When it comes to investing in real estate, particularly commercial real estate, not all properties are created equal. For example, a brand new 5-year-old property in downtown Manhattan is much more attractive than a 20-year-old building in East Harlem. This is part of the reason why real estate investors assign classes to different buildings: Class A, Class B, and Class C.
Before getting into it, understand that there’s potential to make money in all three classes. The classes are mainly just a tool to quickly understand what type of property you’re referencing. When it comes to investing profitably, it’s much more important to focus on your investment strategy and goals as an investor. With that said, let’s take a look at the three different classes of real estate.
This is considered the most ideal real estate to own. Here are a few of the common characteristics of Class A real estate:
- Location: Situated in the most sought-after areas of the city with minimal crime.
- Property age: Generally constructed within the past decade.
- Resident income level: Comprised of individuals with high earning capacities.
- Appreciation: Projected to see a continuous rise in property value well into the foreseeable future.
- Property condition: Maintained well, exhibiting minimal visible physical problems.
This is considered the second-best class of real estate to own. Class B properties are generally 10-20 years old and in good locations, but not quite as prime as Class A. Here are a few other characteristics of Class B real estate:
- Location: Situated in neighborhoods characterized by slightly older homes and low incidence of reported crime.
- Property age: Typically ranging from 10 to 20 years old.
- Resident income levels: Residents generally fall within the middle to upper-middle income bracket.
- Appreciation: Moderate appreciation potential, although not expected to perform as well as Class A properties.
- Property condition: Some maintenance might be necessary.
Class B buildings are typically still in good shape and have been well maintained but, again, they’re not as overly impressive as Class A.
This is considered the least desirable type of real estate to own and usually includes older buildings that are located in less attractive markets. Class C buildings are typically much older and in need of repairs and upgrades to the interior and exterior of the building. Here are a few more characteristics of this type of class:
- Location: Generally found in old neighborhoods where crime may be more noticeable.
- Property age: Class C properties tend to exceed 30 years in age.
- Resident income levels: Typically fall within the lower to middle-income range. Appreciation: The future value of the property may or may not experience an increase over time.
- Property condition: If maintenance has been postponed, there is a possibility of requiring costly repairs.
Again, this doesn’t mean that you can’t make money by buying Class B or even Class C buildings. This is mainly because there are a lot of other factors to consider when making your decision. Let’s take a look at a few of those factors.
Other Things to Consider
Despite the classifications, there is actually no hard line between Class A, B, or C properties. This is because the criteria vary widely and are somewhat subjective.
That said, here are some other factors that can influence how a property is classified:
- Location – This is perhaps the most important factor. In general, the closer that a building is to a city center in a popular area, the better chance that it will be considered a Class A property. However, different neighborhoods can also determine how a property is classified. If a neighborhood has attributes like good schools, a nice downtown area, and a strong culture then it will be more likely to be considered Class A.
- Existing tenants – Another thing to consider is the type of clientele that currently rents the building. For example, a major office building might be nothing special visually and located far away from Seattle’s downtown area. But, if that building is rented by Amazon then it will likely be considered a Class A building. This is because Amazon is one of the biggest companies in the world and will surely be reliable for paying their rent on time.
- Future potential – Another thing to consider is the future potential of a property. This is actually where a lot of money can be made. Ideally, an investor will want to purchase a Class B or C building, infuse some capital to enhance the property in different ways, and then increase the rent. In this sense, many investors want to buy a building at a Class B or C price and turn it into a Class A building.
Know Your Strategy
If given the option, virtually every real estate investor would prefer to own high-rent property in the most coveted downtown areas. However, owning this property usually comes with a high price tag and steep competition. For these reasons, Class A is not necessarily always the most profitable real estate to own. This is also why having a sound, reliable strategy is much more important than simply trying to buy the most expensive buildings.
For example, many investors prefer to use a value-add strategy. This is when the investor buys an underperforming asset at a great price, adds some sort of valuable addition, and then increases the rent to boost the asset’s value. A few examples of “adding value” to a multifamily property could be modernizing the interior of the units, adding more amenities like a gym or sauna, or forming strategic partnerships with local businesses to offer discounts to your tenants as a perk for living there.
Another common strategy is an opportunistic strategy, which is when investors take advantage of short-term market inefficiencies or market dislocations to acquire properties that are undervalued or distressed. This can be a way for investors to acquire properties at an exceptional price.
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Sachin Maskey is a physician, real estate investor, philanthropist, and entrepreneur. He has over 17 years of expertise in the medical industry as a family medicine specialist. Outside of medicine, he is the founder of the commercial real estate investment firm Avatar Equity as well as the Dhana Yoga Foundation. You can follow along with Sachin on Instagram, Facebook, TikTok and LinkedIn.