 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: Building Classifications 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: Are 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: Are 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. Neighborhood Classifications 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. Contact Kim McMahon: |
