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Classifying Real Estate Classes – A, B & C

December 14th, 2017
A classification system has been applied to real estate as an overall rating structure comprised of central qualifying characteristics. Assets are marketed as either Class A, Class B or Class C properties, which makes it easier for industry professionals to communicate the general differences in property types.  This classification also helps strategic investors to gauge the level of risk and return involved in investing in different properties. The characteristics separating classes cover a multitude of factors, which include property age, location, appreciation, rental, demographics, tenant income and property management.

Class A

These are generally new properties in the top tier of the market having been built in the past decade. These properties are typically professionally managed, have extremely low vacancy rates and provide the highest level of amenities such as modern architecture and smart technological systems for tenants from the high earning bracket. There may also be other varieties of facilities which may include swimming pool, gym, spa, coffee bar, 24 hour lobby service and even valet parking.

Class B

Class B properties usually have above average rents and property value, however due to their age, lack of amenities, location, or possibly building quality, they will not be marketed as Class B. Pertaining to a commercial center, the mix of tenant quality can also lower the property to Class B. From an investor's perspective, there is usually a lot that can be done to bring improvement through renovation and add value in order to change the property’s class from Class B to Class B+ or even Class A.  Assets of this type are thought to always have a high level of demand no matter what the macroeconomic financial situation might be.

Class C

A Class C property is considered to be less attractive in its current form for investment as the possibility to get more yield out of the asset is limited, due to outdated building, inadequate tenants, a high level of vacancy, low demand location and functional obsoleteness. Only through significant renovation and a real estate management pivot could there potentially be a reclassification of the property to a higher level.

Property Investment across Classes A, B & C

Each type of asset class has a level of demand and there is no necessary correlation between asset class and money-making potential. Acquiring a Class C asset could pay off extremely well in the future, if the acquisition is coupled with a reasonable business plan, changes in local infrastructure or a heating up of demand in a newly desired area.  While this type of investment strategy may take a long time to deliver upon expectations and involves a high level of risk, it could prove extremely lucrative.

If an investor is looking for a high level of security they may decide to opt for the highest class of properties.  However, during a recession, when high income earners may be affected, this strategy may be considerably problematic. Focusing on Class B would seem to be the safest option with a moderate to high yield gain if the investment and management is conducted correctly.

While any asset class could make for a good investment, it is crucial that the property not drop in asset class throughout the property management and holding period.  One way to reduce the likelihood of the property dropping in asset class is to ensure that the property is developed and/or managed by a professional and trusted company.

How can you be confident that the development or management of the property is in good hands?  One way is to invest through a real estate investment management company, such as iintoo.  iintoo offers 2-3 year investments in a variety of properties, ranging from Class C multifamily to Class A student housing.  iintoo only offers quality deals having personally vetted the project’s developer, management, building permits, construction plans and revenue forecasts.  It works directly with developers to create reasonable business plans that maximize potential returns and puts safeguards in place that mitigate risk.  Moreover, iintoo oversees each project throughout the investment’s life cycle, visiting the site, conducting frequent update sessions with the project’s sponsor and, in general, making sure the investment is on track.

 

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