What is a Class A Property?
Property Classes Explained
Real estate investors use these terms to describe several important physical and financial characteristics of a property. Some of these characteristics typically include (but are not limited to):
- location of the property
- age of the property
- income levels of residents
- condition of the property
Understanding the combination of these items can help an investor determine a general value for a property.
One extremely important point to remember when discussing property classes is that everything is relative. A property should be evaluated in the context of the other properties in the general vicinity.
For example, a Class A Property in one geographic location should only be compared to other Class A properties in the same area. An area may be a city or county or another geographical area within a state. Keeping this in mind will help an investor stay focused on becoming an expert in their local market.
Class A Property Guidelines and Characteristics
Even though there are no officially designated guidelines for what makes a Class A property, experienced investors generally understand what different property classes represent.
General guideline descriptions for Class A properties are:
- Location – Built in the most desirable parts of town with little crime
- Age of the Property – Typically built within the previous 10 years
- Income Level of the Residents – High-income earners
- Appreciation – Positive property appreciation for well into the foreseeable future
- Property Condition – Well-maintained with few evident physical issues
In short, Class A properties are the nicest houses in nicest neighborhoods.
These are the properties that are highest-priced, best-kept properties in the general vicinity. Oftentimes Class A properties are the newest properties, but they don’t have to be priced on the higher range of the spectrum
Are Class A Properties a Good Real Estate Investment?
Class A properties may represent the nicest buildings in the best neighborhoods, but does it make good financial sense to invest in this type of real estate?
Let’s cover some of the pros and cons of investing in Class A properties.
Advantages of Investing in Class A Properties
- High Earning Potential – Class A properties will have the highest potential for charging the highest amount of gross rent.
- Well-Managed and Well-Maintained – For an investor who isn’t interested in dealing with the most common headaches that come with dilapidated properties and difficult tenants, Class A properties – while not a guarantee of smooth sailing – will typically allow the property owner to side-step the most challenging aspects of managing properties and finding good tenants. Part of what makes a Class A property desirable is the lack of deferred maintenance and long list of needed repairs.
- Great Potential for Appreciation – Sometimes a Class B, Class C or Class D neighborhood can slowly transform to a Class A neighborhood through the process of gentrification, but more often, a Class A neighborhood will stay a Class A neighborhood for decades to come. This is partially because of the way homes are built and how property parcels are laid out, which allows Class A properties to be more reliable for stronger appreciation over a longer period of time.
- High-Income Tenants Stay Longer – While every tenant’s situation is unique, there’s a case to be made that a high-income tenant is likely to stay put for a longer period of time, which allows for more consistent and uninterrupted cash flow for the landlord.
Disadvantages of Investing in Class A Properties
- Higher Upfront Investment – Compared to other property classes, Class A properties require a higher initial investment by far. Even with the best financing options, the down payment alone for a Class A property will be a larger obstacle for many real estate investors.
- Cost Recovery – With the higher upfront cost of acquiring a Class A property, along with the initial cost of repairs and improvements on a larger property, it may require a significant time period to produce positive cash flow for this property type.
- Higher Maintenance Costs – Since most Class A properties are larger in size and/or have more built-in luxuries that aren’t assumed with other property classes (e.g. – pools, air conditioning, underground sprinkling, etc), there are many more components that will inevitably break and need to be repaired or replaced, thus leading to higher ongoing maintenance costs.
- Greater Risk for Vacancy and Loss – In many markets, there will be a smaller demand for Class A properties than other property types. As such, Class A properties may sit vacant for longer periods of time between tenants, and the cost of a large vacant property can add up quickly.
While every real estate investor is coming from a different financial situation and has a different set of goals, Class A investors are typically those with a stronger financial position with the ability to cover higher costs (both initial and ongoing) that arise from deferred maintenance and longer vacancies.