I was recently asked where Class A, B, and C properties are located in Las Vegas. The short answer is that the type of property class is defined more by the tenant population than the physical location.
In Las Vegas, and I assume most cities, class A areas tend to be in reasonably well defined geographic areas but class B and C locations are not. Class B and C properties are more defined by the tenant population than the geographical area. Below is my definition of Class A, B and C properties. Note that the following description is only my opinion, only applies to Las Vegas and should not be considered some sort of universal "definition".
Class A properties tend to be newer, prospective tenants tend to have higher incomes and are primarily credit based and typically pay the highest rent. Credit is very important to this tenant population so evictions and skips are rare. In Las Vegas Class A properties tend to be in subdivisions or communities with HOAs and have a well groomed and uniform appearance and in the best school districts. Class A properties tend to be lower risk, tenants stay longer and properties are more likely to appreciate. Summerlin and Green Valley are examples of class A property areas.
Class B properties - Compared to class A properties, class B properties are generally older, tend to sell for a lower $/SqFt and tenants generally have lower incomes and credit scores. Tenants tend to stay shorter periods of time (1 to 2 years) and evictions are more common than with Class A properties (few total evictions since tenants know that they will be out in less than 30 days if they do not pay). Initial rehab is likely to be higher and tenant damage is also likely to be higher than class A properties. Class B properties tend to generate a higher return than class A properties.
Class C properties - Class C properties are generally older and are located in less desirable locations. These properties generally need significant rehab and significant tenant damage is much more likely. The tenant population is primarily cash based so leases mean little and many have government subsidies. Skips and evictions are common. Rent payments tend to be in cash. Tenants tend to use mass transit so selecting properties near bus routes is very important. Some of these properties generate high returns.
Now that you know how I define class A, B and C I will explain how we find such properties. We use software we developed to filter the thousands of available properties looking for the very few properties that meet specific characteristics. Usually less than .1% of the available MLS listed properties qualify as potential investments at any given time. Below are example characteristics for each of the classes. Note that we have about 50 characteristics for class A properties. The number of characteristics is less for class B and much less for class C.
- Within a specific price range
- Acceptable ROI using the following formula: ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost). Note that for Nevada there is no state income tax.
- Time to rent <30 days
- Within a fairly well defined geographical area
- Single family
- Two+ garage
- Three+ bedrooms
- Two+ baths
- Within a minimum and maximum lot size
- Correct ratio of building footprint to lot size
- Master bedroom and guest bedroom sizes meet specific criteria
- Built after specific year
- Association fees above $20 and below a specific amount
- Certain floor plans are excluded
- Certain subdivisions are excluded
- Rehab below a specific amount with no high risk rehab items
The characteristics of class B are similar to class A but also includes town homes and the price range is lower. We look for a higher ROI than for class A properties due to increased risk.
Class C properties have a very different criteria than class A or B. Price range is typically less than $100,000 and includes all property types (single family, town homes, condos). The key criteria includes:
- Significantly higher ROI
- Time to rent < 30 days
- Adjacent to major bus routes
- 2+ bedrooms
- 2+ baths
- Certain locations, communities and floor plans are excluded
Once we have properties that meet the specific class criteria I personally visit them and evaluate the area and subdivision/community. If it looks acceptable, I evaluate the property including the floor plan and estimate rehab cost and rehab risk. If all of this is acceptable, I take a video and send it to the property manager and the client. The property manager provides an independent opinion of the property in general plus time to rent and the rental rate. If the return is acceptable and all agree that the property makes sense we make an offer. The offer amount is based on return, not the asking price.
In summary, we primarily select properties based on property characteristics, potential tenant characteristics, risk and return, not geographical locations.
One additional class of properties is multi-family. We divide these into two categories: 4 units or less and more than 4 units. More than 4 units requires commercial financing. The criteria for multi-family is quite different since the value is largely based on the cap rate, deferred maintenance and tenant risk. Larger properties (~30 units+) are evaluated based on current usage and potential future usage.
What are your definitions of Class A, B, and C properties?