Determining the class of property in real estate is incredibly helpful when deciding the extent of the rehab of a house.
Properties and locations can be split up into different classes of A, B, C, or D. A are high-end and D is more the rundown part of town. Each city has its own class A, B, C, or D areas and they can differ from city to city.
Class A in one city could be a gated community with a pool, spa, and gym. Another area the most desirable locations could be on the lake or river. In another city an area close to the hospital or college so people can easily get to work or school. 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 adjust what qualifies a location as A, B, C, or D however you like to fit the city you are investing in.
Walking or driving around a neighborhood gives a pretty good idea of what class it falls under. Looking up crime rates and schools is also helpful. Find pictures of properties that sold in an area or visit a few open houses of properties listed in the area to get a better idea of the rehab needed. Here are some things to look for when assessing a property.
Class A
The house:
- Larger houses
- Newer houses (the oldest houses maybe 10-20 years old)
- If older it has been remodeled
- Functional updated floor plan
- updated finishes
- Landscaped yards (usually professionally done)
- Apartments may have workout rooms or pools
Location:
- The most desirable area
- Possibly gaited communities
- Expensive vehicles
- Good neighborhoods
- Low crime
- 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. 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 to make buyers happy. Keep in mind these areas are also the hardest hit in a recession. These properties also have the highest sale price, high-risk high reward 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. Vacancy rates go up more in class A during a recession. Others rent in class A areas with no issues.
It comes down to personal preference. I stay away from class A. Rehabs are too large and expensive for my current budget. I also stay away from these places when it comes to rentals.
One last thing I want to say about class A is just because I personally, or 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 if you can make a flip work in class A 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 houses:
- Little older than class A
- Home needs some updating
- Maybe some maintenance that was put off but overall solid home
- Yard kept up but not professionally maintained
Think of an old grandma’s house. She kept up on maintenance but also kept the ugly cat and flowers wallpaper, wood paneling, and outdated fixtures and appliance.
The location:
- Safe neighborhood
- Crime low
- 25-50% of properties are rentals
- Good schools
- Not as convenient of a location as class A for work, restaurants, or shopping but close. Only a short commute.
Drive-by on a Friday night or Saturday. People may be walking their pets, kids playing in the yard, people are having a BBQ. This will be a mix of white-collar and blue-collar families. The neighborhood has a family-friendly feel to it.
Considerations for class B.
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. Look for areas that are improving and trending toward class A. Remember an area can always go up or down a class too. If the location continues to improve the property can increase in value. When working in short timelines for a flip don’t count on an area improving and increasing value.
This can also be a good place to rent. Rents are not as high as in class A but your initial investment is less and ROI (return on investment) tends to be higher.
I like this option because if a flip gets too expensive and there will be no profit at the end, rent the house out for a few years. Make money off the renter and if the area continues to appreciate you can have better profits a few years down the road.
I like these areas 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, I like to walk through a house first and have a list of questions to go through with the inspector. Get additional specialty inspections if needed.
Class C
The houses:
- Older houses
- Dated
- Needs some maintenance
- Poor layout
- Major repairs or remodels
The location:
- Blue-collar households with steady jobs
- A larger amount of rentals
- Crime low
- Schools are good
- Some distressed properties
- Few vacant properties
Considerations for class C
The properties tend to be cheaper but the rehab is usually pretty extensive. A positive to that is you can sell a home listing all the new updates. It is critical to estimate repairs right, missing a few things could cost you thousands.
The timeline for the rehab will probably be longer because of the work that needs to be done. The resale may not be as high as class A or B but the upgrades and finishes won’t be as expensive. There could be a good possibility for value add as long as ARV (after repair value) is estimated correctly.
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.
I think finding the right property here can make a good flip. I like to flip in class B and look for rentals in class C but there are good options for flips or rentals in either class.
Class D
Some people only have ABC classes. Some have A-F or even further. I like to have the A-D and keep it as simple as possible while being able to see the difference when researching an area.
The houses:
- Distressed properties
- Low priced
- Needs large amounts of work
- Little maintenance has been done
- Peeling paint
- Yards overgrown
- Junk in yards
The location:
- Low-income area
- High crime rates
- Poor school
- Mostly rentals
- Vacant houses
- Distressed properties
Considerations for class D
A flip is difficult in this area. I am sure some investors can flawlessly pull it off but I 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 one area but this can be risky. I wouldn’t recommend starting this way.
Some investors rent in areas like this. Tenants can have problems with late rent or not paying. 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. People won’t be expecting many luxuries or amenities in these locations so costs can be kept lower.
What Class Property or Location to Choose When House Flipping
Know the area you plan to invest in. What do people want in their class A, B, C, and D locations? This is very specific to what market you are in and why you need to learn your market.
Location and property don’t always match. Having a class C property in a class A neighborhood may be a great potential flip just run your numbers carefully.
Keep in mind this is not a grading system where A is the best investment. It is simply a system to help you assess an investment.
If you have any thoughts or examples of property classes in your area let me know in the comments. What class area do you invest in or are thinking of investing in? I love learning and hearing about other’s experiences.