Investing in Commercial Real Estate can be as easy as A-B-C - alright maybe not, but knowing your ABC’s can save you a lot of time and frustration. Certainly when your deciding what and where to invest.
Commercial properties are defined -or classified- by a letter system. While classifying can get a little fuzzy - let’s just say it’s subjective - here are some basics to get you started:
Class A - are newer properties built within the last 15 years and have the most amenities, highest earning tenants, and typically demand the highest rents with little-if any- deferred maintenance. Usually owned by institutional investors -REITS- have the lowest cap rates, highest per unit prices and have the most potential for appreciation, but lowest cash flow starting out.
Class B- are generally 15-30 years old, have some amenities, have low deferred maintenance,
Institutionally owned or by high net worth individuals., have appreciation potential with decent cash flow from the beginning.
Class C- 30+ years old with fewer amenities, have more deferred maintenance and higher cap rates and can have lower occupancy rates. Tenant base can include government subsidized tenants. Usually owned by private investors or investment groups. Provide higher cash flow and cap rates, but generally have lower appreciation.
Class D- Older buildings in challenging neighborhoods. Have no amenities and high deferred maintenance. Tenant base may require intensive management. These properties have double digit cap rates and little appreciation potential. While these buildings by the numbers may look like cash cows, collecting rents can be challenging and what is collected may be eaten up by deferred maintenance. These kinds of buildings are not suggested for the first time investor.
The classifications for neighborhoods are very similar to the buildings and use the same A,B,C & D lettering system.
A- newer growth areas
B- Older, stable areas
C- Older, stable or declining areas
D- Older, declining, potentially rapidly declining areas
Hopefully, this will help you both decide the what and where to invest in. It will also give you the ability to better describe to someone else what you want.
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