I may be a bit biased. Why? Because I run a real estate company and we specialize in B-class properties. So please forgive me, but that’s what I’m going to be talking to you guys about today. But I also want to compare the other asset classes.
So, let’s talk about an A-class property in an A-class area. This particular property and area will predominantly be in an affluent area, the prices will be higher, and the likelihood of this area being heavily owner-occupied will be very high. It will also likely have amazing amenities and infrastructure, shops and restaurants, and anything anyone could want and need in close proximity. It’s going to be in a great school district and going to have homes that you’ll want to live in but not necessarily own as an investment property.
Why? Because I don't think the cash flow is going to be sufficient enough to really get you excited. Not only that, but I also believe that there are alternative investment vehicles that can probably get you the same return on investment. I'm talking 3%, 4%, or 5% but without the headache you might come across owning an investment property.
As landlords, there's always something breaking down that we need to fix—leaking pipes, clogged toilets, or the gutters falling off. Passive income and financial freedom are about not getting that phone call, so I think that you're better off putting your money elsewhere. Just off the top of my head, I remember looking at some bank rates in Australia, where I'm from, and you can tie up your money in a term deposit over there and get 3.5% annually without doing anything.
So. to me, that’s not a bad conservative investment if you’ve got a large amount of money and want to diversify. Or you can buy a property in an A-class area, get the same rate of return, and get that dreaded phone call that none of us wants.
Now let’s talk about C-class. In my opinion, even though C-class properties present an amazing opportunity on paper, I don’t feel that those paper figures are going to be achieved in real life on a consistent basis. There’s just too much volatility in a C-class area. This is an area where if you drive through, there will be boarded up homes, it’s going to be a bit more derelict, and it may have abandoned cars. There’s not going to be a sense of ownership in the community, and you will probably find a higher-than-average crime rate.
There are some decent C-class areas, but it’s just one of those things where you may not feel comfortable being in that particular area. Another thing to mention is C-class areas are predominantly investor-owned, or perhaps tenants are residing in the properties. Look, I think that for those investors who want to be active and hands-on, these areas can offer a fantastic cash flow—but it is going to be a full-time job.
Now, if that is what you want, then go ahead and do it. I did it and did really well.
Then, I’ve got my favorite, and that is a B-class asset in a B-class area. I am proud to say that I consider myself a blue-collar working-class guy. I live in the same areas that my company sells in. So, when we sell a property to our investors, we always like to say, “Hey, your tenants are our neighbors.”
These are areas that have infrastructure supporting them and tenant demand. They're not "sexy" infrastructure like in an A-class area, but there's still going to be universities, decent school districts, and some kind of employment. Here in Toledo, we have GM Powertrain, the Jeep factory, and Chrysler Assembly. It's more blue-collar with a lot of glass, steel, and manufacturing. I would say it's 50% investor-owned, 50% investor-occupied. There's still pride of ownership in the community because even the vacant homes, which are hard to spot, are kept up by a landlord in the area to make sure there is curb appeal along the street.
Another thing to mention is the cash flow tends to be much more consistent. What I mean by that is you know the tenants are going to stay and pay—whereas in a C-class area, it is very volatile and one year may be good, another year bad. In A-class areas, you’re probably going to have white-collar tenants who are going to stay and pay for a very long time, but the cash flow may be pretty low. Then in B-class, it tends to be a higher cash flow, with a decent tenant who is consistent year after year.
Look, as real estate investors, you don’t need to whack every ball out of the ballpark. Consistency is the key to successful real estate investing. You want a steady return, you want to be as hands-off as possible, you want passive income, and you don’t want to deal with headaches. You definitely don’t want to deal in an area where you are not getting a good return on investment.
So B-class all the way. I believe in it. I do it, and my advice to you is that you should, too.
If I’m wrong, I want to hear from you.