Investing Options

There are a variety of different types of investment properties to invest in.  One decision to make is the class type.  Properties are categorized based on several different indicators.  There is not a definitive definition of A,B,C and D properties, but below are some of the general guidelines. It helps to have a working understanding of how properties are categorized when discussing investment properties with other investors.  Most investors experiment with properties from a few different classes and then eventually specialize into a specific class that meets their investing needs.

 

Class A,B,C, or D

Class A: 

 

  • Class A properties are perfect for the conservative investor.  They are more predictable and but also have a lower upside.
  • Lower vacancy rates.  Expect a 4% vacancy rate.
  • Homes are located in mostly owner occupied communities
  • Typically single family homes
  • Suburban and rural areas  
  • 5-8% cap rate
  • Typically $120,000+ purchase price
  • Faster appreciation and sellability 

Class B:

  • Class B properties are also a relatively conservative approach
  • Vacancy rates around 6%
  • Communities are typically a 50/50 mix of owner occupied and rentals
  • Often in suburban and rural areas  
  • 8-10% cap rate
  • Typically $90,000-120,000 purchase price

Class C:

  • Class C properties offer higher returns but can be less predictable.
  • Vacancy rates around 8%
  • Communities are comprised of mostly rental units
  • Often in urban areas
  • 10-12% cap rate
  • Typically $50,000-90,000 purchase price

Class D:

  • Class D properties offer higher returns on paper but can be very volatile and require and experience landlord.
  • Vacancy rates around 10%
  • Communities are comprised of mostly rental units
  • Almost always in urban areas with high poverty and crime rates
  • 12+% cap rate
  • Typically under $50,000 for a single family home

 

Single Family VS Multi Unit

 

Multi Unit

Benefits: 

  • Great cash flow
  • Ongoing rent -- one vacant unit with other occupied units still provides some income

Disadvantages

  • Potentially lower appreciation 
  • Smaller sales network: When selling the property, only investors are potential buyers
  • Fast turnover rate
  • Marginally qualified tenants

Single Family

Benefits:

  • Faster appreciation 
  • Larger audience of potential buyers to sell to someday
  • Long term tenants
  • High qualified tenants

Disadvantages

  • Lower cash flow
  • No income when property is vacant

Summary:

Both multi-unit and single family homes can provide great investment opportunities.   Multi unit properties almost always provide higher cash flow, but require more work because there are more tenants and they are typically less qualified.  Multi unit owners should use a property management company unless they are experienced landlords.  Single family homes are often a better investment for investors looking for a less risky investment.  They appreciate faster and attract long term tenants, so they are often considered a safer, less stressful investment option.