There are 4 classes of properties to consider when looking at a turn-key rental property. Investors have their preference as to which classes they typically buy and this varies from investor to investor.
What are the 4 classes?
In descending order according to cost and condition, you have ‘A’, ‘B’, ‘C’, and ‘D’ classes. A-class is the high-end of the range while D-class usually needs major repairs and rents for the least amount.
Properties in these neighborhoods are in move-in condition, don’t need any major repairs, and are generally newer or in a flourishing area of the city.
They’re typically well-maintained neighborhoods and both the cost-to-buy and the monthly rent are higher than the average property being rented.
In addition, these neighborhoods are typically in the best school districts and the lowest crime areas.
A-class properties aren’t normally on the market at a discount so most real estate investors don’t consider A-class properties to be good cash-flowing rentals.
These neighborhoods are primarily owner occupied residents and typically don’t make good rentals due to their higher cost and taxes.
Not only will it cost you more money to purchase, but your tenant pool is drastically lowered because most won’t be able to afford the rent for these properties.
Some assume that with the higher cost property, you’ll have less tenant issues to deal with but that’s not always the case.
In general, most turn-key rentals won’t be in an A-class neighborhood.
Both ‘B’ and ‘C’ classes can be the sweet spot for investors.
A typical ‘B’ is in decent condition but might be a bit older than your ‘A’ neighborhood. The neighborhood is still close to jobs and other amenities but updates are needed.
Perfect for white collar tenants, the rent is more manageable and are seen as “good and safe” property. The schools are decent and there’s low to mild crime in the area.
There’s a good chance that the tenants are more long-term compared to a ‘C’ or ‘D’ which greatly helps your vacancy rate. Tenants looking for higher priced rentals will most likely have better credit (more to risk) and better employment history.
You can find deals for properties in a B-class neighborhood that need some small repairs and aren’t retail-ready. Buying these properties ‘as is’ and fixing them up can save you money on the buy and can provide you with good cash flow each month after it’s fixed up.
B-class neighborhoods will most likely see better appreciation than lower class areas.
These properties need some work but if you can get them repaired, the cash flow can be great.
You can typically find highly distressed properties in these neighborhoods that are not listed on the MLS. This provides an opportunity for you to come in, purchase the property at a discount, fix it up, and tenant it.
‘C’ properties have a lower monthly rent than your ‘B’ properties and with this can come instability of long-term tenants. It’s not always the case, but it happens. Investors are willing to take this additional risk because the properties are cheap to acquire and can deliver a high rate of return.
A neighborhood that’s C-class is great for blue collar tenants who might not be as worried about the schools and crime rate, but instead and the distance from work and how high the rent is.
Neighborhoods that are considered ‘D’ require the most work and risk, which most investors don’t want to deal with.
From collecting rent, dealing with evictions, damage to the property when a tenant leaves, and upkeep of the property, these properties can be more hassle than the cash flow is worth.
That being said, you can find these properties at the deepest discounts and if you’re trying to get your feet in the door, this might be a low-cost option for you.
Property management can help with the “hassle” that is associated with ‘D’s but it’s purely your preference if you want to add these properties to your portfolio. You should note that many PM’s won’t manage properties in these areas.
Vacancies in these neighborhoods are normally high, along with a high number of properties needing repair and a high crime rate. Additionally, vacant properties in these areas are more likely to be vandalized due to the higher crime in the area.
School ratings, crime statistics, neighborhood condition, and proximity to amenities are also things to consider when deciding which neighborhood class type works for you.
Most A-class neighborhoods will have better ratings for school and crime, while your D-class neighborhood is the opposite.
It’s all about your preference when deciding the type of rental property to purchase. The good thing is that with turn-key properties, they handle the property management so you don’t have to worry about issues that arise. They can handle vacancies and maintenance issues while you’re working on getting more deals.
If you want to learn more about investing in rentals passively, here’s a free guide on ‘Building Wealth with Rental Properties’.