Property classes are something every real estate investor needs to know. Determining the class of property will help you determine the extent of the rehab needed, and your potential for profit.
Properties and locations can be split into different classes of A, B, C, or D. A’s are at the high-end, and D’s are on the low end.
Whether a property is a class A or D depends largely on the home’s LOCATION.
Classes of Property by Location
Whether your home is a Class A or lower can vary a lot by where it is located.
Class A in one city could be a gated community with a pool, spa, and gym. But in another area, an A could be a home on the ski lift, or next to a large office building, making it easier for people to get to work.
You get the idea. Look for the places people want to live in your city.
Ratings of neighborhoods and properties are not an exact science. You can even adjust what qualifies a location as A, B, C, or D based on your own investment criteria.
That said, you can get a pretty good idea of the class of a neighborhood by:
- walking or driving around and observing the condition of the buildings
- looking up crime rates and schools
- finding pictures of properties that sold in an area
- visiting a few open houses in the area to get a better idea of the rehab needed.
For each class, here are some things to look for when assessing the property:
Class A
The property:
- Larger
- Newer (no older than 10 or 20 years)
- Or, if older, it has been remodeled
- Modern floor plan
- Updated finishes
- Landscaped yard (usually professionally done)
- Apartments may have workout rooms or pools inside the building
The location:
- Most desirable area
- Possibly in a gated community
- Expensive vehicles
- Good neighborhood
- Low crime rate
- Great school district
- Close to good employment or college
- Tenants or homeowners are high-income earners
- Very few to no vacant properties
- Close to parks
- Nice restaurants nearby (in some cities, the restaurants should be within walking distance)
Get a good idea by looking for the best of what a city has to offer. Watch the market listing for higher-priced houses and areas that sell fast.
You can also talk to local realtors to find out some of the most desirable locations.
Considerations for investing in class A.
Flipping in class A can demand a high sale price but also there will be a hefty cost to the rehab in this area. People expect all the bells and whistles. Everything needs to be fixed, updated, and high-end finishes are required to make buyers happy.
Keep in mind – these areas are also the hardest hit in a recession. But, they also have the highest sale price.
So you will have a high-risk high-reward investment if you get it right.
A quick note on rentals:
Many investors avoid class A due to picky tenants. Some investors say tenants in this class complain about the slightest issues.
It’s also true that vacancy rates go up more in class A properties during a recession.
But other investors rent in class A areas with no issues.
It all comes down to personal preference. Just because other investors avoid class A doesn’t mean you should. The extent of rehab or pickiness of tenants can change drastically depending on the city or area.
Learn the area you’re investing in. Know what people expect. And then, if you can make a flip work in class A then give it a shot!
Consider all the information but don’t let it stop you from trying if you think it can work.
Class B
This is a little cheaper than class A. This may be an area that is in a transition to class A.
The properties:
- A little older than class A
- Need some updating
- Maybe have some maintenance that was put off, but overall they are solid homes
- Yard kept up but not professionally maintained
Think of an old grandma’s house. She kept up on maintenance but also kept the ugly flower wallpaper, worn-out wood paneling, and outdated fixtures and appliances.
The location:
- A safe neighborhood
- Low crime rate
- 25-50% of properties are rentals
- Good schools
- Short commute (not as convenient of a location as class A for work, restaurants, or shopping but close)
To get a feel for whether your location is in class B, drive-by on a Friday night or Saturday. People may be walking their pets, kids playing in the yard, people are having a BBQ.
A class B location will have a mix of white-collar and blue-collar families. The neighborhood will have a family-friendly feel to it.
Considerations for investing in class B.
The biggest benefit is that it’s not as expensive as class A. The homes are a little older so there is more work needed, but also more potential to add value for a flip.
Overall, these areas are great for flips or rentals. Just watch out for big issues when buying older properties and ALWAYS get an inspection.
Inspections don’t always catch everything, so walk through the property first and have a list of questions to go through with the inspector. Get additional specialty inspections if needed.
And to get the biggest benefit from a class B investment, look for areas that are improving and trending toward class A. Remember an area can always go up or down a class!
A quick note on rentals:
A class B neighborhood can be a good place to rent. Rents are not as high as in class A but your initial investment is also smaller, so your ROI (return on investment) tends to be higher.
Class C
The properties:
- Older houses
- Dated look and feel
- Needs some maintenance
- Poor layout
- Some major repairs or remodels
The location:
- Blue-collar households with steady jobs
- A larger amount of rentals
- Low crime rate
- Good schools
- Some distressed properties
- Few vacant properties
Considerations for investing in class C
The properties tend to be cheaper but the rehab is usually pretty extensive. It is critical to get your repair estimates right, because missing a few things could easily cost you thousands. The timeline for the rehab will also probably be longer because of the work that needs to be done.
That said, there could be a good possibility for profit as long as the ARV (after repair value) is estimated correctly.
The resale value of class C homes may not be as high as class A or B but the upgrades and finishes also don’t need to be as expensive.
A quick note on rentals:
Renting in this area tends to have a good ROI. People have steady jobs and if you screen tenants properly this is a great option. Many investors focus on class C properties for their rental portfolio.
Class D
The properties:
- Distressed
- Low priced
- Need large amounts of work
- Little maintenance has been done
- Peeling paint
- Yards overgrown
- Junk in yards
The location:
- Low-income area
- High crime rate
- Poor schools
- Mostly rentals
- Vacant houses
- Distressed properties
Considerations for investing in class D
A flip is difficult in this area. I am sure some investors can flawlessly pull it off but it’s safer just to stay away from class D real estate. Even after fixing up a house, the resale is low.
One way it can work is if you are considering fixing up MANY of the properties in the same to try to improve its class from D to C, but this can be risky and takes a lot of time, money, and effort.
A quick note on rentals:
Some investors still choose to rent properties in areas like this because the cost to acquire properties is low. It may cost a bit to fix any large issues but the cost for finishes will be minimal.
But, investors often find that their tenants have problems with late rent or not paying.
What Class Property or Location to Choose When House Flipping
Keep in mind that this is not an official grading system where A is the best investment. It is simply a system to help you assess your real estate investments and make the right decision.
Having a class C property in a class A neighborhood may be a great potential flip! Just run your numbers carefully.
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