Am looking into commercial residential and want to know the differences between a class A, B, C buildings. Besides the ubiquitous letter grade, what actually makes the building class a C vs an F aka a war zone? I’m sure it’s location, amenities, proximity, tenants, transportation, population, crime, etc. Is there a specific list I can use as a guide?
There is no specific list for this type of thing. You have your A class, which would be downtown prime locations where Apple stores are.
B class would be the area surrounding this A area that is still very clean, pricy to live in and maybe some.
C class is lower income, maybe a little bit of crime. Cheaper to live.
D and below are places you dont want to drive at night.
@Antoine Martel just to clarify, Large anchor stores/amenities within walking distance for an A class. This is a great starting point, thank you.
A property class is not defined by the neighborhood. For example you can have a class A property in a war zone, or a class C property in a upscale neighborhood.
Some people will define neighborhood or areas with the same classification as they do with properties. Example is a class A area, B, C, ghetto/war zone.
Defining class. For my operation we define properties into 3 main groups. A, B, or C.
Class A property is anything we buy that is very good condition, zero work, and I mean zero. Not event putting paint on walls.
Class B property for us means it likely needs paint, and new flooring.
Class C property will be when we strip it of everything; flooring, cabinets, appliances.. roof could need replacing, inside and outside doors, any amount of work that’s more that putting down paint and flooring.
A true Class A property in a war zone? Hmm, not sure I'd agree with that.
Definitions will vary, but when it comes to apartments, some general rules of thumb:
Class A: Built within the last decade OR older property that has been very nicely renovated/well-maintained and is located in popular neighborhood
- Lots of amenities (doorman, security system, washer/dryer inside the apartment units, stainless steel kitchen appliances, on-site gym, doggy park, package room, reserved parking, etc.)
- Convenient/great location near central/downtown business districts, shopping, restaurants, transportation hubs, etc.
- Tenants are typically white collar professionals who can afford to buy a home but choose not to be homeowners
Class B: Property is generally somewhere between 15 to 30 years old, but could be older.
- Some amenities, but not as upscale as a Class A property. (Black kitchen appliances.)
- Located in middle-class to upper-middle class areas.
- Property appeals to the masses (entry-level professionals, college students, seniors, etc.)
Class C: Generally more than 30 years old
- Little to no amenities (for example: no washer/dryer hook-ups inside the units, window air conditioning units/no central AC, white kitchen appliances)
- Located in stable middle-class, working class, or lower income neighborhoods
- Blue collar and entry-level professionals, college students, seniors, some renters who receive housing subsidy (*Sec. 8)
- Potential for stronger cash flow than Class A
- Higher maintenance needs than Class A and B
Class D: Generally more than 30 years old
- No amenities
- Kitchens and bathrooms look very old ("Harvest gold" kitchen appliances)
- Located in areas that may have high crime, high unemployment
- Great cash flow if purchased at a low price, but there is little chance of appreciation
@Dulce Beltran a good rule of thumb is based on rent per square foot in a given market. The highest 25% of rents = Class A; the upper middle 25% = Class B; the lower middle 25% = Class C; and the lowest 25% = Class D.
But in reality these “classes” are subjective, and different people will have different interpretations even within the same market. They are more general definitions rather than specific.
@Dulce Beltran not too long ago I posted a blog post and a short video discussing Multifamily classes: https://www.biggerpockets.com/blogs/8514/54703-how-to-determine-the-class-of-an-apartment-building
Hope this helps.
You can have Class B level finish type rehabbed properties in D area. Those are mistakes typically though which are way over improved for the area.
Talk to some hard money lenders and they have war stories where a complex was completely made new with amenities in a wrong area and tenants paid for 2 months and then trashed the place again. HML lender had to take the property back with a loss.
There is age of the building A,B,C,D etc. and then quality of the location. You could have a D quality building in a B area with deferred maintenance and design flaws that can be fixed to change from a D to B building.
I do not like transitional areas or war zones not matter how nice the property seems. The land is what is valuable with location and the improvements are typically secondary.
If you buy in transitional or rough area for what seems high upside you are speculating and not investing.
@Dulce Beltran I think you're mixing the quality of the area and the quality of the building. I'm sure you could find apartments in Del Mar that aren't within walking distance of a large anchor store. I'm going to guess that they rent for a heck of a lot more (and worth a ton more) than anything that's amenity-adjacent in El Cajon. I've seen a few links to guides around but just for kicks, try applying the pseudo-rubric in this NYT article about Manhattan to San Diego. It just doesn't work and even the article points out that there will be disagreement about local agents on the designations.
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