Investor · Multiple · Member since 2019 · 175 posts · 150 votes
I am reading a lot about property classes and how, who, and where are they determined? What data source determines the property class? Is is subjective by real estate agents? Is it as simple as driving around and figuring it out?
I will say this varies tremendously by markets, in Cleveland for example we have lots of A/B properties well over 20 years; some of our highest end rentals are in "historic districts". Of course some new construction in Strongsville is also A class, but so is a 40 year old home in Concord, Solon, Highland Heights.
Whereas we also have new construction in the gentrifying parts of the city, like Tremont, that are directly across the street from boarded up homes. Despite the new construction, the neighborhood is considered B-ish because of the mix of properties around it. This used to be a pretty rough area overall.
Average income levels in a given zip code as well as school districts are good indications of Neighborhood class. If you have an A neighborhood, you can have A and B properties in that neighborhood.
It is not an exact science, and can be subjective to the market. But here are the basics of each class.
Class A Property:
This is the “high-rent district”. These are the high-end, luxury properties in upscale communities. They are generally no more than 10 years old, maybe up to 15 years old at the most. Class A apartments have numerous amenities, professional management, and sit in desirable neighborhoods. They demand the highest rent and therefore attract white-collar, high-income professional tenants who are “lifestyle” renters by choice. These are high quality properties that require very little or no deferred maintenance for the Buyers. Class A properties will generally have high valuations and lower market Cap Rates.
Class B Property:
A step down from Class A, Class B properties are in the 10 to 20 year-old range, and are mostly well maintained. They will sometimes have a few of the more common types of amenities, and may or may not be professionally managed. Class B properties are a solid middle-class mix of both white-collar and blue-collar tenants. Some are renting by choice, while just as many are renting by necessity. Depending on the actual age of the property, at least some level of deferred maintenance is not uncommon. While they generally have higher market Cap Rates than Class A properties, it is still variable whether they will have good cash flow or be an appreciation play.
Class C Property:
Continuing down the scale, Class C properties are generally 20 to 30 years old, and pull in blue-collar and moderate-to-lower income tenants who will generally be renters for life. These properties will have very few or no upgraded amenities, and rents will be below market. While they may or may not be professionally managed, Class C properties will have some deferred maintenance issues and need renovations and upgrades.
Class D Property:
This is where we find many older properties of more than 30 to 40 years old, in need of major repairs. Many of these are low income, government subsidized housing units. Plenty of houses in these neighborhoods are boarded up, and retail plazas are vacant. They are in lower socioeconomic communities with higher than average crime rates.
I will say this varies tremendously by markets, in Cleveland for example we have lots of A/B properties well over 20 years; some of our highest end rentals are in "historic districts". Of course some new construction in Strongsville is also A class, but so is a 40 year old home in Concord, Solon, Highland Heights.
Whereas we also have new construction in the gentrifying parts of the city, like Tremont, that are directly across the street from boarded up homes. Despite the new construction, the neighborhood is considered B-ish because of the mix of properties around it. This used to be a pretty rough area overall.
Average income levels in a given zip code as well as school districts are good indications of Neighborhood class. If you have an A neighborhood, you can have A and B properties in that neighborhood.
I am reading a lot about property classes and how, who, and where are they determined? What data source determines the property class? Is is subjective by real estate agents? Is it as simple as driving around and figuring it out?
Work with agents, check out Google and take a visit. Experts in that area will know, but the internet is a huge tool. You can even look for police reports in that neighborhood. In Cleveland, for example, you can find a B street in a C neighborhood. Or you may find a D street in a B neighboorhood. Of course, the area is generally the same, but sometimes you have these odd ones. Taking a trip or asking an expert is a good way to go.
I would like to add that grading is more accurate if properties and neighborhoods are graded separately. In Akron, there are 'A' properties in 'D-' neighborhoods (over by the zoo) where builders build affordable housing. You can also find some 'D' properties in 'A' areas. What @Anna Sagatelova said about Cleveland properties is also true in Akron. 90% of the housing stock in the city of Akron was built before 1970 and there are quite a number of really fine A++ older homes especially in west Akron.
Property classes are different from neighborhood classes, and many people often use them in combination. If you have a class A property in a class D neighorhood (yes, it happens), the you have a class C unit overall. If you have a D property in an A neighborhood, then it's likely vacant and ripe for rehab, or already purchased and awaiting permits for rehab (or tear down).
I also think of property locations and property conditions having different classifications. In some older neighborhoods especially historic districts, the tenants look for older houses - they preferred the art deco bathroom tiles, the thick plaster & lath walls over granite countertops and stainless steel appliances.
but class D neighborhoods are easiest to tell. If you enter a neighborhood and you immediately lock all doors from the inside, and check to make sure your gun is loaded, you are in class D no doubt.
On the other hand, most class A+ neighborhoods as you drive through you cannot see the houses from the street. The house is set way back at the end of a long winding driveway, the front is fully fenced for maximum privacy. Occasionally through binoculars you may catch a glimpse of someone sitting on a porch, sipping a glass of mint julep, holding the glass with a white gloved hand with the pinky finger sticking up.
