Guide to Property Class Types: From A’s to D’s

property class explained

Just like when you were back in school getting a report card with A’s and B’s, property class types are graded as well.

Although I never altered my grades, I once had a “friend” who carefully turned his C- into a B+.

On the surface it looked like he was doing well in class. His parents were duped and didn’t even realize their kid was actually struggling. The parents could have helped more had they known their child was actually just barely above a D.

So what happened with my friend?

He ended the semester with a D. Even though his parents then grounded him for lying, he’s now financially free because he is smart to invest in passive income.

Whether one gets A’s or D’s, I would argue it doesn’t predict one’s financial success.

Likewise, rental property is often described in this way. You have your A’s, B’s, C’s, and D’s. Unlike in school where everyone is shooting for an A, real estate investors all have their own preference. Many shoot for B’s and C’s, while some even target D’s!

In this post, I’ll explain what rental property classes mean, their general trends, and what to watch out for when someone is selling you a specific property class.

Table of Contents Show

Property Classes Defined

Calling a property Class A, B, C, or whatever is pretty subjective. While one investor may call a property Class C another investor or Turnkey provider may label the same property as Class B.

Here are some characteristics (condition, location, and tenant class) that describe each property class.

What is Property Type A?

Property Type A is a versatile category that encompasses various types of real estate investments. It includes residential properties such as single-family homes, duplexes, and apartment buildings, as well as commercial properties like retail spaces, office buildings, and mixed-use developments.

This category offers investors the flexibility to diversify their portfolio and tap into different market segments. Whether you're a seasoned investor or just starting, Property Type A can be an excellent choice for your real estate investment journey.

When it comes to residential properties, Property Type A offers options for both long-term rental income and potential appreciation. Single-family homes provide stable rental income and the opportunity for capital appreciation over time.

On the other hand, apartment buildings can generate higher rental income while also benefiting from economies of scale. Commercial properties within Property Type A, such as retail spaces and office complexes, provide the potential for significant returns and long-term lease agreements.

Class A

a+ home

Class A properties tend to be new construction or built within the last 5 to 10 years. However, old historic homes that have been fully remodeled can still fall within this category.

The amenities are top of the line and often new. We’re talking stainless steel appliances, granite counter tops, crown molding, hardwood floors, and the like.

Class A properties are located in the most desirable areas with the highest potential for appreciation. The great location and condition of these homes will not only keep vacancies low, but they also attract the highest quality tenants.

These are high income earning professionals or white collar workers including doctors, lawyers, and business owners. On the downside, Class A properties come at the highest purchase price.

So the investor’s initial cash flow tend to be the lowest when compared to Class B or lower properties.


 
FREE Making Money with Real Estate Investing Course

Get the real estate investing course for FREE and Subscribe to the MPI Newsletter with loads of investing tips, advice, and advanced strategies for investing in real estate.

 

Characteristics and features of Property Type A

One of the key characteristics of Property Type A is its ability to generate passive income. With residential properties, investors can earn rental income that can cover mortgage payments, property taxes, and other expenses.

In the case of commercial properties, leases with long-term tenants can provide a stable and predictable source of income. This cash flow can help investors build wealth and achieve financial freedom.

Another feature of Property Type A is its potential for appreciation. Real estate has historically appreciated over time, and investing in Property Type A allows you to benefit from this trend.

Additionally, strategic improvements and renovations can further increase the value of the property. This appreciation potential makes Property Type A an attractive investment option for those looking to build wealth in the long run.

Furthermore, Property Type A allows investors to leverage their investments.

Real estate properties can be purchased with a combination of down payment and financing, which means investors can control a larger asset with a smaller initial investment. This leverage amplifies the potential returns on investment and enhances the overall performance of Property Type A.

Tips for maximizing investment returns in Property Type A

To maximize your investment returns in Property Type A, consider the following tips:

1. Conduct thorough market research: Stay informed about the local real estate market to identify areas with high demand and growth potential.

2. Diversify your portfolio: Consider investing in different types of properties within Property Type A to spread your risk and optimize your returns.

3. Improve the property: Enhance the value of the property through renovations and improvements that align with market demand.

4. Stay updated with trends: Keep an eye on market trends and emerging opportunities within Property Type A to stay ahead of the curve.

