When investors get ready to put down money on a property, they consider many factors. They may assess whether the house will cost much to upgrade, whether it's on a decent lot, what amenities it offers, and more. However, if you're a property investor, there is something else you'll want to keep in mind when looking for your next property— the neighborhood classification.
You may have heard about properties being a class "A" location or a class "B" location, but what does it mean, and how can you tell? A neighborhood's property class can influence the answer to the question, "how much can I rent my house for" and ultimately the ROI you generate from the property.
Our Philadelphia property management experts have insights into what types of properties are classified as A, B, or C and how that can impact your success!
Understanding a Class A Neighborhood
When you think of a Class A property class, you may be thinking top-of-the-line, high-quality, and high-end with modern amenities. We automatically associate an A as a good grade, and that holds true when categorizing property classes. Class A properties consist of "cream of the crop" houses with beautifully manicured lawns and mature tree-lined streets. These areas are well-kept with low crime rates and excellent schools.
These properties may attract people with families because of the great environment they find to raise children. Even people without children appreciate a Class A neighborhood because of the well-kept yards, neat streets, green space, and low crime rates. These neighborhoods invite people to walk be outside and mingle with neighbors. Real estate investors won't see many vacant lots in Class A areas because they fill up fast.
While these areas in Philadelphia tend to make great homes to settle down in (and can be an impressive addition to a real estate investment portfolio), they aren't usually a great investment opportunity for rental property owners because of the high price and low returns. In addition, home rental companies know that investors have to charge quite a bit in rent to cover the investment cost. Many of these properties may even be in HOA neighborhoods, which adds a fee. So, although these properties are attractive and impressive to show off to friends and colleagues, a property management company won't often recommend them as the first choice for an investment property.
Defining a Class B Neighborhood
Where Class A properties don't often pay off, class B property homes offer some of the best investment choices for rental properties. Class B properties are homes to middle-class families that are a target demographic for property owners. In these areas, you'll see plenty of contractors, small business owners, and construction workers in these typically blue-collar neighborhoods.
When considering "how much can I rent my house for," property management companies know that this type of neighborhood will generate a decent ROI. A class B property modest but well-kept and reasonably priced, making them an all-around attractive deal for a real estate investor. You'll also find a wide selection of these homes available to fit your portfolio and ROI goals.
Are Class C Properties Worth the Investment?
If Class A neighborhoods are the "best" quality homes, should a property owner ever consider a Class C property? It depends.
A property manager can tell you that Class C neighborhoods in Philadelphia are typically "run-down" areas with a much higher percentage of renters living there. At first thought, that might seem like a positive situation because you might find excellent demand for rental homes. However, before buying Class C properties, consider a few other factors.
In many cases, the tenant turnover rate is high. Also, property managers know that the ideal rental amount won't be as high as Class B properties. These rental units are in areas with high crime, gang, and drug activity. Rentes must be okay with seeing a significant (and frequent) police presence, and your insurance premiums could be a bit higher due to the crime rate.
However, not all Class C properties should be eliminated as investment opportunities simply because they are rated "C." The cash flow on these properties can be fairly good due to the high demand. If you are only planning on investing in one or two properties, it's best to stick with Class B as your primary property type, then add a Class C investment if it makes good financial sense for your portfolio and long-term ROI.
If you decide to go with a few class C properties to flesh out your portfolio, consider a property management team to help you create strong leases and enforce them.
Choose the Best Property Classification With a Philadelphia Property Management Company
With various neighborhood classifications and what it might mean for your investment goals, it's smart to get expert help from a property management company that knows the Philadelphia area well. With our professional property management services, Renewal can help you find and optimize returns for every property in your portfolio!
Learn more about different property types when you download the "Free Biography of the Perfect Investment Property."