How to Evaluate A-Class, B-Class, and C-Class Properties

by | BiggerPockets.com

One thing is for certain—everyone has an opinion and everyone has a different perception when it comes to evaluating asset classes. I’m proud to tell you that I’m a blue-collar, working class guy, so my perception of a certain asset class is different than someone else’s perception. I’m not here to tell you that I’m right, and I’m not here to tell that I’m wrong. I’m just happy to share my experience, my opinion, and my perception of the different types of asset classes and how to evaluate them.

A-Class Properties

So, we’ve got three asset classes: A, B, and C. Now, an A-class property should have about a 4-6% net cap rate. What I mean by net cap rate is that after you take out all of your costs—like your property management fees, your insurance, taxes, and a calculation for maintenance and vacancies—you should arrive at about a 4-6% net return investment. If you are investing in A-class real estate and you are not getting that return on investment, I would forget about investing in those areas because you’re not even keeping up with inflation, and in my opinion, it just doesn’t make any sense. Now, these properties tend to be located in areas where properties are newer and have 1,500+ square feet, the school districts are fantastic, amenities are plentiful, and neighborhoods have curb appeal. The homes in these areas are predominantly owner-occupied.

B-Class Properties

The B-class area, in my opinion, should offer a cap rate of around 8-10%—once again, net, after you take all of your costs into consideration. These neighborhoods usually consist of a mix of 50 percent investor-owned properties and 50 percent owner-occupied properties. The areas would also be very well kept, with few distressed homes and fairly low crime rates. I would like to refer to these areas as nothing sexy, nothing flashy, but very fundamental, full of blue collar working people. Here in Ohio, I live in one of these B-class areas. They tend to also be in close proximity to infrastructure, amenities, and good school districts. Ultimately, B-class areas represent a very solid asset class.

C-Class Properties

Last but not least would be the C-class area, which is predominantly investor-owned, with few owner-occupied properties. The crime rates are usually higher, with older homes, worse school districts, and no amenities within close proximity. Now, what a C-class area can get you as an ROI is beyond me. In my opinion, these areas tend to be very volatile. They tend to have 12, 15, or 18% net cap rates—but honestly, I think those are just paper figures. I don’t see you achieving those returns in real life. It might happen, but every year would be different. I also don’t see any potential for appreciation there. You are pretty much just buying for cash flow—if you manage to get that desired cash flow.

Related: Why the Vast Majority of Investors Should Stay Far, Far Away From D-Class Properties

What Asset Class Should You Invest in?

Backtracking a little bit here, in a B-class area, you might see a little bit of appreciation, but it will predominantly be a solid kind of cash flow investment, providing a steady income. The A-class areas would not provide much cashflow, but potential for appreciation because they are desirable. Homeowners want to live in these properties, and we all know that homeowners base their decisions on emotion. And when you base your decision on emotion, you are buying a house not based on the numbers, but on everything else that makes it look pretty, places it in a good school district, or whatever else. Plus, you tend to spend more money.

So that’s a quick summary guys on the different types of asset classes. I know I have written a ton of blog posts on this before so feel free to check those out. I would also love to get a detailed correspondence going below in the comments section. I want to hear what your perception is of the different types of asset classes. How you evaluate your deals when you’re looking to invest in a particular area?

I want to end by saying I speak to a lot of investors, and one thing that everyone gets very wrong is this—they all talk about the stats and demographics, asset classes, vacancy statistics, employment rates, and capital growth projections. But it never comes down to the asset class or demographics, in my opinion; it always comes down to the people. The team that you are investing with out of state, out of the country, or even in your own backyard will either make or break your investment. I’ve got a little quote and it goes like this: “If you buy the best house on the best street in the best neighborhood with the best capital growth projections, but your property manager is incompetent or a cheat, you’re going to lose money because they are going to steal your rent.”

So focus on the people rather than the stats and demographics of the particular area. That’s pretty much it.

What kind of asset class do you prefer? Why?

Comment below. I’d love to hear from you.

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.

17 Comments

  1. Jessie Huffey

    I’ve never even thought about asset classes when making investments and honestly think my properties don’t fit in to any of the above classes as the areas I invest in are rural (nearest town 20 min. away has population of 10k)- 95% owner occupied, far away from amenities, pretty good school districts, strong community focus. But what I have found to be helpful is that living in a small community, reputation gets around. This can be a boon to a landlord as renters want to be accepted into the community, I have found they want to avoid doing anything that can damage their reputation with their neighbors like being loud, not paying rent, etc.

