The Commercial Property's ABCD

Like any professional language there is terminology you can learn. These terms, are used to help you to understand a property's assets and expedite decision making when referring to asset property classes.

Class A properties are new, upscale apartment buildings. Average rents are high, and they are generally located in desirable geographic areas. Class A properties have the highest valuations often referred to as per door and the lowest market cap rates.

Their main attraction appreciation as it relates to their area position.

Class B properties can be ten to fifteen years old. They are generally well maintained and have middle class tenants. Cap rates will be higher than Class A but lower than Class C properties. However, they are valued primarily as appreciation assets, rather than cash flow, vehicles.

Class C properties generally have blue-collar and low to moderate income tenants. The buildings tend to be thirty to forty years old, and the rents are below market. Class C buildings are very attractive because they offer the best cash flow - compared to Class A and Class B. And they can be the first to appreciate in an emerging market.

Class D properties are generally positioned in lower socioeconomic areas. The neighborhoods are often referred to as war zones and can be in neighborhoods prone to violence. Class D properties can cash flow but typically do not they appreciate because of their condition and where they are located. Owners of Class D properties have to spend more money on management and security and renter overturn.

The cash flow investor generally considers Class C properties are the bread and butter of the apartment industry. The best deals occur when an investor finds an unlisted or pocket listed Class C property in a Class B area and makes improvements to it.

Likewise, finding a Class D property in a Class C area and repositioning it to generate more income through forced appreciation will increase occupancy and/or rents while creating equity that enhances Return On Investment.