How to Identify A, B & C-Class Areas (& How to Know Which You Should Invest in!)

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G’day, everyone.

Engelo Rumora, your favorite Australian, here again. 🙂

My sincere apologies for not submitting a blog for you guys last week. It was an absolutely hectic schedule, and I was very caught up in a substantial amount of small day to day tasks. Let me ask you this: What small things are you doing every single day to get you a step closer to where you need to be? My belief is that doing the small things consistently will eventually allow the big things to just fall into place.

You have to trust me when I say this. There is no explanation to how it happens. It just does. Trust yourself and have faith in the process of what you’re doing. Find your purpose in life, and you will never again hit snooze on your alarm. Accept that every experience is a good experience. Good or bad. It just comes down to how you perceive it to be. Learn from the experience, even if it’s a negative one, and keep moving forward.

One of my favorite quotes is:

“If you can’t fly then run, if you can’t run then walk, if you can’t walk then crawl, but whatever you do you have to keep moving forward.” – Martin Luther King, Jr.

Come on, let’s do this guys! Pump the job Sunday, Monday, EVERYDAY.

Asset Classes in Real Estate

Today, I am revisiting a blog I wrote a while back about my perception of the different types of asset classes. This is a topic that regularly gets argued about on the BiggerPockets Forums, as there are many different opinions on how these asset classes should be categorized. My opinion is based on me considering myself to be a blue collar working class guy who doesn’t come from a rich family and wasn’t raised with a silver spoon in his mouth. With that being said, my perception of a Class B area might be someone else’s perception of a Class Z area, so I’m not here to argue if I’m right or wrong, but just to share my experiences from investing over the years in the many different markets across the US.

Real estate experts and investors share different perceptions when it comes to ranking property and area classes.

Most will rank them on a general scale from Class A to Class C, with others going as far as from Class A to Class F, and possibly including lower subcategories of each class, such as A-, B-, and C-, etc. Different states and cities can also offer variations on how the “classes” are ranked. People’s socioeconomic status can also dictate how they categorize the different asset classes.

I prefer to stick with the KISS (Keep It Simple Stupid) approach and will only rank a particular area/property as either A, B, or C.

Sometimes you might see me throw in the B- or A-, but those occasions tend to be rare.

Please see below how I distinguish the different area and property classes in Toledo, Ohio, a market I have been heavily active in for over 2 years now.

How I Rank Real Estate Asset Classes

Class “A”

These properties are top of the line.

They are more newly built homes, with the majority of them situated on large river front lots or acreage. The properties are very well-maintained and possess a “WOW” factor. When driving past, you can’t help but wish you lived in one of them.

Class A properties in Toledo are not actually located directly in Toledo, but more so in the suburbs, which are within a 20 minute drive away. These homes are situated in sought after school districts, are within a short commute of medical/shopping facilities and have ease of access to all major highways.

Owner-occupiers reside in these properties, with literally none of them being tenanted. The folks living in these homes are mostly white collar with jobs in finance or the medical industry. The cash flow is low, with a higher potential for growth due to a demand from homeowners whose decisions tend to be emotion based when purchasing.

Class “B”

I believe that Class B properties should be the bread and butter for every hands-off investor.

They can range to be anywhere from 30 to 60 years old and are mostly occupied by blue-collar working class people. While driving around you might find the odd vacant home with an overgrown yard, but in general the area is very well kept.

There is also a decent amount of infrastructure around to support jobs. For example, in Toledo, it would be steel and glass factories, the many hospitals, GM Powertrain and Jeep. Toledo University is another one of the big employers located in a Class B area.

The school zones tend be slightly less prestigious, but the close proximity to all amenities makes the area very similar to Class A. The residents equal out to 50% owner occupied, with the other 50% investor owned and tenanted.

Due to the cash flow, growth potential and exit strategy offered, Class B properties should be the foundation for every investor looking at building a substantial cash flowing property portfolio.

Class “C”

These properties fall into the highest risk category, but can also be very lucrative investments with a right strategy and a few “differently wired” characters to make it work.

WARNING: Unless you have an armored vehicle, I don’t suggest you drive in this area after 5 p.m.

Related: How to Avoid Getting Shot at a Real Estate Club Meeting

All joking aside, most of the Class C homes are much older than the higher ranked areas, with some dating back as far as the 1880s. Many will show visible deterioration, and a higher portion of them are boarded up.

Higher than usual crime will also be present within the area.

These properties are predominantly investor owned and are occupied by tenants in lower socio-economic groups, usually dependent on government benefits. They offer by far the highest cashflow out of all the classes, but require very hands on and full time monitoring/management.

The property manager needs to specialize in this particular area in order for the numbers to work. This class should only be considered once a solid portfolio has already been built with Class B properties that are performing and generating a decent monthly cash flow.

Conclusion

In my opinion a great portfolio needs to be built on strong foundations by acquiring B Class properties with the lowest amount of debt possible.