    • Engelo Rumora

      Thanks for your comment Jessie,

      if I had to throw it out there I’d say your area is a B+ or A-

      I also own a few properties in rural towns and the homes are quite desirable from a tenant perspective.

      Most of the folks are blue collar working class people that don’t want to live in the “hustle bustle” of a bigger city.

      Thanks again and much success

  2. I love your comments generally. However, I believe we cannot generalize that the cap rate for a certain class property such as A is 4-6%. It varies, depending on locations. For example, the cap rate for A class property in Los Angeles could be 1-2%. We cannot generalize. Thanks.

    • Engelo Rumora

      Thanks Paul,

      Locations do vary and many things come into perspective.

      The better and more expensive the market, the lower the cap rate tends to be.

      I guess my cap rates estimates are based on the averages that I have experienced across the board.

      I didn’t really look into areas like Beverly Hills and Park Ave in NYC lol

      Much success

  3. Hi Engel. Thanks for the post. I specialize in what you describe as B class properties. As far as I am concerned, dealing in A class type rentals is pure gambling, betting on appreciation. AND how many investors can really even afford to carry them with their almost ALWAYS negative cashflows? Screw that. Why “buy a negative cashflow”?

    That said, I have made $Millions in all three of the classes you described, but in my old age (58) I have no appetite for the C class types, where carrying a gun while at the properties is the norm! Screw that too!

    Which leaves me with my favorite, B class types of investments. I long ago, learned to NEVER plan or count on appreciation. That is, gambling. Thus my ONLY interests in Rental investments are in the other three benefits (Tax benefit, Equity buildup, Cashflow), in ascending order.

    Something very closely related and relevant to dealing in B class properties, is property condition and the opportunity for sweat equity. I am also a blue collar, working class guy, who also happens to have a law degree! Those are NOT mutually exclusive traits. I like to concentrate on value creation in my investing in Rental Real estate. One of my primary risk management principles is “make your money going in.” In other words, your purchase price is the key. Paying too much for a property puts you behind the curve, permanently.

    I look for bargains, often properties for which there are few potential buyers. That can occur for many reasons, including poor physical condition(s), manufactured or mobile home on the property (prevents most mortgage financing on them), lack of curb appeal, etc. These sellers are in the appropriate “motivated” mindset that is necessary for me to acquire them at a low enough price to make the numbers work for me. These sellers may be willing to not only sell you the property at a huge discount price, but sometimes even provide seller financing with very attractive terms. Remember, I am a long term player, not a flipper or get rich quick operator.

    I can literally buy solid older rental properties, for HALF the price of a new one. And the rent potentials are almost the same. That means, I can buy TWO older rent houses for the same price as ONE new one and have vastly better financial performance numbers as a result. I look for such older opportunities that need work. I like doing the work myself on them, with my wife (the Blue Collar). And I especially LOVE the money I make by performing this work myself and creating huge sweat equity (the Lawyer ;).

    It is infinitely easier for most want to be rental realty investors to get into these types of B class properties than it is for them to do so in A class. For ALL the reasons I mentioned above. And getting started, is the key to success, isn’t it? Most people have dozens of “reasons” (Excuses) why they just cannot quite get started with buying rental properties. With my approach, it is not only easy, but almost (disclaimer applied) “risk-free” if you know a little about the process and just follow the simple steps, with a little discipline and patience. I have bought many properties for no money down, and even when I had bad credit, and could not qualify for a mortgage. Just takes a little knowledge, time and effort. So what? What doesn’t? (My first investment Condo unit was bought at age 18, assuming a VA mortgage – made $30K on that one in 5 years, including interest from a note I held when I sold it – all with a positive cashflow from a the start). Well, that was 40 years ago! Lots more stories as you can imagine.

    Summary: Anyone who is willing to work can get rich in rental real estate if they learn how the game works, and just show up and put in the effort to learn, analyze, acquire, renovate and then hold and manage as a rental for 20 years. B Class properties approached properly, are the way to accomplish Wealth Creation as well as a huge passive/retirement income, with so little risk it is almost unbelievable (I have never lost money on a real estate deal, ever, in 40 years, and hundreds of deals. And I am not unusually smart!

