Before we start differentiating, we need to understand what a property class is. Property classes are a three-tiered category system used in the real estate industry and are used to price and valuate as asset based on many features. An A class Property will be different from a B class property, as well as C class property.
Class A Property
What is property class and how does it relate to class A? Class A property is considered the crème-de-la-crème of real estate. Class A property will attract your celebrities and other A-list entertainers.
An Example of Class A Property
In 1992, Madonna bought a 1928 Mediterranean Revival Mansion, in Dade County. Her Miami mansion was north of the Vizcaya Palace and gardens. It was a 6-bedroom home complete with a large outside pool and sits right on the shores of the Atlantic Ocean.
Madonna sold it back in 2000, but it remains a good example of a class A property. Class A properties are newer on the market, no more than 10-years old.
Class B Property
What is property class and how does it relate to class B property? A class B property is bought by people who come from the middle class. The class B property is a little older than a class A, but they still command a good price. Blue-collar workers are the people who usually invest in a class B property.
The only difference between a class B property and a class A property is a buyer’s net worth. Class B buyers typically earn less than class A buyers, but they are still rolling in the money.
Class C Property
What is property class and how does it relate to class C? Class C property is more for those who live in a lower income area. Class C property attracts people who live off of government subsidies and working low wage jobs.
You will find a lot of pawn shops and check-cashing businesses in the area. The area we live in is considered to be a class C property. We live near the projects and the homes are older.
The homes look about 30 years old or more. They need a lot of maintenance and repairs are ongoing. These properties are perfect who cannot afford much. They typically cost less than class A or B.
What about class D?
Class D typically functions the same way as class C. though the tenants may be a lot tougher and more dangerous.
Investment Benefits of Each Class and How They Compare to One Another
1) You will find very attractive returns in commercial real estate. You will learn this during your first day of real estate class. Rule #1, you always wait until the commercial real estate is chasing yields, and right now they are. Sometimes real estate offers more attractive options than stocks or bonds.
We are using Madonna as an example again because she is a genius with real estate. She has bought many properties over the years, including her Miami home. Some properties she keeps in the long-term and some she sells after a few years. Her investment portfolio is solid and amazing. One reason why is because she makes great choices in the real estate market.
2) Real estate offers clients a steady cash flow. You can get this cash when the dividends are distributed. You have a choice between monthly, quarterly, and annually.
3) What about the equity? You can choose the property appreciation or the capital gain when the house sells. You can choose between buying and selling right away or holding onto the property for many years. Those who decide to buy and sell right away are doing what many call “the fix and flip.”
4) Some investors like to take advantage of the depreciation. Depreciation may decrease the accounting structure of the property, but it does not decrease the value of the property. You can use a tax benefit called “passive loss” to offset other income. Talk to your tax representative about this tool. It may save you a lot of money, especially when you have made improvements on your home over the years.
5) There is something called a “principal paydown.” It is a monthly savings plan that reduces the leverage, which increases the equity. You can find out more about this tax tool by clicking here.
6) It is a good way to diversify a portfolio that has a lot of hard assets. Real estate is different than buying into a company. You may be buying into something that is here today and gone tomorrow when you buy into a company.