How Do You Define Class A, B, and C Properties?

9 Replies

I have been recently asked about where I think the Class A, B, and C properties in Las Vegas are located. So I put the following response together. The short answer is that the type of property class is defined more by the tenant population than the physical location.

In Las Vegas, and I assume most cities, class A areas tend to be in reasonably well defined geographic areas but class B and C locations are not. Class B and C properties are more defined by the tenant population than the geographical area. Below is my definition of Class A, B and C properties. Note that the following description is only my opinion, only applies to Las Vegas and should not be considered some sort of universal "definition".

Class A properties tend to be newer, prospective tenants tend to have higher incomes and are primarily credit based and typically pay the highest rent. Credit is very important to this tenant population so evictions and skips are rare. In Las Vegas Class A properties tend to be in subdivisions or communities with HOAs and have a well groomed and uniform appearance and in the best school districts. Class A properties tend to be lower risk, tenants stay longer and properties are more likely to appreciate. Summerlin and Green Valley are examples of class A property areas. 

Class B properties - Compared to class A properties, class B properties are generally older, tend to sell for a lower $/SqFt and tenants generally have lower incomes and credit scores. Tenants tend to stay shorter periods of time (1 to 2 years) and evictions are more common than with Class A properties (few total evictions since tenants know that they will be out in less than 30 days if they do not pay). Initial rehab is likely to be higher and tenant damage is also likely to be higher than class A properties. Class B properties tend to generate a higher return than class A properties.

Class C properties - Class C properties are generally older and are located in less desirable locations. These properties generally need significant rehab and significant tenant damage is much more likely. The tenant population is primarily cash based so leases mean little and many have government subsidies. Skips and evictions are common. Rent payments tend to be in cash. Tenants tend to use mass transit so selecting properties near bus routes is very important. Some of these properties generate high returns.

Now that you know how I define class A, B and C I will explain how we find such properties. We use software we developed to filter the thousands of available properties looking for the very few properties that meet specific characteristics. Usually less than .1% of the available MLS listed properties qualify as potential investments at any given time. Below are example characteristics for each of the classes. Note that we have about 50 characteristics for class A properties. The number of characteristics is less for class B and much less for class C.

Class A

• Within a specific price range
• Acceptable ROI using the following formula: ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost). Note that for Nevada there is no state income tax.
• Time to rent <30 days
• Within a fairly well defined geographical area
• Single family
• Two+ garage
• Three+ bedrooms
• Two+ baths
• Within a minimum and maximum lot size
• Correct ratio of building footprint to lot size
• Master bedroom and guest bedroom sizes meet specific criteria
• Built after specific year
• Association fees above $20 and below a specific amount
• Certain floor plans are excluded
• Certain subdivisions are excluded
• Rehab below a specific amount with no high risk rehab items

Class B

The characteristics of class B are similar to class A but also includes town homes and the price range is lower. We look for a higher ROI than for class A properties due to increased risk.

Class C

Class C properties have a very different criteria than class A or B. Price range is typically less than $100,000 and includes all property types (single family, town homes, condos). The key criteria includes:

• Significantly higher ROI
• Time to rent < 30 days
• Adjacent to major bus routes
• 2+ bedrooms
• 2+ baths
• Certain locations, communities and floor plans are excluded

Once we have properties that meet the specific class criteria I personally visit them and evaluate the area and subdivision/community. If it looks acceptable, I evaluate the property including the floor plan and estimate rehab cost and rehab risk. If all of this is acceptable, I take a video and send it to the property manager and the client. The property manager provides an independent opinion of the property in general plus time to rent and the rental rate. If the return is acceptable and all agree that the property makes sense we make an offer. The offer amount is based on return, not the asking price. 

In summary, we primarily select properties based on property characteristics, potential tenant characteristics, risk and return, not geographical locations. 

