Smart investors know that their cash flow and returns are at the mercy of the real estate market. The market has its ups and downs, and while no one can predict how the trends will turn from year to year or quarter to quarter, thinking about recession has to be a part of your investment strategy. This has become more urgent than ever with the recent COVID pandemic. While we’re not in a recession at this point, owners who are over-leveraged are finding themselves in an uncomfortable place right now.
We’re talking today about different property classes, and what you should look for as you’re building a recession-proof investment portfolio.
Understanding Property Classes with Philadelphia Rental Real Estate
Each property classification embraces a different risk and return because when we’re talking about property class, those properties are graded according to geographical and material features. Letter grades are assigned to properties after considering a combination of factors such as:
- Property age
- Property location
- Typical tenant income amounts
- Property growth and appreciation
- Property amenities
- Rental income earned
CLASS A
Class A properties are the top rental homes on the market. They are units found in high quality, desirable buildings. These are generally newer homes that are no more than 10 or maybe 15 years old. Renters are likely high income earners and vacancy rates are lower than average. Rents are high and the properties are well-maintained, upgraded, and modern. These rental properties can often withstand economic downturns and recessions. The COVID pandemic, for example, has not affected many of these tenants because they are able to work from home without any interruption to their salary or job security.
CLASS B
Class B rental homes are a bit older than their Class A counterparts. They’re well-maintained but tenants are often not high earners. A lot of these units and homes are not professionally managed, so there might be some deterioration or deferred maintenance that can hurt during a recession. These make good investments because improvements are often cost-effective and result in a better tenant pool and higher rents. During a recession, there might be higher turnover and vacancy.
CLASS C
Class C properties are typically older. They’re usually at least 20 years old and they have not been updated in a while. Usually, they’re found in neighborhoods that high-quality tenants will avoid. A large investment will be needed to bring Class C properties up to date. This means the rental rates are going to be lower. On a positive note, many residents will be housing voucher recipients or Section 8 participants, and those rents can be counted on even during recessions.
Choosing Different Types of Rental Property Investments
When you’re putting together your rental portfolio, it’s easy to aim for all Class A properties. This makes sense for a lot of reasons. However, if you want to grow a portfolio quickly, and you’re looking for a way to reduce your risk, acquiring Class B and Class C properties can be a good idea. This leaves you room to grow and improve, and it sets you up to face a recession with enough diversity in your portfolio to keep you collecting rent, avoiding vacancy, and pushing through the downturn.
If you’d like more information on protecting your investments from recession, contact us at TCS Management.
TCS Management is a full service property management company headquartered in Philadelphia, Pennsylvania, also serving Cherry Hill, NJ, Wilmington, Delaware and the surrounding areas. We focus on single-family and multifamily residential property management of homes, condos, townhomes, and apartment buildings.
