Classes of Property in Real Estate – The Ultimate Guide
Land is always an asset, and it is the safest one. The real estate market is tricky, and there are chances of loss without the proper information. Property prices typically rise in tandem with demand. Real estate prices fall when available homes are abundant (increased supply) but lack buyers.
Choosing a suitable investment always seems risky, but the risk is reduced if you have all the basic information. The type of market in which one chooses to invest may significantly impact on the profitability of that rental property.
There are numerous subfields and subcategories to investigate when thinking about real estate. Each category of real estate (residential, commercial, and industrial) is designed to meet the needs of a different clientele and operates in a different economic environment.
For this reason, investors should gain some familiarity with real estate categories and market selection strategies. The article has the ultimate guide for you to gain knowledge about the classes of property in real estate, so the language of the real estate market is understandable.
Because, as mentioned above, the real estate market is tricky. Understanding these categories will enable you to make informed real estate investment decisions.
What’s the Difference Between an Asset Class and a Property Class?
Getting straight into it – An asset class is a group of investments with similar characteristics and trading patterns. Examples of asset classes include stocks, bonds, and cash. The type of real estate property to which a specific investment belongs is called its property class. Residential, commercial, industrial, and agricultural properties are the most common.
Investment types represent the primary distinction between asset classes and property classes. Property classes are specific to real estate investments, whereas asset classes are broad categories of financial investments. On the other hand, real estate can be classified as its type of investment. There are a few terms that may be confused with the asset class of real estate:
- Real property: This term refers to land and any improvements or structures on the land, such as buildings, fences, or roads. Real property is a subset of real estate.
- Real estate investment trusts (REITs): These trusts own, operate, and finance real estate. REITs allow investors to own a share of a diverse portfolio of real estate assets. REITs aren’t the same as owning real estate but are a way to invest.
- Real estate crowdfunding: Individuals pool their money online to invest in real estate projects. Real estate crowdfunding allows people to invest in real estate without owning a property, but it’s often seen as a way to own property.
- Real estate development: This refers to the process of improving and building on land to create new properties. It is not the same as owning real estate but is related to the real estate industry.
- Real estate agents and brokers: These professionals help people buy and sell real estate properties. They are not the same as owning real estate but are involved in buying and selling properties.
The terms “asset class” and “property class” refer to different aspects of the real estate industry, and it is critical to understand the distinction between the two.
The phrase “asset class of real estate” refers to a broader investment category that includes houses and apartments. It can refer to physical properties like apartments or office buildings and financial instruments like real estate investment trusts or crowdfunded real estate investments.
By making more informed property purchases, investors can benefit from a better understanding of the real estate asset class.
By contrast, the phrase “property class” describes the distinct nature of the underlying real estate. Real estate investors would do well to become acquainted with the various property classes to assess demand for and potential returns on individual investments.
One type of real estates, such as residential, may carry a different set of dangers and potential rewards than another, such as commercial real estate. Investors would be wise to educate themselves on the differences between the various types of real estate available to them.
Property Types in Real Estate
Real estate properties can be categorized by their use and purpose. Here are some common real estate assets and property types.
- Residential property
- Commercial property
- Industrial property
- Agricultural property
- Vacant land
- Mixed-use property
- Short-term rentals
We have discussed the main real estate property types below.
Individuals and communities are housed in homes. This estate is well-known among investors and consumers. Single-family homes are single-family dwellings that are detached. Homes that stand alone with front or back yards. Single-family homes can be found in cities, suburbs, and rural areas.
Apartments are made up of two or more rented units. Apartments can be found in cities, suburbs, or villages. A landlord or property management company owns month-to-month or long-term rentals.
- Standalone houses: Or single-family homes are the most common residential property.
- Townhouses: These are individually owned homes and share only exterior walls with neighbors.
- Condominiums: Privately owned condos are part of a larger community. A person typically owns condos in joint sovereignty with a condo owners association (COA).
- Multi-family houses: Multi-family homes include duplexes and fourplexes with two and four units. Commercial property is a building with five or more units.
There are various types of office space in office buildings: private offices, open workspaces, conference rooms, and kitchens and bathrooms. Both freestanding and attached office buildings have advantages. Commercial properties include offices, retail stores, and warehouses.
Retail is a type of business that sells directly to customers. Storefronts in retail can be freestanding or attached to a mall. Warehouses are used to store and transport goods. They can be housed in freestanding warehouses or industrial parks. Loading docks and bays may be present in storage and distribution facilities.
Many businesses use commercial real estate, whether owned or rented. Learning about commercial property types and features can help businesses and investors. The most common examples are:
- Office buildings
- Medical centers
- Retail stores
- Multifamily housing buildings
There may be some similarities between commercial and industrial real estate, but there are also key distinctions. Typical examples of industrial real estate include properties used for manufacturing, warehousing, or transporting goods.
This area has six different types of industrial buildings, but the vast majority fall into three broad categories: production, logistics, and flexible use. Examples of industrial properties include:
- Distribution centers
- Industrial parks
- Manufacturing buildings
- Storage facilities
As a buyer, seller, or owner, you must understand the land’s intended use and the various land types. How a piece of land is used significantly impacts the price expected to be paid for it. Commercial lots will be in higher demand than comparable residential lots. The use of property can be an excellent indicator of the future development of adjacent lots. Each land type has unique characteristics and applications. Following are the type of land properties.
