903: Classes of Properties Explained
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00:01
Welcome to Episode Three of season nine of the Growing Empire Show today we're going to talk about classes of properties and why that would matter for you as the investor. So stay tuned.
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Welcome to growing empires hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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For investors, property classes is a really important factor to consider because each class represents a different level of risk and return. You should use these different classes to analyze your investment strategy and decide on which one is best for you. I commonly talk about not having all your eggs in one basket. So I do think it's really valuable information to know the difference between the properties, the level of risk associated, and which one you should have in your investment strategy. With that being said, I think that it's really important to have all of them in your investment portfolio. So let's break them down a little bit. Class A, Class A is a property that usually represents the highest quality of fit and finish for the unit in the most desired locations and they usually are premium rents. So you can have class A properties very typically around center cities, in areas where there's a lot of development going on, or in major metropolitan areas. These are usually large buildings, with hundreds of units, and they really do represent the highest quality of living for rental apartments. So let's talk a little bit about the fit and finish of these and I will compare those to others so you can understand what I mean. So in a class A property I would very much expect there to be it's an amenity driven building, usually. There's parking, there's a gym, there's a mailroom, there's a package delivery service, there's intercoms, there's storage, sometimes a bike room. They are high amenity driven buildings. And usually the types of tenants that live in these units are usually corporate employees. You can have professors, you know, they're usually business class tenants, you know. They work for a living, they are a lot of times in corporate America, you know, and they are just the type of people that spend very little time actually in their home because they're probably commuting and they're most likely working more than just a typical 40 hour week. So what they expect in their locations is convenience. One thing I forgot to mention is that a lot of times laundry facilities are inside those buildings as well. So the most common demand of these types of tenants are amenities, right? It's convenience. So anything that you could do to put into your building that would be an amenity driven feature is going to be great to attract these high quality Class A tenants to live in these Class A buildings. And the finishes of the properties are usually the higher quality materials. So you will see things like ceramic tile, and you will see hardwood floors and stainless steel appliances and quartz or granite countertops. These are again commonly used finishes for these types of units. And they're usually very modern buildings. A lot of times they're constructed from ground up. And if they're not constructed from ground up, there's been significant renovation or rehabilitation to an old building to turn it into something brand new. But with that, you're talking all new plumbing, all new electric. I mean, you're talking a really, really beautiful modernized building. The challenge with this type of property or this class of property is number one, they're very expensive. So they will turn out to be the lowest cap rate. But they also present the least amount of risk because everything is renovated in terms of dollars for repairs. They however, also present a much higher risk because they are much harder to rent and the population of people that can afford them is usually much smaller than you would find in a B and C class so it takes longer to rent. And you do present more risk because of the economy shifts. Where do you think those a class tenants move to? They move to the B class neighborhood for more affordability. So they're a risky proposition from the term of occupancy and they're a very low risk proposition from the term of repairs and maintenance. Because everything should be brand new, and it likely was just constructed. So although you may have an old building you have brand new everything inside Building. That's class A.
05:02
Class B, I would consider your suburban area. Okay, so these buildings tend to be one step down from class A. They're generally a little bit older. The tenants will earn less than the tenants that would be able to afford an A class property. The condition of the unit will be still very neat and pretty. However, the quality of materials will be downgraded slightly. So instead of, for example, hardwood floors, you might find vinyl plank floors that look like wood. Instead of granite or quartz countertops, you may find like Corian countertops. So it's a little bit of a lower quality of fit and finish, not by much. They will aesthetically be very similar and very pleasing to the eye. So aesthetically, they look similar, but the quality of the materials will be a little bit downgraded. And this type of tenant like I said, is usually a little bit of a lower income tenant. But we're not talking workforce housing or on public housing, we're talking about just a lower grade income. When we're talking about Class A properties, I would say you typically should expect three to four times the rent in income, Class B properties, two and a half to three times the income would be a good metric to affordability for these units. And while there may be some deferred maintenance in class B, again, these properties are generally a little bit better cared for. They are typically older than the Class A but not by a whole lot. So you should have a little bit more in your budget for repairs and maintenance. But the good news is, is that this is currently the average class of properties for occupancy. So they are in much higher demand than the A class properties. There's a much wider range of potential tenants to rent to. And because Class B is considered a little bit more suburban than Class C would be, it's definitely more desirable of a location for those tenants to be in. The other thing that I particularly find in my area is that I also find that class B properties have a much longer tenancy, okay. Much, much longer tenancy and renewal rate with increases than our class A properties or a Class C properties. So when you're factoring your analysis on a Class B property, you're going to want to factor in a little bit more for repairs and maintenance, but a little less on your vacancy rate than if you were comparing it to a class a property.