Definitely in art mixed with a science. Also your perspective are you an agent, pm or investor.
For example in Cleveland the east side has tons of A communities by income standards but the turn times of how long a property sits on the market is atrocious. You may make $50k on a flip but have to wait 6 months from list. ( in specific areas - not all of CLE)
As a full time investor turn time is hyper important for me to turn my properties and money over as many times as possible in a year.
Another example is are you a flipper or a renter. Some rents in what some define as an A may hold strong values but rents compared to purchase price may not be comparable to a B.
I am reading a lot about property classes and how, who, and where are they determined? What data source determines the property class? Is is subjective by real estate agents? Is it as simple as driving around and figuring it out?
It's very area specific. I work mainly on the north side on Chicago and many realtors from south side call an area C that I would call a D and area I call B they would call A
My grading goes like this..... I focus on A-C only.
A - Average income is over $100k or young college educated professionals
B - Hipsters and young professionals. Incomes mainly over $60k for adults in area
C - Middle class. Lots of hard working people but not white collar. Some hipsters
D - Shootings happen once a week or so. Many people on Sec 8 but also many market rate tenants/home owners. Some loitering on corners/stores
F - Open air drug market. Gangbangers hanging out on corners and loitering 24/7 infront of stores. Shootings happen several times a week
I'd break down residential real estate like this (definitely some subjectivity here):
A class area= High year-over-year price appreciation, excellent public schools (elementary school ratings are the most correlated to higher real estate prices), little-to-no crime. Low cash flow. White collar professionals, higher education rates. Think 5-6% CAP rates.
B class areas= Moderate year-over-year price appreciation, decent public schools, lower crime. Moderate cash flow. Blue collar workers & middle managers, moderate education rates. Think 7-9% CAP rates.
C class areas= Lower year-over-year price appreciation, lackluster public schools, moderately high crime, higher cash flow. Low income earners, higher unemployment, low education rates. Think 10-12% CAP rates.
D class areas= Practically no price appreciation, worst/struggling public schools, highest crime rates (especially drugs and violent crime), highest cash flow. Highest rates of unemployment, high rates of poverty, lowest education rates. Think 13% + CAP rates.
Thank you to all who posted and given their version of property classes. As much as I want to drive around I am an out of state investor looking at buy and hold MF. Now, I would not buy a property unless I have eyes on. I know that I have to rely heavily on a solid property management company to not only maintain but to help find me deals as our relationship grows. Thanks again to everyone's contributions and comments.
Use median household income by zip code (and school rankings, to a much lesser extent). Needs to be more specific in certain neighborhoods. And C class in one sub-market can be different than C class in another.
Most everyone thinks they are in B class areas. Demographics tell the true story.
I am reading a lot about property classes and how, who, and where are they determined? What data source determines the property class? Is is subjective by real estate agents? Is it as simple as driving around and figuring it out?
There's a commercial definition of Class A,B,C. You can actually look it up.
Class A- Brand New buildings with lots of amenities, good infrastructure & location
Class B- Building are usually older; priced less than Class A & need some updates/restoration
Class C- Oldest buildings (20+ years); need significant maintenance; less attractive locations
Where things become subjective is an older building located in a neighborhood that's changing for the better. Is it a Class B property now when it used to be considered Class C? We kind of throw out these definitions for our business because they can become misleading.
I also think of property locations and property conditions having different classifications. In some older neighborhoods especially historic districts, the tenants look for older houses - they preferred the art deco bathroom tiles, the thick plaster & lath walls over granite countertops and stainless steel appliances.
but class D neighborhoods are easiest to tell. If you enter a neighborhood and you immediately lock all doors from the inside, and check to make sure your gun is loaded, you are in class D no doubt.
On the other hand, most class A+ neighborhoods as you drive through you cannot see the houses from the street. The house is set way back at the end of a long winding driveway, the front is fully fenced for maximum privacy. Occasionally through binoculars you may catch a glimpse of someone sitting on a porch, sipping a glass of mint julep, holding the glass with a white gloved hand with the pinky finger sticking up.
Pinky Finger is the dead giveaway of a Class A+ neighborhood! lol
If a property (build in 1960) has been newly renovated (2018)? does it impact class of the property assuming everything else equals?
- Affordability: High Rent - Amenities: 1 miles distance from public transportation, Safeway, and other restaurants. Schools are rated 5 on Redfin. - Livability: Crime is low. 50/50 owner to renter ratio.
I am reading a lot about property classes and how, who, and where are they determined? What data source determines the property class? Is is subjective by real estate agents? Is it as simple as driving around and figuring it out?
I'd say its not as simple as driving around but not as complicated as needing a professional to tell you. You can tell the difference between slums and prestigious areas, there's your class D and class A. Anything outside the slums would be class C and anything outside the prestigious area is class B. This is subjective to anyone in real estate with the knowledge of property classes.