Class A
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.
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.
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 D
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.