Real estate investors must perform extensive research and due diligence before acquiring a property in order to determine whether it adheres to their investment model and warrants any potential risk. While it is imperative that investors conduct their own research, there are a few basic standards and rules individuals can view as guidelines for how valuable or risky an investment might be. The class rating for a property, for instance, provides investors with a general understanding of a property’s condition and desirability.
There are a few key elements of class ratings investors and other real estate professionals should be aware of. To start, the rating system has been developed by investors, lenders, and brokers, as opposed to professional organizations operating in areas of construction or property management. With this in mind, the rating system is used largely as a shorthand for the level of risk investors will be taking on if they acquire the property.
A few of the most common factors that go toward a property’s class rating include age, location, income levels of existing tenants, potential for growth, amenities, and rental income. Properties are rated either as a Class A, Class B, or Class C. Unsurprisingly, the soundest, most valuable buildings are graded as Class A Properties. It should be noted that there are no official standards for class ratings, and a Class A property in one market might rate as a Class B or lower in another market.
Most Class A properties are relatively new, generally 15 years old at most. Similarly, these properties can be expected to feature the latest amenities, which attract long-term, high income tenants. Furthermore, Class A properties occupy some of the most valuable real estate in their markets. Class A rental properties are usually supported by professional management agencies, and typically experience few serious maintenance issues.
By comparison, Class B properties are somewhat older, approaching two decades. Most tenants have reliable income, but not as high as Class A tenants. Multi-unit properties may or may not employ professional management teams and sometimes suffer from deferred maintenance issues, meaning property owners lack the funds or ability to immediately rectify problems as they arise.
While Class B properties are obviously not as valuable as Class A properties in the short-term, many investors prefer Class B investment opportunities because they are more affordable and can be renovated and improved. A Class B+ property is especially valuable to investors. This rating indicates a well run property in good condition that is just a small step down from Class A, which can still translate to significant savings for investors.
Finally, Class C properties are almost always more than 20 years old and are often in pressing need of renovations. These can represent large costs for investors who are tasked with bringing infrastructure up to code before renting or selling the property. Unlike Class B properties, this type of real estate is generally located away from attractive areas or neighborhoods. Investors may struggle to establish a steady cash flow from Class C properties because they typically attract the lowest rental rates in the market.
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