If you’re new to real estate investing, there is no doubt that you may be overwhelmed by the various terms and restrictions out there that impact you. When in doubt, it’s always helpful to get a property tax lawyer or another industry expert on your side to answer your unique questions, but before you get to that point, there is a lot of info you can uncover on your own.
On that note, understanding different property grades is one of the fundamentals to real estate investing. To put it simply, properties are categorized into different grades or classes based on certain criteria. The most common grades are A, B, and C. Each category reflects the risks and values associated with a property as well as its physical and geographical traits. These classifications also help lenders, realtors, and investors during communication.
Here’s an example of how different properties fit into these grades:
Generally, A grade properties are in optimal locations, offer top quality living spaces with structures being no more than 15 years old, and higher rental fees are charged.
On average, B grade properties are next in line in terms of value, location, and conveniences. They are a good investment for those willing to take a mild to moderate risk and opting for a lower price point.
Finally, Class C properties are ideal for shareholders more focused on higher cash returns over capital appreciation. The C classification encompasses the 20+-year-old structures that are often in need of renovations and upgrades. They are generally located in less popular areas and the rental fees are on the lower end of the scale.
While C properties won’t likely increase in value, they can still provide a steady flow of monthly rental income for the investor, as long as the properties are well maintained.
It is quite common for C properties to make up entire neighborhoods with housing types ranging from single-family homes to multi-family complexes. Tenants are generally on fixed incomes, relying or government support, or working multiple jobs at lower wages. These individuals are often overwhelmed with bills and work massive hours, leaving little time to focus on owning their own property or moving unless forced to do so.
In this setting, rental rates are usually higher than the actual property value. The C properties should be viewed as buy and hold investments that are purchased at lower price points with the expectation of seeing approximately 25% on the investment returns, as long as the homes are maintained. With the exception of tenants losing their income source or being forced to relocate, oftentimes, tenants will remain long-term, especially when in close vicinity to jobs, medical facilities, and shopping, with easy access to public transportation.
Sometimes C grade property owners will offer a lease option or rent to own contracts to trusted tenants. This can be a win-win situation when the terms convey that a percentage of the monthly rent will go towards ownership in return for taking care of the maintenance and upkeep of the property.
Memphis Buy And Hold is specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses from 2007 up to the present of experience in real estate investing and property management in the Memphis and Nashville markets.
