Considering Investing in Class C Properties? Read This First
Many investors prefer to chase Class A and B properties, and for good reasons. They are newer and located in more desirable locations. The tradeoff is that they prices are higher. And most investors avoid Class D properties, and this is generally advisable. They may be in extremely poor condition and located in dangerous neighbourhoods. This leaves Class C. Is it worth it to invest in these properties, and what should you know before you make your decision?
What is a Class C Property?
First things first, what is the definition of a Class C property? They are usually more than 20-30 years old and may be located in less desirable areas. They typically need renovation to bring the infrastructure and systems (e.g. plumbing, electrical) up to date and require more extensive ongoing maintenance.
You’ll find that these properties net lower rental rates, particularly if there are Class A and B properties located in closer proximity.
Investing in Class C Properties
The tradeoff – there is always a tradeoff! – is that Class C properties are much more affordable in terms of purchase price (and, likely, taxes, depending on your area) than Class A and B. If you have a targeted real estate investment strategy that focuses on cash flow, they may be a good investment. Here’s what we mean:
If managed well, your Class C property may not appreciate, but you do have an opportunity for strong cash flow. Renters in these areas tend to have low or minimum wage jobs and have difficulty saving. This makes homeownership a challenge to say the least. Class C locations will have a deep pool of renters; while the value of the property itself may not rise, rents can.
You must factor in the costs of owning and managing a Class C property, such as higher maintenance and insurance costs. You may also see more turnover and a higher risk of vacancy than in Class A or B locations because job changes and moves can be frequent with this demographic.
But remember, you will have a large pool of potential renters and steady income. There is typically not a lot of difficulty in renting these units, especially if your building is in generally good repair and you are responsive to tenant issues. You can buy and hold for the cash flow or consider a lease-to-own option for reliable tenants of single family homes.
Is it worth investing in Class C properties? That’s up to you and the strategy you have set. If you need more information, contact us today.