Our investors often ask about the difference between Class A, Class B, and Class C properties. While there are some boundaries between these three real estate classifications, there are no official guidelines.
We’ll go into the details below, but in a very simple sense:
- Class A properties are investment-grade, high-quality properties that are extremely desirable and attract high-income renters.
- Class B properties are one step down from Class A, generally older, and typically need more work and upgrades, but they have more potential to add value.
- Class C properties need significant renovations and improvements and typically offer the greatest upside potential.
These three distinct property classifications offer different benefits to investors. For instance, Class A properties are typically more stable and are generally preferred by risk-averse investors hoping to preserve investment value and benefit mainly from cash-flow. Class B and C properties can be slightly riskier, but also provide potential to earn greater returns for those investors who can add value through upgrades and improvements — and sustain the risk.
Let’s get a bit more detail on the contrasts between Class A, Class B, and Class C properties and what they mean for real estate investors.
What Are Class A, Class B, and Class C Properties?
Class A, Class B, and Class C properties are classifications of real estate investments. Class A are top-tier, with robust amenities and high-paying tenants. Class B and C properties are lower-tier, with lower rents and lower-tier locations. While riskier, they also carry higher ROI potential.
Factors
The differences between Class A, B, and C properties come down to factors like: 
- Building quality
- Finishes
- Amenities
- Locations
- Tenant types
- Rents
- Investment risk
- ROI potential
Quick Examples
A Class A property might be a new apartment building on Manhattan’s Upper East Side, with pools, laundry facilities, fitness centers, a 24-hour concierge, and package storage.
A Class B property could be a 6-year-old apartment building in Reading, PA, close to shopping centers and good schools, surrounded by middle-income neighbors with children.
A Class C property might be an apartment complex in need of updates in Chicago’s Englewood community, with two elevators, limited parking, and limited access to shopping.
Class A Properties: The Pinnacle of Commercial Real Estate
If tenants are competing for a property and the word “upscale” applies, it’s probably a Class A property.
A Class A property is in high-demand with high-paying, top-tier residential or commercial tenants. Class A buildings have top-quality finishes like hardwood floors, natural stone, and statement lighting.
The building is either new or frequently updated, and it features modern interior design elements like open layouts and custom cabinetry and furniture. A Class A property might also have home automation, climate control, and state-of-the-art home entertainment systems.
Class A Amenities and Locations
A Class A property provides access to premier amenities like fitness centers, built-in Wi-Fi, resort-style pools, hot tubs, and lounges. You may even find comfortable co-working spaces where residents can unwind and work flexibly without being confined to their apartments.
In cities, Class A properties are in the best neighborhoods, such as New York’s Greenwich Village, San Francisco’s Mission District, or Chicago’s Lincoln Park. In suburban or rural areas, Class A buildings are in exclusive locations adjacent to attractions like national parks, beaches, lakes, ski resorts, or gated communities.
Class A Tenant Types and Rents
Properties with an “A” classification appeal to high-income tenants who can afford (and prefer) a luxury setting. These residential or commercial tenants are generally more likely to stay longer and pay rent in full and on time.
Rental income from a Class A property tends to be high. Typical residential tenants are high-earning professionals such as doctors, lawyers, and bankers. Commercial tenants are generally established corporations or well-funded startups.
Class A Investment Potential
Because Class A properties enjoy strong demand from higher-income tenants, they tend to be easier to fill. This makes them more stable and reliable as investments. They also generate consistent, reliable returns, making them a safe haven for preserving and moderately growing wealth.
They’re easier to sell, and gradually increase in value over time, so they’re typically less risky than other kinds of properties. While these factors make them attractive to investors, they do have two key drawbacks vs Class B and C properties: they don’t have as much rapid upside potential and they have higher acquisition costs. Investors willing to assume more risk may choose class B or C properties instead.
Examples of Class A Properties
- Wells Fargo Center: A newly-renovated office building in downtown Tampa, Florida, with panoramic views of the waterfront.
- Skyscraper in New York’s Financial district: A gleaming building that’s home to prestigious firms and tech start-ups.
- Luxury apartment complex in San Francisco: A chic neighborhood building with a gym, pool, and 24/7 concierge service.
- Condo in Aspen with ski-in / ski-out lift access.
Class B Properties: The Middle Ground
You’ll find Class B properties somewhere between the upscale Class A and the distressed Class C.
A Class B property typically isn’t new construction, but it also isn’t too old or tired. While it may need a few updates and won’t have the very best amenities, it is usually in a desirable location and provides comfortable living space or work space.
Buildings are in good condition, with above-average rents, such as an apartment complex or condo on the fringe of a Class A location. They may have tile floors, laminate counters, carpeting in bedrooms, and fully functioning mechanical and HVAC systems.
Class B Amenities and Locations
A Class B property will generally have similar amenities to Class A, though they may be fewer in number or slightly diminished in quality. You might find nearby access to gyms, swimming pools, dog parks, and playgrounds, with the occasional rooftop deck or patio.
Class B properties typically aren’t far from Class A properties, though they’re in slightly less desirable locations. For instance, while a Class A property might be right on the beach, a Class B property may be a few streets away, lacking the spectacular views but still in a prime location.