5. Seek professional advice: Consult with real estate professionals, financial advisors, and property managers to gain valuable insights and guidance.

Factors to consider when investing in Property Type A

While Property Type A offers great investment potential, it's essential to consider several factors before diving in. Firstly, conducting thorough market research is crucial. Understanding the local real estate market, including rental rates, vacancy rates, and property prices, will help you make informed investment decisions.

Secondly, evaluating the property's condition and potential renovations or improvements is essential.

Assessing the property's structural integrity, maintenance requirements, and any potential value-add opportunities can help you determine its true investment potential.

Additionally, it's crucial to consider the financing options available for Property Type A investments. Exploring different loan programs and mortgage rates can help you optimize your investment strategy and maximize returns.

Lastly, having a solid investment plan and exit strategy is vital. Consider your short-term and long-term goals, and how Property Type A aligns with them. Having a clear plan in place will help you navigate the real estate market more effectively.

Class B

Class B properties tend to be a littler older than Class A properties. Usually between 10 and 30 years old and so Class B properties will result in a bit more maintenance to maintain them. Properties may still have some great amenities such as hardwoods, but it isn’t always required. Located in stable, good communities with good schools and the potential for appreciation.

The tenant class can be a mix of professionals and higher earning blue collar workers. While the rents are not as high as Class A properties, the acquisition costs are much lower. So overall, cash flow is acceptable with potential appreciation.


 
FREE Making Money with Real Estate Investing Course

Get the real estate investing course for FREE and Subscribe to the MPI Newsletter with loads of investing tips, advice, and advanced strategies for investing in real estate.

 

Class C

Class C properties tend to be old properties, built 30+ years ago. Most suffer from quite a bit of deferred maintenance. They are located in older or even declining neighborhoods where there’s a large mix of renters and homeowners. While crime is not found everywhere, it can be more apparent here and the local schools are not that great either. Appreciation potential is very low or not to be expected.

The tenant class is blue collar and earning an hourly wage. Finding qualified tenants will be tougher and may contribute to longer vacancies. Management will be more intensive than with Class A or B properties so expect higher maintenance, higher turnovers, and higher likelihood of evictions.

On the plus side, investors can purchase Class C properties for cheap that rent for greater than 1% of their acquisition cost. So cash flow can be quite high with these rentals.

Class Dd- property

Class D properties are old, run-down, and often in need of significant repairs. They are located in declining communities that are dangerous with high crime and poor schools.

Some investors describe it as a “war zone”. The tenants here are very low income, have bad credit, and many have a criminal background.

From a management perspective, these tenants are the most challenging to work with and the most time-consuming when it comes to collecting rent. While evictions are to be expected, don’t expect any appreciation on your Class D property.

These properties are the absolute cheapest to acquire and have the highest rent-to-price ratios on paper. So in theory, Class D properties can have the highest cash-on-cash returns.

Property Class Trends

I’m a visual learner so let’s see if we can graphically depict the major relationship of various property classes. As you can tell, the following are not to scale or scientific in any way, but it illustrates key relationships that you should be aware of.

Price and Returns (Cap Rate)price vs returns

Price is what you pay for a property. Class A properties come at the highest price and Class D come at the cheapest. As you go up in property class from D to A, the price will increasingly rise.

Rental income also follows a similar trend. Class A properties will rent more than Class B properties, which in turn rents more than Class C properties. But, there’s one big distinction.

The drop in rent as you go from Class A down to Class D is less than the drop in price.

Let me repeat this because this is key.

Home prices drop much more than the drop in rent when going from Class A to Class D.

For example:

A $300,000 home would probably be a Class A property and may rent for $2500 a month

A $150,000 home would probably be a Class B property rents for $1500.

A $75,000 home would probably be a Class C home may rent for $1000

A $30,000 home would probably be a  Class D home may still rent for $750

It is interesting to note that the price drops significantly when dropping in class. This is not always the case but it is most likely the case. Even though this happens with property classes, the rent does not reduce in the same proportion.

In going from Class A to B, the price is reduced by 50%, but the rent only drops by 40%. In going from B to C, the price reduces again by 50%, but the rent drops by only 33%.

