Real Estate Investing: Classifying Neighborhoods A to C
Table of Contents
Real estate investors know that certain properties will help them fulfill their investing goals better than others. Depending on factors such as location, amenities, condition, and age, a property can go up or down the class rating system.
When it comes to property class, there is actually no strict rule that determines what class rating a property should have. The terms “Class A”, “Class B”, and “Class C” are used as a loose standard within the real estate industry. They can help investors and real estate professionals communicate a property’s value quickly and easily.
While the class rating does not fully reflect the value of a property, it does give a reliable description of what investors could expect. Each property class has its advantages and disadvantages, which is why some investors may choose to focus on one over the others. For example, BAM Capital only takes on Class A, Class A-, and Class B++ assets because one of our goals is to provide low-risk investment opportunities for our investors. [1]
These classifications not only apply to properties but also neighborhoods. Location is very important in terms of real estate investing, which is why the same class ratings are used. Despite being a “loose standard”, these class ratings are still worth learning about. Here are the characteristics of each neighborhood class rating.
Neighborhood Classes
The usual class ratings are Class A, Class B, and Class C. Sub-categories like Class A- or Class B++ are used to describe properties or neighborhoods that are somewhere in between these standard classifications. [2]
It is important to remember that these classifications are just a guide and investors can still make their own assessment based on several factors—including their subjective opinion. In fact, one investor may think a property is Class B while another thinks it is Class C.
These class ratings can also be assigned to specific neighborhoods based on criteria such as location, home amenities, crime rate, property condition, etc. Class A neighborhoods may have plenty of Class A properties because they are well-located, while Class C neighborhoods may have homes with fewer amenities. [2]
Investors can use these classifications to find neighborhoods with the type of properties they are looking to invest in. This can come in handy when considering their budget, investing goals, and ROI expectations.
Even though there are no set rules, there are still a number of factors that may influence a neighborhood’s class rating. For example, a neighborhood with new homes and impressive amenities may get a higher rating than one with older homes and no amenities. Class C neighborhoods typically have the oldest properties.
Realistically, certain neighborhoods will have homes of varying ages, so other factors come into play. The condition of the properties—whether the homes are well-maintained or not—will factor into the equation. The same goes with repairs, renovations, and landscaping. Some neighborhoods have undergone renovations and landscaping to make them more attractive to potential tenants. [2]
Even if a neighborhood is considered Class C or Class B, they can still improve in the future if new homes are built and if older properties are repaired and renovated.
Neighborhoods with easy access to restaurants, grocery stores, schools, parks, malls, golf courses, and transportation hubs are typically Class A to B.
Neighborhood classes aren’t just about the properties but also the people living in them. Places with high income tenants or working in good companies can increase their neighborhood’s rating. Similarly, a neighborhood with a high crime rate will have a lower rating because tenants are less likely to move in. Class A neighborhoods have the lowest crime rate. [2]
Finally, there are also financial aspects that affect the neighborhood classes. For example, an area’s average purchase price may indicate the neighborhood class
Appreciation factors into a neighborhood’s class rating as well. It can sometimes be easy to spot neighborhoods with no appreciation potential. This includes neighborhoods that are considered Class D—which is the lowest rating.
Class A Neighborhoods
Class A neighborhoods are considered top-of-the-line. They’re the best of the best. Sometimes they are even considered among the best places to live. These neighborhoods attract wealthier tenants because the properties are on the higher end of the spectrum.
Class A neighborhoods are generally bigger, more modern, and have all the bells and whistles that make them appealing to prospective tenants. Amenities like granite countertops, central air setups, SMART home systems, alarms, real wood flooring, and multiple bedrooms are not only common but often expected. [2]
These neighborhoods are well-located and have access to impressive area amenities such as golf courses, entertainment, fine dining, and parks. Class A neighborhoods also don’t need to worry much about crime. The properties within are new and well-built, and they are also well-maintained.
If there is a downside to Class A neighborhoods it’s the fact that they come with a high price tag. Because of the price, tenants may have higher expectations in terms of amenities and maintenance. But investors don’t necessarily have to take on the role of landlord if they are interested in a Class A property. Through multifamily syndication, multiple investors can pool their money in order to purchase a single asset. A syndicator locates and puts the deal together and then looks for investors. This is a passive type of investment that does not require investors to manage the property. They will profit from the cash flow and the equity once the deal has closed, depending on the deal structure. Passive investors supply most of the capital required in exchange for equity in the real estate. [3]
BAM Capital prioritizes Class A and Class A- properties because they are the most reliable investments with the greatest potential for a huge profit.
Class B Neighborhoods
Although Class B neighborhoods aren’t as prestigious as the ones in Class A, they can still be good. In fact, they have the most potential of upgrading to Class A with a few repairs, renovations, and additions.
The properties in a Class B neighborhood are generally well-built even though they are a bit older. Despite not having as many amenities, Class B homes are well-maintained. General repairs may be needed because of the age of these properties. [2]
Class B neighborhoods aren’t as well-located, but they are clean and have curb appeal. Schools, shopping centers, and popular restaurants are typically located nearby. In terms of crime rate, these neighborhoods are considered safe and comfortable for renters.
Residents are usually working-class families as well as a few higher-income earners. Investors can expect a steady cash flow from these middle to upper-class type neighborhoods. Class B properties are not as expensive as Class A ones. Additionally, Class B properties can be upgraded to increase home value and even monthly rent. Overall, Class B neighborhoods have attractive properties that can make good investments. [2]
BAM Capital occasionally offers Class B++ properties that can easily be upgraded to Class A.
Class C Neighborhoods
Class C neighborhoods aren’t necessarily bad, but the properties tend to be older and don’t have the finishes that Class A or B typically have. Some properties may be over 20 years old. Investors and renters shouldn’t expect a whole lot of amenities. Class C properties may also require a lot of repairs or renovations before they can be ready to rent. However, this is to be expected because these properties have a lower price. [2]
Neighborhoods that are not well-located or landscaped may be placed in this category. In terms of appearance, the properties can be described as average. That said, they still have access to plenty of fast food, grocery stores, shops, and some restaurants. They are also located near bus routes and other means of transportation. The crime rate is a bit higher than a Class B area.
Residents of Class C neighborhoods are usually blue-collar workers and mid to lower-income earners.
Some investors focus on Class C neighborhoods because the properties are more affordable and practical. They can also be a good fit for newer investors. With a few repairs, these properties can become Class B, which raises its equity. However, a Class C property also has the potential to transition into a Class D which is something investors would want to avoid.
BAM Capital’s focus is on creating low-risk investment opportunities for investors, which is why it does not offer Class C properties.
Work with BAM Capital
Investors looking for a multifamily syndicator should work with BAM Capital. BAM Capital will arrange the syndication deal and also handle property management, so you don’t have to worry about the usual responsibilities associated with real estate investing. You don’t have to take on the role of a landlord. Through multifamily syndication, investors can enjoy a low-risk and passive investment where they can get money from the cash flow and equity once the deal is done. [1]
BAM Capital works with accredited investors and negotiates the purchasing and financing of high quality multifamily real estate properties on their behalf. This Indianapolis-based company currently has over $700M AUM and 5,000+ units. Schedule a call with BAM Capital and invest today.
