Distinguishing between A-Class, B-Class, C-Class properties?

Question

Are you able to tell which ones are the A class, B class, and C class properties based on how much it is being sold for and what types of public schools are available in the area? What are other ways are you guys able to distinguish between the properties? How are you able to tell what is the average salary of the people who are living in a neighborhood?

Matt Devincenzo · Answer

You can search on the forums for lots of posts about how to determine class, some even delve into local criteria like asset price etc. Every area will have its own distinction....like NY/Boston/Chicago etc there may be A properties that are 100+ years old and there may also be brand new to market assets. The age is part of the local neighborhood quality without degrading the asset to an inferior condition.

Here is a discussion on MFR asset classes...it gives aome key points for what makes up the quality of an asset:

https://www.biggerpockets.com/forums/311/topics/797178-multi...

Gregory Schwartz · Answer

Hey Corazon,

This is a great topic. Its important to know that the property can be A, B, C or D and so can the location. So lets break it down

Properties

A - Usually brand new or completely remodeled.

B- I usually think of these houses as older but well taken care of. They might be slightly out of date but no major issues.

C- Usually we're talking about old houses, maybe 20+ years old and they look it. These are the affordable rentals

D- In my opinion, D houses require rehab just to be livable. If people are living there usually they are on hard times.

As far as the neighborhoods and areas, yes the schools have a lot to do with that,

A - gated community or a high end downtown area

B - your standard neighborhood with a park. Nothing special but its nice

C - Older neighborhood, some of the houses are run down, some are well-kept

D - Commonly referred to as a war zone

I like to find C properties in B neighborhoods and fix them up a little. Good luck :)

Peter W. · Answer

There are two classifications as alluded earlier one is the property itself (used by appraisers) and one on the neighborhood.

Mostly people here refer to the neighborhood.

I’ve always looked at medium household income to hedge the neighborhood. Class C is at median metro area income, D is much less and then I don’t have a hard and fast rule for a vs b other than A is where the doctors love plus best schools. I will sometimes look at median home price instead of income if income data is unavailable.

Gregory Schwartz · Answer

Generally D neighborhoods are areas my wife wouldn't feel safe. I only invest in areas that we would live (me, my wife and our little daughter), and for us that means we naturally avoid D areas.

John Mason · Answer

Class A Properties:Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.Vacancy Est: Historically 10%, 5% the more recent norm.Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition
to Class B, but neighborhood may impede these efforts.Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important!
Also, focus on 2 years of job/income stability.Class D Properties:Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciationVacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental
history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Yiwei Cheng · Answer

I would say A & B will appreciate the most.  Think of A neighborhoods like where everyone wants to buy in your city

Yiwei Cheng · Answer

Hi Corazon, this is how I would think of class A, B, C neighborhoods:

Class A neighborhoods are the prominent areas where everyone wants to live, your most expensive houses, gated community, high end homes, high price points, great school districts usually

Class B neighborhoods have more rental houses, up and coming neighborhoods with lots of flips, you may also see yards not as nicely kept up, starter home neighborhoods usually

Class C & D neighborhoods are mostly rental areas, more run down or empty houses, street by street, more crimes in the area, lower prices to purchase

The classes usually has nothing to do with the age of the house.

Corazon B. · Answer

So you are able to tell if it's a D neighborhood simply by the way it looks? Houses look old and ran down?

Corazon B. · Answer

Thanks for the info everyone. Very helpful.

Distinguishing between A-Class, B-Class, C-Class properties?

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