A Quick Guide to Real Estate Asset Classes
In the business world, it’s much easier when things are organized. Having categories and systems allows people to collaborate and operate efficiently. This is the case for real estate and its asset classes. With asset classes, investors, agents, and other real estate professionals can better evaluate and compare investment properties. Here’s a quick guide to real estate asset classes:
First Things First – What is an Asset Class?
An asset class – in any industry – is a group of investments that are similar and therefore categorized into different classes based on these similarities. Real estate is an asset class of its own, usually found under the category of “alternative assets” when one looks at asset classes. With that said, there are asset classes within real estate, also known as “property classes.” Here is our guide to real estate asset classes.
A Guide to Real Estate Asset Classes
Typically, there are three asset classes in real estate – A, B, and C. The real estate investment’s characteristics categorize these property classes. Some things that contribute to the decision of which class a property falls into are location, property condition, and the market in the area. Like in other industries, real estate asset classes help investors better understand, communicate, and make decisions about real estate investments. Though due diligence is still a must, knowing a property class is an essential step in understanding an investment property for an investor.
Often the highest quality properties for their market, Class A properties are usually priced high and don’t have much room for add-value. These properties tend to be found in highly sought-after areas that include wealthy residents and high-ranking schools. Properties in this class also tend to have high-end amenities and are often recently built or updated, which makes them even more desirable. Due to the low add-value, popular demand, and high prices, there’s much competition for Class A properties, and investing in them usually doesn’t lead to much profit.
Properties in Class B tend to be in the “middle” regarding factors for classification. They aren’t in the best areas but are still in relatively desirable locations. Schools are average, amenities are moderate, and residents are generally middle-class. These properties are usually a little older and have room for improvements and the addition of amenities. Due to the decent quality of the area and property conditions, along with the lower demand and competition leading to lower prices, Class B properties are often the best type of property to invest in. They have a low risk of being a money pit or completely undesirable while providing excellent opportunities for add-value. Investing in Class B properties is usually the way to go if you’re hoping for a significant profit.
The properties that usually fall into Class C are often old – sometimes more than 30 years old – and require substantial renovations. They’re also not in the best markets or locations. These properties can be found at very low prices, which can trick new investors into diving in with hopes of making improvements and raking in huge profits. Still, investors must be extremely careful with Class C properties. Yes, investments in this class can be lucrative, but they also can be disastrous, and oftentimes it’s not up to the investor if they can fix the problem. Sometimes a house is too old or has so many issues that the money to fix it up wouldn’t be worth it, or sometimes the location is a non-starter. When looking at Class C properties, it’s best to do extensive due diligence and not get weighed down in excitement over low prices.
When looking at properties to invest in, the safest and smartest option will almost always be found in Class B. With decent conditions all around and value-add opportunities, there’s usually plenty of breathing room for success.
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