- Greenfield – Greenfield sites are undeveloped plots of land suitable for business or industry. Greenfields are frequently former or active agricultural land. Greenfield sites offer business and industry development advantages if they have utilities and transportation.
- Brownfield – Brownfield sites are unused, obsolete, and frequently abandoned industrial properties with known or suspected environmental contamination. They encourage growth in areas with utilities and transportation networks, reduce the need to raise taxes for infrastructure, and offer an alternative to city and small-town fringe development, all of which help curb urban sprawl.
- Greyfield – Greyfield is real estate that has seen better days and is now economically redundant, failing, moribund, or underutilized.
Property Classes in Real Estate
Investors can immediately determine the potential impact of a property on their portfolios based on its classification. Even though this system is subjective and necessitates nuance, it provides investors with a streamlined, standardized vocabulary for discussing properties in their markets.
In the real estate market, properties and communities are typically assigned grades A, B, C, or D. A neighborhood with a “C” grade can teach an astute investor a lot. Investors may target “D” homes in “B” neighborhoods to bring them up to neighborhood standards through extensive renovations, demolition, and reconstruction.
Let’s discuss the classes in detail.
The construction, craftsmanship, materials, and systems of Class A properties are the best. Institutional investors want to pay more for assets that are worth more. Class A real estate is the most exclusive and expensive type of property.
These properties are typically between 10 and 15 years old, with luxurious fixtures and fittings. Their rental prices will be higher than the national average because they are in desirable areas with plenty of amenities, high walkability scores, and excellent school districts, among other things.
Pros of Class A properties are that they are professionally managed and maintained, have great potential for appreciation, and have high earning potential. The cons include greater vacancy and loss risk, extended cost recovery, and higher upfront investment.
Class B properties are typically less luxurious and more functional than Class A. Smaller businesses, those with less established credit histories, or those unable or unwilling to sign a long-term lease are typical Class B tenants.
It is common for buildings of this type to lack maintenance. Class B properties can potentially provide higher returns to investors than Class A properties. A decent location for an office building is acceptable, but it is unlikely to be the most expensive location in town. Many of the suites in a Class B building will need layout changes to meet modern office standards.
The pros of Class B properties are that they are valuable with reasonable cost, provide steady income, and tenants take care of the property themselves. The cons are that there is not a tremendous amount of equity, and it demands maintenance.
Class C offices are usually in less desirable areas. Class C properties are typically at least 20 years old and show significant wear. Those wishing to purchase, renovate, and sell quickly may be interested in these properties. Because of the time and money required to generate returns, investors consider Class C properties to be the riskiest.
Class C properties appeal to a diverse range of tenants and typically have lower rents than Class A and Class B properties. As part of a major renovation, the interior lobby and common areas (elevator lobbies, circulation corridors, etc.) may be demolished and replaced. Class C structures are ideal for those who prioritize functionality over luxury.
The advantage of Class C property is that it has low entry barriers for investors, is always high in demand, and is available at a discounted price. The drawbacks are that it requires constant maintenance, offers a low-income level, and makes a diverse real estate portfolio.
Class D properties are older homes in dangerous neighborhoods. A change in the neighborhood’s demographics and particularly problematic former tenants are two of the many potential causes of problems in older buildings.
Investors are rarely interested in Class D properties unless they reposition as more desirable or profitable. These homes typically require extensive maintenance and may violate building codes. Tenants of Class D may have a longer commute to essential services such as supermarkets.
The few advantages of Class D properties are low rates and low maintenance costs. The high crime rate, frequent repairs, and inconsistent income levels are the disadvantages.
Which Property Class Should You Invest In?
There are many different property classes to consider when investing in real estate. The best one depends on various factors, including investment goals, risk tolerance, and available capital.
There is no “best” type of real estate; investors select their holdings based on predetermined strategies and market indicators. Speculative investors may prefer low-risk Class C properties to increase their selling price or rental income. A Class C property that undergoes extensive renovations has a good chance of being upgraded to Class B or even Class A.
As an investor, knowing your property types will give you more confidence when discussing investment opportunities in your desired location with your contacts. Real estate investments can be prudent for diversifying and expanding one’s wealth.
One type of real estate may offer one set of advantages, while another may offer different risks and potential returns. The most successful investor is the one who knows the most about the market in which they are investing, is up-to-date on the most recent developments in that market, and is willing to consider all relevant risks.
If you are starting as an investor or broker, you will need a partner that gets you to the frontline of real estate marketing to seek real estate deals.
REI Capital Growth is the boss in business because they keep updated information on market trends and knows all property types and their information.
REI Capital Growth employs professionals with more than 5 years in the field, giving reasonable real estate market analytics while providing consultations for equity and capital growth.
We point you in the right direction and save your investment from loss. We analyze the market, evaluate a property, make investment strategies, and offer constant support throughout the investment process.
If you are unsure and don’t want to take the risk, reach out to us at REI Capital Growth