One additional class of properties is multi-family. We divide these into two categories: 4 units or less and more than 4 units. More than 4 units requires commercial financing. The criteria for multi-family is quite different since the value is largely based on the cap rate, deferred maintenance and tenant risk. Larger properties (~30 units+) are evaluated based on current usage and potential future usage.

What are your definitions of Class A, B, and C properties?

Great summary. Marco Santarelli did a good podcast on this topic as well. It's more or less in line with your classification, but with a few good points about "wants": malls, shopping, entertainment being in proximity to class A. I enjoyed it:

https://itunes.apple.com/us/podcast/passive-real-estate-investing/id1006557991?mt=2

@Ryan B. --  thanks for the mention.  I enjoyed recording that episode. 

@Eric Fernwood -- good post Eric.  Call me overly analytical, but I firmly believe that properties and neighborhoods should be classified separately.  Many investors will use grades interchangeably between them, but the reality is they are separate.

It is possible to have what you might call an "A" grade property (however you define that) located within a "B" grade neighborhood.  Or any variation thereof.

Continued success!

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@Ryan B. Good point Ryan. I should have mentioned this in my earlier post.

When we first started about 9 years ago we approached property selection on "wants" basis. Some of the "wants" we considered included schools, proximity to shopping and proximity to concentrations of jobs. While we found some correlations, we learned that selecting properties based on expected tenant behavior did not work well in Las Vegas. What we found to be very accurate was time-to-rent and estimated return. And, while most properties with a low time-to-rent and high return turned out to be near the "wants", there were too many exceptions. The only reason we are able to use time-to-rent and return as a key selection criteria is the software we developed. Our software enables us to filter the very few good properties from the thousands that are available. During our research we had a lot of surprises about things that effect time-to-rent and return which we would never have guessed. Below are some examples:

• If the drive time to the strip exceeds about 20 minutes, the time-to-rent increases.

• If the width or length of the master bedroom is less than 12', the time to rent increases.

• Certain floor plans do not rent well at all even if they are within a subdivision that on average rents very well.

• If the master bedroom is on a different level than the other bedrooms, the time to rent increases.

Over time we've determined about 50 such criteria through which we filter properties before we apply time-to-rent and return calculations. Basing our selections on specific criteria (like master bedroom dimensions), time-to-rent and return has consistently proven to work well. Without such software, I believe a "wants" based selection approach would be the way to go.

@Marco Santarelli ,

An interesting viewpoint. Las Vegas may be different than other locations but I have not seen class A properties in class B locations. Part of what makes a property class A is the location and the individual property. My experience is that people who can afford to live in class A areas do not choose to live in class B locations. Builders built the same floor plans all over the city so we have real data to support what I am about to say. The same floor plan in Summerlin or Green Valley (two of the A class areas) will rent for more than it will in some of the B areas. The same is true for sales price. The exact same floor plan will sell for more in a class A area than it will in a class B area. So, while what you are saying may apply to other locations I have not seen it in Las Vegas.

Agents need to be careful when discussing a different "class" of home or neighborhood. You can get yourself into trouble if you start breaking anti-steering laws saying one neighborhood is better than another. The only reason I mention this is because I have clients that read threads like this and then they want me to tell them which parts of town are "safer" etc. There is a fine line that agents must walk.

For me class a is simply property that I can self manage from a distance in an appreciating area with professional tenants ;) 

Most of my properties are C.  Most of my grades in school were also C.  I wonder if there is any correlation....

Frank

Great info @Eric Fernwood ! As you said, it is also dependent on what area of the country you are in. I'm in the mid-Atlantic, and the majority of the homes here are not new construction, so I think ours kind of straddle the line between A and B properties. We also live in a much smaller community than Las Vegas. I like some of your observations as well. I have noticed that even where we live, some of these apply. I have to be very picky about how the rooms are cut up, and I agree with you on how the bedrooms all have to be on the same floor. 

Great break down. I am looking to buy a SFR rental property in Summerlin.

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