Once a strong foundation has been established and a decent amount of cash flow is generated each month, you can then consider taking on more risk. By using leverage and diversifying into the Class C area, you will further increase monthly cash flow, which will enable you to grow your portfolio at a quicker rate.

Disclaimer:
There are more horror stories than fairytales in this asset class, and it’s known to be a “hit or miss” type area. Make sure you conduct a ton of due diligence before investing. Don’t forget, it’s the people on the ground who will make the numbers work or not.

One of the most vital components, no matter what class you decide to invest in, is to have the right property management in place looking after your best interests.

Related: Protect Your Investment: How to Tell a Good Property Manager From a Bad One

Smart investors base their decisions on the numbers in the deal and focus on building a team that can make those numbers work. Capital growth is a prediction and if it occurs should only be considered as a bonus. Hoping a property will go up in value is not a sound strategy.

As far as Class A properties go, they should just stay as the “WOW” factor, and instead of telling yourself, “I wish I lived there,” once you have built a grand portfolio, you can!

What do you think? Do you agree with my assessment of different asset classes when it comes to real estate?

Let me know your opinions in the comments section below!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

28 Comments

  1. Jamie Montpellier

    100% agree with you on this one!

    I invest out of my current area where homes average 600-700k asking price and where pretty lawns, pretty SUVs and manicured homes line the streets for the most part. It doesn’t make sense to invest here for the most part. However, I come from a blue collar town some 3-4 hours away and homes can be taken from 100-200k depending on the neighbourhoods and type of homes. That’s my bread and butter so to speak!

    Canada as a whole is considered overvalued but there exists pockets of value if you know where to find them.

    Great article!

    J

    • Engelo Rumora

      Hi Jamie,

      Thanks for your comment.

      I believe you can find great deals in any market at any time.

      As long as you stay patient, know where to look and are good at negotiating.

      Even in a severely overpriced market like Australia is right now in my opinion, I know of fellow investors making good profits on fix and flips.

      Thanks again and have a great weekend.

  2. Riley F.

    Engelo, welcome back, and thanks for writing the above — good fodder for thought this morning.

    I’m not sure why you would skip from ‘A’ where the homes are owned by medical and finance employees where “Owner-occupiers reside in these properties, with literally none of them being tenanted.” to a ‘B’ property which are owned by blue collar workers. If you actually mean ‘literally’ above, and not figuratively, then to me you either own a blue collar house that is pretty nice, or a slum. That makes the whole thing kind of binary.

    In reality, I tend to think with the below guidelines, and use shades of grey, though I know you said you like to simplify above:

    A: Generally owned by upper end white collar employees – cash flow tends to be sparse, but existent in certain markets.

    B+ / A-: Generally owned by low end white collar employees (clerical, office work, etc.) / upper end blue collar jobs (skilled trades, etc.) – cash flow improves from straight A, but not by much

    B : More blue collar than white at this point – cash flow continues to improve, in my opinion, possibly the sweet spot between vacancy, yield and tenant quality

    C+ / B- : Lower-middle end blue collar work, may start dipping into Section 8, cashflow, as above, continues to improve, but vacancy might tick up, this is where you start to see more issues, but still better than above

    C : Low end blue collar, older homes, higher vacancy, evictions, repairs, issues, etc. Should cashflow well, if you can keep them tenanted. Head ache factor definitely increases.

    D : Low, Low end blue collar work, if they are employed at all. Bring a gun to collect rent, this is a war zone. All Section 8 tenants, lot of evictions (they’ve been through that before), tenant quality decreases substantially, GREAT CASHFLOW (on the pro forma at least – good luck collecting)

    I know this isn’t as simple as above, but I find that life rarely presents a dichotomy. It makes me think of the Einstein quote “Things should be as simple as possible, but no simpler.”

    • Jeff Greenberg

      Riley,

      I think that you did a good job of refining it down, but in CA you won’t find your low end white collar in what I would consider a B+ A- area. I would reserve that for the young up and coming. Young doctors/lawyers.

      In the solid B would only have the high end blue collar.

      Section 8 would be in the lower C properties.

      All an opinion but it helps the new people get the idea.

  3. Engelo Rumora

    Hi Riley,

    Thanks for your comment and further expanding on my blog. I don’t yet have words like “Binary” in my vocabulary so I had to look that one up haha 🙂

    My apologies for not making it as clear as it should be with using the correct grammar.

    Thanks and have a great weekend.

  4. Giovanni Isaksen

    Great post @Engelo. You are 100% right that smart investors invest for cash flow and take the appreciation as a bonus. A lot of people forgot that in the last bubble and paid dearly for it.

    I once heard location classes described this way:
    A- you’d like to live there.
    B- you would live there.
    C- you could live there
    D- you’d rather live under a bridge.

    That’s a humorous description and something that I think throws off a lot of investors. Which is letting their personal tastes drive their investment decisions. I’ve met a lot of millionaires next door who own 40 or 50 units of class C apartments free and clear. They’re taking home 100k/year or more and have a net worth of several million dollars; all from owning properties that most of us wouldn’t want to live in.

