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You might see property advertised as being in a Class A, Class B, or Class C in brochures or emails from real estate brokers. This is mostly a commercial term, but I (Alan) am seeing it more and more in small multi-family listings as well.

You only want to invest in Class A right? Not so fast! Just because that's the best grade in school doesn't mean it's the best asset for you to invest in! It entirely depends on your buy-box and your investing strategy.

Before I break down the 3 classes, there are few things to know up front:

•  Asset class has nothing to do with the tenant base. There are stellar tenants at all price points and there are terrible tenants at all price points. 
• Your asset class rating is a quick score card based on a combination of the location and the condition of the property being advertised for sale.
• You, the seller, or broker can make up any class distinction they want for any property. It's merely advertising lingo to catch your eye quickly to see if you want more info based on your investing strategy. It's in a seller's best interest to advertise correctly and quickly to the right buyer, but there is no way to officially assign an asset rating to any property because it's subjective. 

Well, salespeople tend to do that, but it can be very helpful to sort through the noise if you get hundreds of unsolicited pitches a month like I do.

1. Class A Properties

Class A properties are properties that have been recently renovated or newly built in the best part of town. This is a classic buy-and-hold turnkey property with no work needed on the unit(s). You are buying at a premium price because of location, high-end amenities, and location. For these reasons, cap rate (return) will be low based on it's premium price, but your asset is most likely going to appreciate over time being in such a superior part of town.

Of course it is because boring means low risk! There are low risk and low cash flow returns with Class A properties. This doesn't mean you shouldn't invest in them, though. It depends on your investing goals. Parking money in premium locations can be a very solid and safe investment over time.

2. Class B Properties

Class B properties are what you'd expect: average. This can be because they are older or dated in a premium location or that they are newer in a lesser location. They aren't considered flashy or sexy, but they also don't usually need any renovations either.

It's a property that you can do nothing with and it will be fine for another 10-20 years or you can update a few things if you wanted to juice returns a little. It's completely up to you. But it's a solid investment with average expected returns in both cash flow and appreciation.

It's not mid for everyone. It really depends on what you are looking to invest in. Average is fine for most people, and you'll learn over time that the goal of the next property class, Class C, is to turn them in to Class B properties with renovations. And overtime, assets in Class A properties from above will eventually age themselves into being a Class B asset. It's just the circle of life for real estate.

3. Class C Properties

Class C properties are not desirable as a buy-and-hold in it's current condition due it's it's vacancy rates, location, crime, safety hazards, or other possible liabilities.

So, why would anyone want to buy Class C? Well, you can make gobs of money turning a Class C property into a Class B property through improvements in condition, property management, and amenities followed by a cash-out re-fi or sale. 

These assets require a lot of capital as you need a hefty renovation budget to go along with the purchase price, and it can take a year or more to get to the finish line on those renovations, so there are holding costs too. These properties are also the riskiest class to invest in as you try to predict the future with Class C properties in three ways:

• What the renovation budget will be per unit
• What rents will be for post-renovation per unit
• What the interest rates will be at cash-out refinance time

If you can successfully do all 3, then you will do very well investing in Class C properties. If you miss wildly on one of these 3 predictions, you can be completely wiped out.

If you don't know what's happening right now, it's probably best to avoid Class C properties. This investment is for creating value in the future and even the best investors get caught off-guard from time to time.

In other words:

• Asset ratings are subjective marketing lingo
• Investors need to know which class they are looking to buy
• Investor risk/reward tolerance is the the overall class rating that is being advertised