The Bottom Line in Property Classes

Investors will get a higher rent-to-price ratio as they go down in property class. This ultimately translates into higher capitalization rates and higher returns.

So a Class A property will come at the highest price, lowest rent-to-price ratio, and therefore generally have the lowest cap rates. On the flip side, Class D properties come at the lowest price, highest rent-to-price ratio, and therefore come with the highest cap rates.


making money with rental properties

Making Money with Rental Properties FREE Investing Course

Get it FREE and Subscribe to the MPI Newsletter with loads of investing tips, advice, and advanced strategies for investing in real estate.

 


Appreciation (Location) and Riskappretiation vs risk

Even though, we don't invest for appreciation, it is something to consider. Investors must always invest for cash flow.

When looking at the previous chart, you may wonder why an investor would ever buy Class A properties with their high price point and low returns. So now let’s talk about risk and appreciation.

Much like the first chart, risk and appreciation also follow an inverse relationship.

The potential for appreciation goes up as you go up in property class. Class A properties tend to have the greatest potential for appreciation, whereas the lower the property class, the less likely appreciation will happen.

With property class, risk tends to increase with lower property classes.

Class A properties are viewed as the least risky investments with the highest appreciation potential.

Class D properties are typically the most risky investments with the least appreciation potential. Risk can be in the form of dealing with evictions and vacancies will go up as you go towards Class D properties.

Also following the risk curve is the level of management required to operate the property. The lower the property class, the lower the quality of the tenants so property management will be more intensive.

Class A properties tend to have less maintenance and repairs, whereas Class D properties will require greater oversight to collect rents, perform maintenance, and deal with tenant problems.

The Problem with Property Class Labels

The biggest problem with using property class labels is that many will use their own definition! Some label a property exclusively based on the rankings of its nearby schools.

Others pay less attention to a property’s location, but instead rely on the house’s condition or age. When there’s no universally accepted standard for property classes, there’s bound to be confusion!

Despite there not being a universally accepted definition, there’s less disagreement when dealing with either the best (Class A) or the worst (Class D) properties. Most won’t argue with you if you labeled a property Class D because it’s in a war zone even if it was built in the last 10 years.

The trouble is with labeling those middle B and C class properties — some even use pluses or minuses to get even more specific.

Don’t Be Fooled by the Seller

So what’s the big deal if someone calls a property Class B instead of Class C?

Well, it depends on who’s doing the talking.

Here’s 2 scenarios:

  1. You’re at a networking event and meet a buy and hold investor. They describe their portfolio as a collection of Class B properties.
  2. You’re looking to buy a rental property. A turnkey operator emails you about property they have for sale that is described as Class B.

Which scenario do you need to understand their meaning of Class B?

That’s right. Scenario #2.

In the first scenario, you may not be on the same page as the other investor, but it doesn’t really matter. You’re not buying their properties. For all you know, the properties may not even exist!

In the second scenario, you are a potential buyer. So you must understand that you’re being pitched a rosier picture than the reality. The seller in this case is a turnkey company and has an incentive to sell you at the highest price possible.

A Class B property is going to sell for more than a class C property because it is perceived to have higher value. Keep in mind that a property on the borderline between class B or C will likely be pitched as Class B so that it can be sold for more.

Example — A Real Turnkey Property

So if we can’t trust what property class a seller or turnkey company tells us, then what do we do?

First off, don’t let the seller’s Class B or C description set your first impression of the property.

We need to stay objective and stick to the facts.

Using the property address, we can determine whether a property is in a good location and fits the type of investment we are looking for. As an investor, if you’re looking for a class B property then make sure that what a turnkey company sends you is in fact Class B.

This year I received an email from a turnkey operator that was marketing a Class B+ property for sale. Here’s the actual address that you can even look up:

7602 E 48th St, Lawrence, IN 46226

Class B+ For Sale — Is the Turnkey Full of It?

b property

From the get-go, you may already have a preconceived notion about this property. The turnkey company says it’s B+. Rather than take their word, let’s instead do some research.

Here’s what we can find based on the address.

  • Property is built in 1957, so it’s nearly 60 years old!
  • The nearest school has a Great Schools rating of a 5 out of 10.
  • Zillow estimates the property value at about $75k compared to the city’s median home price of about $127k.
  • Median household income of the property’s zipcode is only $33k compared to the city’s median household income of about $50k.
  • Based on a Trulia crime heat map, the property is in a safe neighborhood.