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The episode will continue in just a moment.
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I recognize that as an active investor, you want to implement best practices that drive the highest returns on your properties. Everything we do at Empire is designed to make life a lot easier for you so you make sound decisions regarding your portfolio. Whether that's through this Growing Empires podcast, our company of services of property acquisition, construction and management, or by becoming an Empire Capital Fund investor, we want you to be as successful as possible. However, using the right methods is critical to achieving your ROI. There's a lot of advice out there and it can be overwhelming. Especially if you're using a method that isn't working. Don't take a chance on an approach that may not be right for you. If you want to be sure I can help you assess if your current strategies are fit to your properties and goals. Book a call with me today to see if there's a better way, go to Jenniferdejesus.com and click book a consult and I can confirm that the method you are using is the right one for you or suggest a simpler, more profitable alternative. One quick conversation and you'll feel better about the choices you're making regarding your real estate investment portfolio and the value of converting to long term.
08:54
And last but not least, we have our class C properties. These properties are typically always more than 20 or 30 years old, they could be as old as 100, 120 years old. They're typically older properties, so there's a lot more repairs and maintenance. I would consider them to be less desirable locations because they're most likely inner city. Okay, these properties are generally in need of a lot more renovation and updating to the building and the infrastructure to bring it up to current code standards are up to date. But Class C buildings tend to have the lowest rental rates than Class A or Class B. So they have a steady stream of cash flow for investors. And in my opinion, they present the least amount of risk with occupancy, but they present the most amount of risk for repairs and maintenance. So if you're going to go into buying a Class C property, you're going to want to make sure that you factor a lower vacancy rate, a much higher repair and maintenance category, and these buildings are most definitely going to need some significant capital improvements. So you're going to want to make sure that you budget for them. So why is it important to have all classes of properties in your portfolio? It's really about that risk factor that we talked about. So for you to have good cash flow, number one, you have to have occupancy. And number two, you have to keep your expenses low. Okay, so for you to be able to have the best of both worlds, you really should have a variety of things in your portfolio. Because if you're going to want to take a risk in one area, you're going to want to capitalize in that same area and another avenue. Now, you certainly don't have to have all of your money invested in real estate, you can invest in stocks and IRAs and different methods as well. And I think that that's all really valuable information. But when we're talking about rental real estate, specifically, I think it's really important to have a variety of things in your portfolio, because they are all dramatically different in how they're impacted by the economic changes. They were all dramatically different in how they produced income during COVID. And who paid and who didn't pay. So I just think it's a really wise decision to make sure that you have all types of classes of properties in your repertoire. You want to make sure that you're buying at favorable rates for those type of class of properties. So again, we're talking about A class is going to be very high premium, very low cap rate. Your C class property should be very low purchase price. So much higher cap rate, but those properties are going to need a little bit more renovation. And the B class properties are kind of your sweet spot in the middle. Okay, so you should be able to buy the C class properties at much lower, much more favorable rates than A class and B class should be right dead smack in the middle. Banks will look at this metric as well to analyze their risk factors. And if you are not a seasoned investor, they are going to be more widely attracted to seeing you purchase in the B class and A class properties because there's a lot less risk from a repairs and maintenance perspective. However, if you're a seasoned investor, any type of class of property is going to be acceptable to the lender. Going back to what I said though, in previous episodes, it's really important that no matter what you're buying, it's cashflow positive from day one. There is something that you need to consider and that's the amount of repairs and maintenance that you have to put into a property to make it successful. And it doesn't mean that you're going to be rich from day one. But you do want to make sure that your property is cash flowing. If you have a variety of properties in your portfolio, when one you're putting repairs and capital improvements into. The other one could be producing enough income to cover that deficit. And vice versa when you're having a challenge with renting and occupancy. The ones that are usually fully occupied and consistent cash flow will help to keep that property flowing as well. I hope you got a lot out of today's show. Until next time, take care.
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For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio visit growingempires.com