    I agree with you that for most people should probably start in class B but it’s a crowded trade; everybody and their brother is looking for the mythical B property in the A area. Because those type properties are in such demand a lot of lower class areas get a mental upgrade as investors convince themselves that the property they do find is in the location class they want it to be in. The key is that if you’re in a market that’s growing, eventually almost every neighborhood gets gentrified. If your market is on the long term downslope eventually most areas will get dragged down so market selection is the first decision to make.

    Good hunting-

    • Engelo Rumora

      Hi Giovanni,

      Thanks for your comment and I love the description of the different asset classes 🙂 Funny stuff lol

      I could probably live in a C class but it would have to be without my family haha

      Just to add to your comment – At the end of the day its the people that will or won’t make the numbers work no matter what the class.

      I always advise investors to focus more on finding the right team before looking into the actual numbers and area. Success in any asset class comes down to trustworthy people that can act as your eyes and ears, heart and soul on the ground.

      Thanks and have a great weekend.

    • Matt R.

      Good stuff Engelo. I guess I should officially lay claim to the authorship of Giovannis A-D desription.
      D IS YOU WOULD RATHER BE CAMPING.
      He has it described close enough though.

      ESRI TAPESTRY…Describes 67 unique hood segments. There will be more than one segment in each zip code. This takes the whole A-D stuff to another level. Good luck!

  5. Jamie Montpellier

    It’s funny that recently an article mentioning the happiest cities in Canada none of the top cities were synonymous with white collar areas but rather blue collar towns…

    For example, the residents of Vancouver, BC were said to be the unhappiest while those of a mining town situated in Northern Ontario were the happiest bunch of them all where the average median salary is far below that of many cities around it.

    Something like a phenomenon…

  6. Bryan Williamson

    I’d just add that you really have to know what’s going on in terms or growth or gentrification of the area because a C neighborhood can turn into a A pretty quick. If you believe in the 80/20 principle then you could say 80% of the bad is caused by 20% of the people. That means to see a huge change you only need a small one ( getting rid of the bad people ) .

    We have a duplex in an area that people refer to as “the bottoms” we spent the last 9 months renovating both sides in that time we have had zero problems even though our next door nieghbor sales drugs. We have had friends move in across the street. We just listed the place for rent and we have a potential renter that is a lawyer for one side which is still under construction. Our other side has 20 showings scheduled for Sunday. Kinda bragging but really just want to illustrate reading the market as a whole is important too. Rents are climbing in other neighborhoods and this is ready for the next wave of redevelopment.

    • Engelo Rumora

      Hi Bryan,

      Thanks for your comment.

      There is a pocket here in Toledo a multifamily complex(Brooke Park – I believe 10+ dwellings) which has high crime but located in the most desirable school district in Toledo.

      Similar to what you mention above.

      I actually spoke to Ryan Pyle(Toledo Investor that owns a dwelling in Brooke Park) about it a few days ago. We discussed how everything around it is cream de la cream with great people occupying the area, except that complex with those 10 dwellings lol

      It would be good buying it up and slowly getting rid of the Riff Raff.

      Thanks and have a great day.

  7. Tony Brown

    Thanks for the post Engelo. My wife and I are newbies to BP and real estate investing and are riding the fine line between ravenously devouring as much info as we can and being utterly overwhelmed! LOL! Seriously though, this post and all of the valuable responses has helped us define the areas we’re looking to invest in as B class, which is very heartening and promising. Good on you mate!

  8. Nick Lee

    A great post.
    I love Giovanni’s description ;
    A- you’d like to live there.
    B- you would live there.
    C- you could live there
    D- you’d rather live under a bridge.

    For a British long distance investor just getting started think that’s my new mantra.
    Thanks Guys

  9. Ayodeji Kuponiyi

    Thanks for the motivational MLK quote and for the informative article. I agree that starting out and I be classed area is the best way to start out in real estate investing. After reading some books, I decided to invest in small apartments.

  10. Eva Z.

    Engelo,
    Thanks for this post! It was very timely for you as I am getting ready to invest in some C-class apartments (actually one of the buildings is bordering on D). Besides armored vehicle and gun (both I am contemplating), do you have any other tips? The previous owner has owned this D-ish building for 12 years and apparently without major issues but still I am somewhat apprehensive. Of course, great cashflow and numbers. I’d appreciate any tips!

    • Engelo Rumora

      Hi Eva,

      Thanks for your comment.

      You will need a very hands on and unique property manager that has years of experience with working in such an area.

      The lower end asset classes are indeed a hit and a miss with the property itself but also sometimes with the people managing it.

      Thanks and I hope that helped.

      Have a great day.

  11. Val Dychok

    Hey Engelo,

    Thanks for the post, I think it is a great breakdown.
    I have a quick question though, based on your description Class A looks like more of a living there rather than investing in, but are those properties actually available for investing in your experience and do people actually invest in those?

    Thanks,
    Val

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