Sticking to the Facts

Right off the bat, this property is old and has average schools. I would consider a Great Schools ranking of a 5 as just okay. It’s not good, but it’s also not terrible.

The property value is estimated to be far under the median value of all homes in that city. Half of all homes in the city are valued at less than $127k, whereas this turnkey property is valued at only $75k. Based on this, we know that the property is significantly cheaper than most properties in the city.

Further, the median household income within the turnkey property’s zipcode is almost $20k less then the median household income of the entire city. So the people living in this area of the property not only live in cheaper houses, but they also earn far less than more than half of the people in this city.

c-Hopefully, you’re coming to the realization that this property sounds nothing like the B+ property it was being advertised as. There was no indication of it being in a dangerous area so I would probably not classify it as a D.

Though it clearly is a very old property, which means it will typically have more maintenance than a newer house. It’s also located in a neighborhood where both household incomes and property values are very low relative to the rest of the city. If buying this property as a rental, that means the tenant class will also likely be of low income.

Ultimately, if I had to pick a class, I would argue that this property is a C. If we’re really splitting hairs, I’d even describe it as a low C.

Conclusion

Properties are often described on a class scale. You’ve got A’s, B’s, C’s, and D’s.

Generally, you pay more as you go up in property class, but receive lower returns. Buy and hold investors who prefer higher class properties tend to accept lower returns because they are seeking a less risky investment, less management, and more potential upside from appreciation.

If you’re looking to purchase a rental property, beware of how the seller describes the property. Whether the seller is a turnkey company or even a wholesaler, their goal is to make as much profit as possible.

So if they’re marketing it as a Class B property, it may actually be a Class C. Even scarier, that Class C property they’re pitching may even be a Class D property in a war zone!

Don’t be duped.

Stick to the facts and come to your own conclusion on the property. If the property checks out and fits the type that you’re looking for, then move forward. If not, keep looking.

I have been networking with O'brian, or OB for short, for a while now. He is a fellow investor who invests out of state too. Like myself, he realized that rental properties were the best investment AND that it is possible to invest in another state that you do not live in.


Real Estate Investing Simplified Real Estate Wealth Builders

5 Premium Masterclasses

Premium online courses for any level of investor: beginner-advanced. Completely go at your own pace and can be taken through "Self-Study" or through "Membership".

Group Coaching

Inside the membership, attend live 90-minute Group Coaching sessions with Coach Dustin Heiner as he and the MPI Coaches teach you how to build a successful real estate investing business.

Investor Community

Connect with the MPI Coaches and the other like-minded investors inside the MPI Mastermind Community. Ask questions about investing and get feedback how to be successful in your business.

Join the Real Estate Wealth Builders Membership Today!


19-Realistic-Book-Mock-Up-ss-upload

Get the FREE Real Estate Investing Guide

MPI-Icon-Blog

Related Articles

Now Is The Right Time To Invest In Real Estate

What You Need To Know About Easement by Appurtenant and All The Other Easement Types

22 Best and Vital Questions to Ask Property Managers

What is IRR and How to Calculate the Internal Rate Of Return

How To Invest In Commercial Real Estate

Airbnb How To Review Your Stay

Get What You Need To Successfully Invest in Real Estate

Get All of the MPI Courses Plus Coaching!

MPI-Icon-Premium-Courses

6 Masterclass Courses

Premium online courses for any level of investor: beginner-advanced. Completely go at your own pace and can be taken through “Self-Study” or through “Membership”.

MPI-Icon-Group-Coaching

Group Coaching

Fast-track your investing success with access all past students’ work. Get access to the list of places to invest, business contacts, lenders, and resources other students have already found.

MPI-Icon-Investor-Community

Investor Community

Work with MPI Coaches and Students inside the MPI Student Community.

MPI-Icon-Investor-Community

Student Success Program

Pair up with another like-minded student for accountability, and crush your investing goals together.

WEALTH-BUILDERS-LOGO-PLAIN

Real Estate Wealth Builders

Get the coaching, education, community, and resources you need to become a successful real estate investor.