Are you looking to invest in Class A real estate? To find the best real estate investment opportunities for you, you need to understand the relationship between risk and return. One of the ways that real estate investors evaluate multifamily real estate is through property classes. Most investment properties will fall under one of three property classes: Class A, Class B, or Class C.
Related: Buy Multifamily Properties: “A, B, C, D” Which Property Classification Suits You?
In this article, we are going to discuss Class A real estate properties and how to invest in them. But before we dive into that, let’s first answer the question: “What is a property class?”
What Is a Property Class in Real Estate Investing?
There being many thousands of options, it can be confusing which investment property to purchase. Property classification is a rating system (typically from A to C) for commercial real estate properties and apartment buildings for sale in a particular market based on a combination of physical and geographical characteristics.
Property classes were developed by real estate professionals to make it easier to identify and communicate about the quality of a real estate property. Investment properties are generally classified as either Class A, Class B, Class C, or Class D. However, most real estate investors will focus on Class A, Class B, and Class C properties.
Before you start buying an investment property, real estate class is a crucial factor to consider. Knowing the class of an income property for sale will give you a good initial sense of the level of potential risk and return. While this property categorization system isn’t foolproof, it can be a good rule of thumb for investors and a first step in the investment property analysis. Keep in mind that property classes should only be used to compare properties in the same market.
What Is Class A Real Estate?
Although there’s no precise formula by which real estate properties are classified, real estate professionals have a relatively consistent description of each property class. Let’s take a look at the real estate properties definition for Class A.
Class A real estate represent top tier properties in their location because of the following key characteristics:
1. Desirable Location
A desirable location is one of the most important features of a Class A real estate property
These types of real estate properties are located in the most desirable and trending neighbourhoods. The areas which host such a rental property are characterized by plenty of green space, low crime rates, a good job market, good transportation links, good school districts, easy access to amenities like restaurants, hospitals, gyms, and other preferred features.
2. New Construction
Generally, Class A properties are newer buildings that were built within the last 10 or less years. Thus, they are in the best condition and need little or no renovation. That’s what makes such multifamily for sale an excellent choice for a beginner or part-time real estate investor with limited experience and little time to renovate a house.
3. Luxury Real Estate
These properties are the most luxurious. They have the latest design features, high-end finishes, and ample amenities like gyms and pools.
On the other hand, Class B real estate is one notch below Class A real estate in terms of quality. They are slightly older and are in a less pristine condition, offer fewer amenities than Class A properties, and are located in fairly desirable neighborhoods. In other words, the location, design, features, and condition of these properties are good but not necessarily great.
Class C real estate is one that is older (20 to 30 years), is in a poor condition, and is located in the less desirable locations compared to Class B property. A Class C property often has deferred maintenance and fewer amenities. As such, significant repairs and improvements are usually needed upfront to bring the property in good standing.
Pros of Investing in Class A Properties
There are multiple important benefits to investing in a Class A property. The major ones include:
1. Reliable Tenants
Since Class A real estate rentals occupy in premier locations and provide the highest level of comfort, they tend to attract reliable, high-income tenants looking for good-quality housing and willing to pay higher rents for it. They are less likely to default on the monthly rental payments and take good care of the property. Evictions, which can be very unpleasant and costly, are rare with such properties and renters.
2. Steady Rental Income
Regardless of what you are buying, it’s always better to buy the highest quality. When it comes to multifamily investing, a Class A property is usually considered a great investment because it appeals to the best tenants and, therefore, generates a consistent stream of rental income. There is usually a long list of tenants looking to secure a real estate lease on high-quality traditional rentals in safe neighborhoods, and, therefore, vacancy rates are low with this property type.
3. Attractive Financing Terms
Lenders also love Class A real estate due to the lower risk level. Hence, they will often more offer attractive mortgage terms on them, regardless of whether you are looking at a conventional mortgage loan or alternative real estate investment loans.
4. Low Maintenance
Maintenance costs for Class A real estate are usually very low since they are new construction and don’t have any underlaying issues. This will decrease your recurring monthly expenses which will in turn ensure positive cash flow and good return on investment. Furthermore, usually you don’t have to implement any major fixes and renovations when you first buy such an investment property, which means you can start renting out and making money right away. Becoming a landlord is much faster and easier with Class A properties.
Related: What Is a Good Cap Rate When Investing in Multi Family Homes for Sale?
5. Liquidity
Class A real estate properties, given their desirability, are usually easier to sell than Class B and Class C properties in the same market. If you decide to sell your investment property, you’ll often attract a large pool of potential buyers.
6. Appreciation Potential
Since Class A properties are located in desirable locations and are built in a high-quality manner, they usually appreciate quickly. This means that you get to make money not only in the short term (through rental income) but also in the long run (through real estate appreciation).
Related: Invest in These 10 Cities for Real Estate Appreciation in 2021
Cons of Investing in Class A Real Estate Properties
Like all real estate investment strategies, buying a Class A property might come with some potential downsides. Here are the most important ones:
1. High Acquisition Cost
Given the desirability and high demand, these properties come with prices that are usually above what an average investor can afford. Therefore, they have a higher barrier to entry than Class B and Class C properties. This means that you might have to look for alternative financing methods if you are a beginner investor with limited funds.
2. Lower Rate of Return
Class A properties are considered the safest properties for investors. However, they tend to have a cap rate potential than riskier investment properties such as Class B and Class C. However, conducting diligent rental property analysis before buying a property will help you ensure the desired rate of return in terms of both a good cap rate and a good cash on cash return.
Related: 12 Best Multifamily Markets for 2021 with High Cap Rates
Is Investing in Class A Real Estate a Good Idea?
Each property type and class has its own pros and cons. You can make money investing in any of the 3 most popular property classes. However, as an investor, you want to go for a property class that can meet your investment goals. There’s a property class for every investment strategy. Class A properties are great for investors who want to diversify into less risky projects with stable rental income. Due to their high acquisition cost, interested investors will also need to have access to large amounts of capital.
While property classes help you to quickly gauge the level of risk and reward, your final investment decision should be based on numbers. Conducting in-depth analysis on multiple rental properties is the best way to maximize the benefits of investing in Class A real estate and minimize the downsides. This is where Mashvisor’s real estate investment tools come into play. With Mashvisor’s multifamily deal analyzer, you’ll be able to find and analyze investment properties for sale in any market in the US. You are able to identify rental homes with the highest cash flow and rate of return in a matter of minutes.
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The Bottom Line
When it comes to multifamily investing, Class A real estate is the highest quality of property you can find in a market. These properties are located in the best neighborhoods, are in the best condition, and come with the best finishes and amenities. While they provide stable revenue, they also cost the most. If you are looking to invest in Class A properties, be sure to use Mashvisor’s tools to find the most profitable deals in the market. Sign up for a 7-day free trial followed by a 15% discount for life.