Pros and Cons of Different Rental Neighborhood Classes
Investing in real estate isn’t as simple as one, two, three. It takes time, research, and lots of planning. Not every market is alike, so it is important to study and analyze each market you are considering prior to purchasing any property. But, it’s not just the market that is different. There are different classes of neighborhoods within each market and buying a rental property in one neighborhood will give you a completely different outcome than purchasing a rental property in a different neighborhood.
In real estate, there are essentially four classifications of neighborhoods—A, B, C, and D. There are few different factors that are taken into account when determining the classification of the neighborhood. This includes school ratings, crime statistics, neighborhood condition, and proximity to local amenities. The classification system works similar to a grading scale and averages all of these factors into one lump grouping.
Of course, each neighborhood classification has its own pros and cons and, as a rental investor, it is up to you to do your due diligence and weigh these factors for yourself to determine which neighborhood would meet or exceed your investment goals the best.
Class A Neighborhoods
Just like an A grade in school, Class A neighborhoods are the most coveted. They are typically the newest and are always well-maintained. The homes tend to have very few repairs needed and are often built from the best of the best materials. Within these areas you will find the hottest restaurants and bars, shopping, and other amenities.
Class A neighborhoods have very little crime and excellent school districts. Income levels in Class A neighborhoods are often on the higher end of the spectrum, too. The state of the neighborhood combined with the amenities, types of residents, and ratings of the crime level and school districts makes this area essentially sell itself.
Overall, these are areas are highly sought after.
Of course, getting into these neighborhoods is a little more difficult.
The homes in Class A neighborhoods are a higher price point, making your overall cash up front a much higher range. Of course, the rental payments in these neighborhoods are higher—but that’s not generally as good as you would think. Tenants able to pay rental fees in these neighborhoods are often capable of buying a home themselves. This limits your tenant pool to those not interested in buying for personal reasons—perhaps they are only in the area for a short time or they won’t be around much to utilize the home.
Class B and C Neighborhoods
When it comes to the jackpot for investors, many tend to find their lucky dice in Class B and C neighborhoods.
Class B neighborhoods are the former A neighborhoods, just aged. These are still nice homes and are often close to local amenities and job markets. Crime rates are fairly low and school zones possess good ratings.
Tenants in these areas are often considered white collar and tend to be the longest-term renters. Homes are generally in good condition; however, they may require a little TLC to get them renter-ready. Moderately priced, they are usually the easiest to fill with high quality tenants.
Class C neighborhoods are the middle ground. In these areas you will find both medium income and low-income residents. Homes are usually older and require much more repair work than an A or B neighborhood. Crime rates are higher, however, not unbearable, and school zones aren’t the best—but they’re not the worst, either. Think of C neighborhoods as the middle ground.
Properties are older, so they are cheaper to purchase up front, however, they do tend to require a lot of ongoing maintenance work. Vital systems, such as plumbing and electrical, are outdated and tend to require a lot of attention and septic systems and roofs are usually coming to the end of their lifespan.
Class D Neighborhoods
Class D neighborhoods are essentially a no-go for many real estate investors. These are the neighborhoods you likely wouldn’t want to be in alone at night and tend to have high crime rates, proliferating drug use, and extensive vacancies. School rates are often the lowest of the barrel and most businesses closed up shop a long time ago.
While you would be able to pick up properties at a real steal in these neighborhoods, they would be hard to fill with respectable tenants.
Each neighborhood has its ups and downs, its pros and cons. Finding which will work best for you and your real estate investment goals is important, so always do your research and consider all your options prior to purchasing any rental home. If you are still unsure, always consult a professional. Having a little help from an experienced investment agent is often the best way to ensure you can achieve your goals without finding yourself stuck down the road.
Photo courtesy of Dearborn