties will be well-located, such as along the waterfront, downtown, or in a suburb, depending on your area.

Class A properties generally command the highest rent but may provide a lower amount of cash flow because of the high-demand for an “easy investment.” That means purchase prices will be higher—and cash flow is lower.

Property Class B

A class B location might be slightly older than its class A cousin, but still has decent restaurants, shopping, and schools. Typically, these areas are 50 percent owner-occupied, with the other 50 percent investor-owned and tenanted. This might be your middle class area, where tenants have a slightly lower income than those in Class A properties.

A class B building is probably 15 to 30 years old. These homes lack the shine of a class A property. Rental income is lower, and maintenance costs are higher due to the age of the home.

However, you can add value here. These properties easily upgrade to a B-plus or even A property with renovations and improvements. Due to the cash flow, growth potential, and exit strategy offered, class B properties create a solid foundation for any investor seeking to build a substantial cash-flowing property portfolio.

Related: 13 Proactive Ways to Increase Rent & Add Value to Your Rental Property

Property Class C

Class C locations typically have tenants with lower incomes than in class B areas, and homes are old—30 years or more, without any historical valuation. This area is less desirable, and many properties show visible deterioration. Some may even be boarded up. The neighborhood is likely far away from shopping, restaurants, and public transit.

A class C building, too, is likely older than 30 years and looks the part. They need frequent repairs, so plan for ongoing maintenance. Systems, like plumbing and electrical, may be outdated and require ongoing attention. Properties will typically rent for less—but will be much more affordable.

These properties are predominantly investor-owned and tenant-occupied. While they offer the highest cash flow out of all the classes, they require hands-on, full-time monitoring and management.

Look for a property manager who specializes in this particular area.

Related: What Does a Property Manager Do?

Which Class Should I Choose?

Many great portfolios rest on strong, B-class foundations acquired with the lowest amount of debt possible.

After you've built a strong foundation that generates a decent amount of cash flow each month, consider taking on more risk. Use leverage to diversify into class C areas, which further increase monthly cash flow and enable you to grow your portfolio at a quicker rate.

Disclaimer: There are horror stories and fairytales in this hit-or-miss asset class. Conduct a ton of due diligence before investing, and make sure to seek out the best property management.

(What about class A properties? Skip them. Instead of telling yourself, “I wish I lived there,” move there once you’ve built a grand portfolio!)

As mentioned previously, the class distinctions are not very rigid or defined, but the classifications outlined here should give you a general indication of how investors view properties and neighborhoods. Research your market to find out what strategy works best for you.

