Opinion: You Should Always Invest in B-Class Properties. Here’s Why.

by | BiggerPockets.com

I may be a bit biased. Why? Because I run a real estate company and we specialize in B-class properties. So please forgive me, but that’s what I’m going to be talking to you guys about today. But I also want to compare the other asset classes.

A-Class Properties, A-Class Areas

So, let’s talk about an A-class property in an A-class area. This particular property and area will predominantly be in an affluent area, the prices will be higher, and the likelihood of this area being heavily owner-occupied will be very high. It will also likely have amazing amenities and infrastructure, shops and restaurants, and anything anyone could want and need in close proximity. It’s going to be in a great school district and going to have homes that you’ll want to live in but not necessarily own as an investment property. Why? Because I don’t think the cash flow is going to be sufficient enough to really get you excited. Not only that, but I also believe that there are alternative investment vehicles that can probably get you the same return investment. I’m talking 3%, 4%, or 5%, but without the headache you might come across owning an investment property.

As landlords, there’s always something breaking down that we need to fix—leaking pipes, clogged toilets, or the gutters falling off. Passive income and financial freedom are about not getting that phone call, so I think that you’re better off putting your money elsewhere. Just off the top of my head, I remember looking at some bank rates in Australia, where I’m from, and you can tie up your money in a term deposit over there and get 3.5% annually without doing anything. So to me, that’s not a bad, conservative investment if you’ve got a large amount of money and want to diversify. Or you can buy a property in an A-class area, get the same rate of return, and get that dreaded phone call that none of us wants.

C-Class Properties, C-Class Areas

Now let’s talk about C-class. In my opinion, even though C-class properties present an amazing opportunity on paper, I don’t feel that those paper figures are going to be achieved in real life on a consistent basis. There’s just too much volatility in a C-class area. This is an area where if you drive through, there will be boarded up homes, it’s going to be a bit more derelict, and it may have abandoned cars. There’s not going to be a sense of ownership in the community, and if you go on SpotCrime.com, you will probably find a higher-than-average crime rate.

There are some decent C-class areas but it’s just one of those things where you may not feel comfortable being in that particular area. Another thing to mention is C-class areas are predominantly investor-owned, or perhaps tenants are residing in the properties. Look, I think that for those investors who want to be active and hands-on, these areas can offer a fantastic cash flow—but it is going to be a full-time job. Now, if that is what you want, then go ahead and do it. I did it and did really well.

B-Class Properties, B-Class Areas

Then, I’ve got my favorite, and that is a B-class asset in a B-class area. I am proud to say that I consider myself a blue-collar working-class guy. I live in the same areas that my company sells in. So, when we sell a property to our investors, we always like to say, “Hey, your tenants are our neighbors.” These are areas that have infrastructure supporting them and tenant demand. They’re not “sexy” infrastructure like in an A-class area, but there’s sill going to be universities, decent school districts, and some kind of employment. Here in Toledo, we have GM Powertrain, the Jeep factory, and Chrysler Assembly. It’s more blue-collar with a lot of glass, steel, and manufacturing. I would say it’s 50% investor-owned, 50% investor-occupied. There’s still a pride of ownership in the community because even the vacant homes, which are hard to spot, are kept up by a landlord in the area to make sure there is curb appeal along the street.

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

Another thing to mention is the cash flow tends to be much more consistent. What I mean by that is you know the tenants are going to stay and pay—whereas in a C-class area, it is very volatile and one year may be good, another year bad. In A-class areas, you’re probably going to have white-collar tenants who are going to stay and pay for a very long time, but the cash flow may be pretty low. Then in B-class, it tends to be a higher cash flow, with a decent tenant who is consistent year after year.

Look, as real estate investors, you don’t need to whack every ball out of the ballpark. Consistency is the key to successful real estate investing. You want a steady return, you want to be as hands-off as possible, you want passive income, and you don’t want to deal with headaches. You definitely don’t want to deal in an area where you are not getting a good return on investment.

So B-class all the way. I believe in it. I do it, and my advice to you is that you should too.

If I’m wrong, I want to hear from you.

Comment below.

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will "Decentralize The Real Estate Industry." He's also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

19 Comments

  1. Vik P.

    I agree with everything except the comparison between an A class asset and a paper asset that gives 3,4 or 5%

    Here is why
    1) phantom
    losses due to depreciation and many other expenses resulting in a net loss while the asset is cashflowing (small amount but still) +ve on a monthly and yearly basis if bought right
    2) Leverage which increases the return significantly which is not really possible on paper assets
    3) Appreciation
    4) If leveraged, mortgage paydown is done by the tenant
    5) If leveraged its also a hedge against the depreciating paper currency

    All in all I dont think paper asset esp money markets and savings acct etc. in the current int rate environment can ever match a properly bought (at the right price), decently or even better well managed and leveraged A class asset imo

    • Engelo Rumora

      Thanks for your comment Vik,

      I’d still prefer a paper asset producing 3% than a property any day.

      Owning real estate for such a measly return is to much of a hassle IMO that isn’t worth the reward.

      Thanks again

      ps. I’d never invest in anything for a 3% return anyway

    • Ricardo Murph II

      Joseph,

      I don’t know Toledo well but your characterization of classes for complete cities is incorrect. Almost every city has ABC and sometimes DF properties. It is short sighted at best to group a complete city into one class. Class groups are based on crime, home ownership and other factors, not just appreciation. Does the Midwest an average appreciate like the Coast on average? No. But there are A-class areas in every city metro area. I am in Cleveland metro and there is every class represented here.

      It is funny you called all of Chicago A class and all of Austin B class. I am assume you haven’t been to many cities or done any research to understand how silly your list sounds.

  2. Herb Chan

    Just sold a small house 2 blocks near the college of engineering at the University of Toledo. Was for sale on the market for a couple of years. Bought it for the kid to go to school. Just sold it to a UT sophomore year student for what I paid for plus what I put in it for repairs after almost a decade. Buyer is in the same bind we were in with dorm fees over 10K/yr. It is definitely a college town, forever expanding. Was a cash deal, just enough for a nice new vehicle in badly need of. Seems like a lot of risk and liability in property. If the saying, “Without risk, there is no reward”. I would rather do coasties or C and above with higher rents worth your time and enough to pay off your property manager plus the expensive repairs cause you are not there, than pick up crumbs in Toledo after property managers and partying college students gone wild with alcohol poisoning with litigious parents. Rents seem low in Toledo compared to other cities but it served our purpose for college student housing. Would have paid the dorm fees and gotten nothing back. If you are a parent, tell your kid to get a STEM degree and get a job in a high rent district city, save your Benjamins for that highly appreciating home to cash out and retire or job change with property manager for transition.

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