In addition to understanding the prospective tenants you plan to attract, you must also understand the types of properties you can invest in. And, ultimately, that decision will play a large role in determining your future tenants.
The key for real estate investors is to drill down to the specific segment of the market the individuals are speaking about, and determine whether it applies to the class of property they own.
There are several different classes of properties that a real estate investor can own, and each one will have different opportunities and challenges, and rarely will those opportunities and challenges be the same as those of a different property class.
It’s not enough to understand how to acquire property because buildings don’t pay rent, people do! Understanding the types of properties that you can invest in will ultimately play a large role in determining your future tenants. It’s important to carefully study the market and determine whether it applies to the class of property you own.
- Class A and B: These luxury and semi-luxury properties are typically located in high-end areas. These classes are typically associated with luxury condos, luxury rentals, high–end single-family homes or high-end luxury multi-family buildings. A breakeven cash flow and above-modest appreciation typically makes paying at market or slightly over market more justifiable depending on the forecast conditions. This is a costly but sound investment when you consider that high-end properties typically are more stable when it comes to income-producing assets. Delinquencies are also less common with these properties.
- Class C: Class C properties typically cater to the middle-income demographic. It is very important for you to do your historical due diligence process before investing in this asset class because middle-income is considered to be stable but fixed, meaning that the household income typically grows at a moderate pace depending on various economic cycles. Tenants associated with this asset class are typically more likely to be long-term renters.
- Class D: This class generally consists of low price properties, which allows for individuals with limited access to capital to participate in real estate investing and typically make their first purchase. However, tenants who typically rent these properties are typically at or near the poverty line, so their income and their ability to generate income is extremely volatile. Class D properties also require much more involvement from the investor than other classes and will, which will require you to be particularly savvy in property management.