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Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Curt Smith Rental Property Investor from Clarkston, GA
    Replied almost 5 years ago
    Hi Brandon, My view and experience is to rank a rental prospect by Great School number. Re calibrating your A-D ranking into a Great school number: A = 9-10 Great school ranking for the high school B = 7-8 C = 4-6 D = 1-3 We intentionally bought in the B range, the cheapest neighborhood in a B class high school. This is MUCH easier to quickly rank a prospect house. Your A-D is too subjective and you didn’t give a “rubric” a measurement system to rank A-D. I just did via Great schools and its a few clicks off zillow, down by “schools”. Go off the high school number. If you study Great School rankings and house price variances within a B class high school district. You’ll find as cheap a houses as you’d find in much lower ranked areas. It’s a mater of snooping the cheapest hoods in good high school districts. Smart parents wanting the best for their kids will drive your high vs low effort of landlording. We have a problem in our B rentals!!!! No body moves out!!! I’m slowly raising rents but I’m stuck waiting for the youngest kids to finish high school then the parents can ponder moving and me jumping rents big time.
    Timothy Livingston Rental Property Investor from Magnolia, DE
    Replied 9 months ago
    Curt, Thank you for that. I am under contract on my 2nd property and was trying to determine where it fell in terms of classification. I had an idea but your school method makes sense. Thanks
    Michael Hayworth Contractor from Fort Worth, Texas
    Replied almost 5 years ago
    Useful piece. Generally tracks pretty accurately, from my view. One nit I might pick with it is the idea that class A = newer. IME, a lot of class A neighborhoods are older areas that went through gentrification. If only my crystal ball were good enough to tell me which older neighborhood near me will be the next to see property values double in the next five years!
    Alexis Davis Investor from Bloomfield, Connecticut
    Replied over 4 years ago
    I would have to agree. I am in Connecticut, and many of the older towns with older homes are considered class A.
    Account Closed Investor from Birmingham, Alabama
    Replied almost 5 years ago
    Totally agree Curt
    Ben Parr Investor from Royal Oak, Michigan
    Replied almost 5 years ago
    I mostly agree, I’m not so sure the grade of the home is so dependent on the age of the structure though, but on whether it’s obsolete, especially as you generally move further East through the country and to the older cities. I’d imagine on the East Coast especially that there are many 100 year old A class homes (of course they’ve been remodeled, insulated, updated, etc.
    Brad Lohnes Investor from Cambridge, Waikato
    Replied almost 5 years ago
    Thanks – this is a useful thought tool – providing language for a key investment consideration. Using this terminology, my wife and I primarily invest in Class C neighbourhoods; as at least in our part of the world, these are the easiest areas in which to obtain properties that can generate positive cash flow. It’s interesting also to note that while most of our properties would be considered Class C properties in Class C neighbourhoods, we do have one that would be considered a Class B property in a Class C neighbourhood. It’s newer than the others and after reversing past tenant damage when we purchased through a bit of a refurbishment, it looks and feels newer than the others. Interestingly, this property also consistently maintains a higher value, and one day if we’re looking to sell any properties, this one will be high on the list. It’s also interesting to consider the Class D neighbourhood – we don’t have a whole neighbourhood in our town that would meet this description, but certainly small pockets. Also, with recent epidemic of P / methamphetamine manufacture and use, individual Class D properties are turning up on all neighbourhoods, sadly even Class A. Finally, I think I agree with others that the age distinction is probably not 100% but to my mind this mostly applies to the Class A neighbourhoods, where there is lots of money to keep properties maintained and therefore older properties can easily qualify as Class A. Thanks for the article.
    Account Closed from Honolulu, Hawaii
    Replied almost 5 years ago
    Great way to know how to invest in real estate. Looking at the various types of neighborhoods and schools do make a difference in types of real estate invest in.
    Remax Advantage Philippines
    Replied almost 5 years ago
    Real estate is an investment, so you really have to think a hundred times before acquiring one. There are things that you need to make sure first before getting a real estate. And as a buyer, you must do a keen research as well to know which one is for you and which is not. Good thing there are post like this to give you an idea about the kind of real estate which is right for you.
    Remax Advantage Philippines
    Replied almost 5 years ago
    Real estate is an investment, so you really have to think a hundred times before acquiring one. There are things that you need to make sure first before getting a real estate. And as a buyer, you must do a keen research as well to know which one is for you and which is not. Good thing there are post like this to give you an idea about the kind of real estate which is right for you.
    Eddie Trefger from New Braunfels, Texas
    Replied almost 5 years ago
    You can always improve the property but not the area. As an investor, I know the bad areas and steer clear of them. I know investors that have purchased properties in the bad areas and regretted doing it. The general rule that I follow is when you buy in bad areas, you will have to deal with bad tenants so I skip the Class D properties. In my opinion, it really comes down to knowing your areas that you are looking at buying in and the types of tenants in those areas that are going to be renting from you.
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied almost 5 years ago
    great breakdown Brandon & great tips Curt!
    Mitchlyn D. Investor from Jacksonville, FL
    Replied almost 5 years ago
    Very informative. As someone who is still learning, my biggest fear is not analyzing my area accurately. I’ve seen many people on the post mentioned to focus on a great school district which is a strategy I’ll be using. Can’t wait for the next post!
    Rachel Luoto Rental Property Investor from Bremerton, WA
    Replied over 4 years ago
    Thanks for the article! It’s always been confusing to me how to tell the classes apart, having it broken into both property and location adds clarity. In my area, how old the home is doesn’t matter, it’s the location. The “historic” neighborhood is the most desirable where I live – that means homes going as far back as the 20s!
    Alexis Davis Investor from Bloomfield, Connecticut
    Replied over 4 years ago
    Thanks. Very useful!
    Jose Harvin Realtor from Hollywood, FL
    Replied over 3 years ago
    You can also tell a neighborhoods rating by asking a local commercial real estate agent what the going cap rate is for an area. low single digits is an “A” and mid to high double digits is an “D” area. They should be able to break it down further for the “B” & “C” areas.
    Dennis L Lewis Jr from Smyrna, TN
    Replied about 3 years ago
    Thanks, Very informative! I kept seeing people on the forum use these terms and had no idea what they were talking about.
    Andy Chen
    Replied almost 2 years ago
    Thanks for clarifying the classification of neighborhoods and school districts is often tied to neighborhoods. My question is what do you think of the C – property in a B – neighborhood and subsequent updating versus a multifamily property in a C – neighborhood? I realize Single Family and Multifamilies are two different genres but where would you put your money, $300K in a single family in a A/B neighborhood versus an updated Fourplex in a downtown/ C neighborhood?
    Taione Sikivou
    Replied over 1 year ago
    Thanks, i find this information super helpful at my current stage as a real estate investor.
    Shashank Gokhale from San Antonio, TX
    Replied about 1 year ago
    Good info, I didn't know what this classification was either. So, with this definition, how would one classify the neighborhoods? If you look at Zillow or other sites, does the average home age indicate the kind of class of the neighborhood?
    Charlene Garrison Investor from Detroit, MI
    Replied about 1 month ago
    Thanks for the distinctions, Brandon. In my reading I have come across this and wondered.
    Christopher Smith Investor from brentwood, california
    Replied about 1 month ago
    I follow Buffett's approach to asset acquisition, buy the best asset classes at times of total market breakdown. As in the 09/10 to 12/13 time frame, prices on even the best asset classes were totally shattered, it was like shooting fish in a barrel. Now you have A properties with low maintenance and a very good class of tenants acquired at 35 to 40% of their past highs, and then you sit on them indefinitely as they massively appreciate while generating quite respectable cash flow. The tough part is really sucking it up and buying when everyone else is hiding under the kitchen sink. But you largely get past that emotional obstacle course with time and experience, works exceedingly well for securities too.
    Kenneth Tinsley Investor
    Replied about 1 month ago
    I surely learned something new here.
    Varsha K Shah Real Estate Agent from Union City, NJ
    Replied 9 days ago
    I am in Union City, NJ. 4C is considered 5 units and up. It's the hottest location because it's 5 mins to Lincoln tunnel and 15 mins to Manhattan..