What variables helps in assigning a class to property?
I am starting my real estate investment journey and educating myself everyday by religiously reading bigger pocket forums. Thank you all for the discussions to help newbies like me.
There are several articles and discussions recommending people to invest in B or C class properties and neighborhoods for good cash flow and returns. I understand the reasoning on the categorization this way to set expectations. However, i am having difficulty in assigning a class to the SFR, MF units that are on market. In my market, there are a lot of older properties so base on Age alone they start to land in the D if it is viewed through the lens of 'age of property' and I believe the assessment is highly subjective, but still how do you navigate it?
What variables you look for to assign a grade/class to the residential real estate units? And, where would you get the data?
Looking forward to your responses. Thanks, Prabh
Most Popular Reply
@Prabh Virk age of the property does not determine grade of property. There are many A grade 100+ year old houses, and D grade 10 year old houses. Although a newer house can have some advantages, they can also have some serious disadvantages--age alone does not determine whether a property is "good" or "bad". I've seen plenty of 100+ year old houses that would be great investments, and plenty of 10 year old houses that would be horrible investments; age alone doesn't mean much.
Appraisers have a structured way of assessing the grade of the property--and, you can probably find info online about how appraisers grade properties. But, many investors use a more informal approach...things that impact the grade of the property include:
Location, location, location (the three most important rules in REI). Generally, I'd rather have a C house in an A area than an A house in a C area. Things that impact the grade of the location include: proximity to amenities, crime rates, average household income, proximity to employment (and the type of employment), aesthetics of the neighborhood, proximity to restaurants, shops & bars (and the quality of those restaurants, shops & bars), proximity to schools / colleges / universities (and the quality of those institutions), the grades of the surrounding properties, etc., etc. An experienced real estate investor will know the neighborhoods of their market like the back of their hand, and knows the grades of all the neighborhoods... Also, in many cities, the less desirable neighborhoods have relatively newer houses, whereas the most desirable neighborhoods are in the oldest part of the city (where most homes are 100+ years old)--in which case, it's almost impossible to get a property in an A grade location without it being a very old house.
The quality, condition, and style of the building, its interior finishings, and its internal systems (e.g.; plumbing, etc.). Is the building a manufactured double-wide, or a custom design with top-tier architecture and materials?
The size of the building and the size of the lot. Also, the quality of landscaping on the lot.
The topography/geography of the lot and surrounding area --for instance, is it on a majestic bluff overlooking the ocean with million-dollar views, or is it a flat lot overlooking a flat empty field?
The overall "feel" of the property...this is somewhat subjective, but some houses are incredibly well-designed and have great aesthetics, floorplans, and functionality...other properties are poorly-designed, lack aesthetics, have awkward floorplans and poor functionality. One of my properties is quite small (only 1100 sq ft), but it feels and functions like a MUCH larger house--I've been in 1800-2000 sq ft houses that feel much more cramped.
The best way to familiarize yourself with property grade is to view a LOT of properties in a LOT of neighborhoods (just looking at photos isn't enough, because photos do a poor job of conveying the quality of the location--which is arguably THE most important factor).
Good luck out there!