    • Alex Hively

      Rob,

      Nice article, your principal benefits that you talked about are pretty much the same as mine except cash flow and equity build up are switched for me. I’d be interested in talking to you further and hearing about your experiences with c class properties.

      – Alex Hively

    • Engelo Rumora

      Thanks for your detailed comment Rob,

      I have seen a big trend amongst many “wannabe” investors.

      They all want something for nothing or an easy way out.

      That’s why many of them are getting scammed by supposed guru’s with their “get rich schemes”

      All good things take time and nothing beats the good old “Hard Yakka (Hard work) as we say in Australia.

      As you mention, I have also done hundreds of deals across all asset classes and you can make money in an asset class at anytime.

      It comes down to having the right people in place.

      My short real estate investment experience has lead me to believe that the safest and best long term play is in B class property.

      Thanks again and much success

  4. Alex Hively

    Engelo,

    Very nice article, whenever I’ve looked at properties, personally, I guess I have always thought about whether that property was in an A class, B class or C class properties. I am also dealing with multifamily properties and just starting to build my team. And I think what you said earlier is a gem, that you need to focus more on your team and know that they are good people thay are actually not going to rip you off in the end. That’s gonna make the property what it is.

    Alex Hively

    • Engelo Rumora

      Thanks Alex and 100% focus on the team first.

      No matter how well you think that you know an area, you will never know it better than someone who was born and bread there.

      Team work makes the dream work 🙂

      Too many investors think they are experts just because they know how go search for deals on Zillow lol

      Get some “eyes and ears, heart and soul” on the ground with the right team players and you will be golden.

      I wish you much success

  5. Bryan Trelegan

    I have been buying “A” class properties in “C” class neighborhoods. I find that these properties have less appeal to buyers since they do not want to commit to buying “C” areas but renters appreciate living in better modern apartments and are willing to overlook the less desirable aspects of the neighborhood , especially professionals without children. The less appeal to buyers is not the negative you may assume, the lower purchase prices created positive cash flows . 3 recent deals that fit this model have left me with more equity , more cash and more cash flow in properties with low capex and fairly easy management. As long as the property appeals to “A” or “B” tenants I’m happy to pay “C” prices

    • Bryan Trelegan

      I realize that I did not stick to the common way to rate property by giving it one grade for both the location and the quality of the physical property. I usually separate these factors since they both have different influences on the quality of the investment. I find that there is opportunity in “C” properties in “A” areas and “A” properties in “C” areas . Both appeal to quality tenants which is usually the difference between easy and profitable rentals and difficult unprofitable rentals

      • Engelo Rumora

        Thanks for your comment Bryan,

        My opinion is that no matter how awesome a property is a C class area is always a C class area and will attract lower socio economic people.

        Thus over time, the A class property in a C class area will just go downhill.

        Different story if you see potential of gentrification happening in the C class area.

        I’m looking into some pockets in Cincinnati now that are C class but I believe they will turn.

        Much success

        • Bryan Trelegan

          Thanks for your comment Engelo, I am buying condos in areas that are gentrifying and in the buildings that were the first to market upscale units in a “C” area , not a war zone but until 8 years ago the area did not have hardly any quality new construction needed to attract higher earning residents.

  6. David M.

    I think different regions may have different definitions, at least for multi-family (maybe you were just talking SFH). Personally, I’m used to seeing properties classified as A, B, C, and D here in Los Angeles and the southwest in general. We have similar definitions at the REIT where I work. My C is more of a blue collar neighborhood (like your B), while D is a war-zone. A-class properties tend to be new development or massively remodeled with high-end finishes, and (if the building is big enough) significant amenities like office space, workout room, laundry service, social spaces, e-vehicle charging, etc. B is usually upper-middle class, with expectations for good finishes.

    In my experience, very few individuals can play in the A-class multi-family space out here. B-class isn’t seeing much more than a 2-3% cap rate, at least near the beaches where I am. Appreciation is the play for A and B, and it’ll happen… at least until the Big One hits.

  7. My market is about 30% owner-occupied and 70% renters, but the crime rate is low, the schools are considered good,and the location is considered excellent. The condition of rental tends to be pretty bad. the agents around here say that no one invests for cash flow, only for appreciation. However, not too long ago buying for appreciation here killed a lot of investors. Investors are staring to pay too much again. Average cap rate is about 4%.

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