Real Estate Asset Classes - A Flavor for Everyone
by Christopher Levarek
“Variety’s the very spice of life that gives it all its flavor.”
- William Cowper
PBJ & Bacon Burger. That’s what it read on the menu at a downtown burger joint in Phoenix, AZ that I happened to be at for lunch a few years ago. Yes, someone had done it. Someone had added peanut butter and grape jelly to this poor unsuspecting medium rare juicy burger patty on a pretzel bun roll. To top it off, they’d even added siracha sauce to this creation!
Now since discovering this item on the menu, I have had many friends over the years tell me this burger is amazing. For me, I just can’t bring myself to order the thing. It just seems wrong. So I’ll take their word for it and continue with the more traditional lettuce, tomato, cheese bacon burger experience that hasn’t let me down.
The point is, everyone has different preferences and flavors. The same applies in real estate and when discussing the topic of the day, real estate asset classes. Real estate asset classes, in general, are just a way of categorizing real estate by quality. Some will prefer luxury properties whilst others are comfortable with a few nicks and scuffs on their investment. Let’s look at the varying kinds of real estate and why you might select one over the other.
Class A
These assets are essentially the highest tier. A class A asset typically is one of new construction or luxury build. All this simply means is that they will typically have those nice granite countertops, backsplashes, stainless steel appliances, wood/tile flooring and brushed nickel bathroom fixtures. Perhaps even these apartments are fixed with usb outlets, nest thermostats, keyless unit entry and include all utility costs in the rent.
In Class A the construction is newer, typically built in the last 5-10 years. The materials used are of higher tier and rents or leases in such property spaces are of course higher. On top of this, many apartments in the A class will typically have a clubhouse, luxury pool/spa, dog parks and full service gyms to go along with them.
Class A assets are the highest rent, the newest construction and typically in the best parts of the city. You should know these assets when you see them.
Class B
So now we move down a tier to the Class B asset. This is typically where we, Valkere Investment Group, like to invest with our partners. Most people will at some time have rented in a Class B apartment in our network and usually something everyone is familiar with. Class B apartments typically have nice furnishings and finishes just like a Class A. Instead of granite countertops however, a Class B apartment might be using solid surface countertops or lvp (vinyl plank flooring) instead of real wood or tile.
Class B assets are also no longer brand new builds or new construction, but rather built in the last 10-20 years thus having some wear. However, true Class B assets have very little major issues and are still in good condition.
Many Class B assets will also have amenities such as a pool or even dog park but you won’t find all new gym equipment or a Theater TV Room with pilot seats very often as you might in Class A. Class B apartment rents are lower and target the working class tenant representing a very large pool of candidates.
Class C
And we are at Class C! When we got started in real estate, we only bought these type of assets. These are of course one tier lower the B, so they are not as updated or “attractive” as a Class B asset might be. Typically, these assets are located in older parts of the city or neighborhood having been built in the last 25-40 years.
Class C assets will often have deferred maintenance and noticeable items such as paint peeling, shingles needing repair or outdated a/c units on the outside. Inside, the units or apartments might have laminate flooring or carpets, basic appliances and a variety of wall colors or even aged decorative wallpaper.
These properties are not falling over but they are typically also not the most attractive or desirable if you were to drive past.
Class D
So the final rung of the tier is Class D. These assets of course are typically ones needing much love or assistance. In most cases, they are filled with deferred maintenance items and have been ill managed for many years. Many were built 40-50+ years ago and have simply been forgotten, or avoided, by their owners.
Most of these properties are also located in areas you wouldn’t want to have your car break down at night. The neighborhoods are a bit rough and often “the place” known for crime related activities and frequent visits from the police.
Inside the property, you will find dated appliances/fixtures in various working order and a variety of flooring structural and paint issues. Most of these properties would need a full gut or rehab to restore to a Class C status.
In Final
There you have the four main real estate classes! Each represents some form of opportunity and potential for an investor as well as offer varying degrees of risk. As is apparent, a Class A would have less risk than perhaps a Class D asset but of course comes with higher price tag.
We’ve purchased in the Class B/C area in almost all our assets and have found these hold the most value the majority of the time. Class B/C represents the largest tenant base(average working individual) and usually have value-add potential thus further insulating risk.
Yet, Class A is not to be overlooked as many younger(millennials) and now retiring individuals(baby boomers) are seeking luxurious, newly built living arrangements with all the amenities. There is a major shortage in the market for the retiring population and Class A assisted living assets are in high demand.
This is exactly why we, Valkere Investment Group, are now adding these asset types to our offerings, check out our assisted living offering.
Hopefully you are now more familiar with real estate asset classes and can decide which one flavor of asset best suits you. Happy Investing!