Class B Tenant Types and Rents
Properties with a “B” classification appeal to slightly lower-income tenants. Commercial and residential tenants may be less established, with lower credit, or unable or unwilling to sign a long-term lease. They may be companies that value function over form, such as call centers or IT, or cost-conscious high-income professionals.
Rental income from a Class B property tends to be moderate, but relatively stable. Though rents may suffer during economic downturns, they typically enjoy a steady cash flow.
Class B Investment Potential
Class B properties can be a good investment because they balance risk and reward. They’re more affordable, with relatively high rents and low vacancy rates. Class B properties attract a broad range of tenants, including working professionals and families, with decent occupancy rates.
With lower purchase prices and moderate renovation potential, a Class B property can offer higher returns with a greater upside potential for appreciation. They can also deliver an attractive combination of wealth protection and reliable rental yields. If markets soften, these properties can hold their value and keep performing well.
Examples of Class B Properties
- Mid-rise office building in Andover, Massachusetts, with basic amenities like nearby dining, outdoor space, and ample parking, suitable for small to medium-sized businesses.
- Neighborhood shopping center with retail units, anchored by grocery stores, serving local community needs.
- Multi-family apartment complex with standard amenities like balconies and stainless steel appliances that attracts middle-income families and offers stable rental income.
- Attractive, modern cabin five miles from Sugarloaf ski resort in Maine.
Class C Properties: The Value Play
When you find yourself in a slightly less desirable area with buildings that need repairs and may be more than 20 years old, you’re most likely looking at Class C properties.
A Class C property is old and needs updates. It may be in a high-traffic area, with significant infrastructure issues like potholes in the parking lot and nearby streets, or outdated HVAC.
Buildings can be in poor condition, with below-average rents.
Class C Amenities and Locations
A Class C property typically has few or lower-tier amenities. It may have clean rooms or functional workspace, but only basic convenience stores nearby for shopping, and below-average schools. It may not have central air conditioning, elevators, or adequate parking.
Class C property locations may have high crime rates and may be further from employment centers, restaurants, and playgrounds. You might find them in East St. Louis, the South Side of Chicago, or Camden, New Jersey, where local economies are struggling.
Class C Tenant Types and Rents
Properties with a “C” classification appeal to lower-income tenants and people on a fixed income. Rents may be at the lower end of the scale.
Class C Investment Potential
Class C properties offer investors a mix of high risk and the potential for higher returns. These properties can be the most affordable. Since they’re also the most in need of renovations, they may deliver high investment yields.
They can also show good cash flow and are often considered cash cows, generating significant rental income for the purchase price. However, some investors consider Class C buildings to be too risky due to the work and capital required to generate returns.
Examples of Class C Properties
- A four-story office building built in 1918 that hasn’t had a major renovation since the 1970s
- A residential apartment building in Flint, Michigan with outdated HVAC, electric capacity, and telecommunications equipment.
- A vacant storefront in North Philadelphia, Pennsylvania, that would need significant renovation before it could be rented again.
- A 30-year-old multifamily building in Morgantown, West Virginia.
Investment Considerations and Strategies
Choosing between investing in Class A, Class B, or Class C properties often comes down to risk tolerance and return potential.
Because of their prime locations, modern amenities, and high-quality tenants, Class A properties command premium rents, but often lower long-term yields.
Class B properties are in good locations but may need upgrades or maintenance, offering moderate risk and returns.
Class C properties are usually older, in less desirable areas, and need significant renovations or management. However, they may provide higher returns due to their lower initial costs.
Experienced investors balance risk, return expectations, and investment goals when deciding between these property classes.
Conclusion: Making Informed Investment Decisions
Class A, B, and C properties are distinct types of residential and commercial investment properties.
- Class A properties tend to be new construction with high-tier finishes and amenities. They attract high-income tenants and have high purchase prices. They tend to generate high rental revenue and appreciate in value gradually over time.
- Class B properties are slightly older (less than 10 years old) with somewhat lower-tiered amenities and finishes. They attract high to middle-income tenants and have more moderate purchase prices. They typically drive mid-tier rental revenue, carry more risk than Class A properties, and can appreciate in value rapidly with renovations.
- Class C properties are old buildings in distressed areas with few amenities. They attract low-income tenants and have low purchase prices. They tend to generate lower, less stable rental revenue and are the riskiest of the three types of investments. However, they can appreciate the most significantly with strategic renovations and upgrades.
Successful real estate investors understand the differences between Class A, Class B, and Class C properties and work to choose the investments that best suit their own personal investment strategy.
Diversify Your Investments With CalTier
CalTier is an innovative online investment and technology platform that lets investors access typically hard-to-reach institutional-grade multi-family real estate investments. With CalTier, you’ll benefit from a diverse portfolio of cash-flowing apartment buildings located throughout the U.S. CalTier provides access to both non-accredited and accredited investors.
Enjoy low fees, a 90-day money-back guarantee, redemption flexibility, and the opportunity to diversify your portfolio, providing you with short and long-term
Sources:
