What Matters More in Rental Investing: Location or Property Class?
“Location, location, location!”
It’s the long-standing mantra every real estate investor hears.
And while there’s some truth to it, the focus on location alone is an oversimplification that can lead to costly mistakes.
What truly determines the success of your rental property investment isn’t just where it’s located—it’s the property class and how it aligns with your expectations and goals.
Whether you’re weighing investments across an entire metro area or within a single neighborhood, properties vary dramatically in tenant pool, cash flow potential, and risk depending on their class.
If you apply Class A assumptions to a Class B or C property, you might find yourself facing a financial disaster.
Instead, the smarter approach is to decide on the property class you want to invest in first, and then find the location that matches your strategy.
Here’s how to shift your mindset and make more informed investment decisions.
Why Property Class Should Drive Your Strategy
Different property classes (A, B, C, D) come with distinct financial dynamics, tenant profiles, and risks. Choosing a property blindly based solely on location can leave you with unrealistic expectations. Imagine buying a Class C property but expecting Class A tenants and appreciation—that mismatch is a recipe for disappointment.
Instead, property investors should start by asking themselves these questions:
- What is my priority? Reliable cash flow or long-term appreciation?
- What level of risk am I prepared to take?
- How much involvement am I willing to have in property management?
Once you have clarity, you’ll know which property class fits your goals. From there, you can begin scouting locations where properties in that class thrive.
What Are Property Classes?
Class A, B, C, and D properties represent a spectrum:
- Class A: Luxury properties in prime locations with tenants who have excellent credit and stable incomes.
- Class B: Mid-tier properties, often in stable neighborhoods, with moderate appreciation and cash flow potential.
- Class C: Older properties in lower-income areas, offering high cash flow but more management challenges.
- Class D: High-risk, low-cost properties with severe management and tenant issues.
To illustrate this, we’ll use our experience managing nearly 700 doors in Metro Detroit, including almost 100 Section 8 leases, as an example of how these property classes behave in the real world.
A Breakdown of Property Classes in Metro Detroit
Class A Properties
Class A properties are at the top of the market, typically new or very well-maintained buildings in affluent neighborhoods. Think of neighborhoods with high-end grocery stores, trendy cafés, and strong school districts.
Characteristics of Class A:
- Cash Flow vs. Appreciation: Anticipate waiting 3–5 years for positive cash flow, but the tradeoff is significant rent and value appreciation over time.
- Vacancy Rates: Historically 10%, though recent trends suggest 5% is the new norm.
- Tenant Pool: Majority have credit scores of 680+ (about a 5% default probability) with stable income and no evictions in their history.
Who Should Invest?
If you’re looking for long-term appreciation and can handle a slower path to cash flow, Class A properties are ideal. They attract high-quality tenants, but their upfront cost might be prohibitive for first-time investors.
Class B Properties
Class B properties occupy the middle ground, offering a blend of appreciation potential and relative affordability. These properties are found in desirable yet slightly older and less luxurious areas than Class A neighborhoods.
Characteristics of Class B:
- Cash Flow vs. Appreciation: Expect decent rent and property value growth over time.
- Vacancy Rates: Historically 10%, but can be as low as 5% with proper tenant screening and neighborhood research.
- Tenant Pool: Credit scores generally fall between 620-680 (10% default probability), often with minor financial blemishes but no evictions in the last five years.
Who Should Invest?
Investors looking for reliable tenants without a hefty up-front cost. They’re also a great option for those seeking moderate growth without excessive risk.
Class C Properties
Class C properties are older rentals in working-class neighborhoods with a higher concentration of low-income tenants. While these properties offer strong cash flow, managing them requires more involvement and careful tenant screening.
Characteristics of Class C:
- Cash Flow vs. Appreciation: Heavy cash flow with limited appreciation. Some investors attempt to reposition Class C properties into Class B, but neighborhood factors often limit this.
- Vacancy Rates: Estimate 15-20% due to tenant churn, nonpayment, and eviction-related issues.
- Tenant Pool: Credit scores typically range from 560-620 (22% default probability). Verifying two years of rental history and job stability is crucial.
Who Should Invest?
For investors who don’t mind hands-on management and are comfortable navigating tenant turnover and minor repairs, in exchange for a steady cash flow stream. They’re common in neighborhoods undergoing slow redevelopment or transitioning zones like parts of Detroit’s North End.
Class D Properties
Class D properties are located in distressed areas and come with the greatest risk. These properties can be incredibly affordable to purchase, but they require careful oversight to be profitable.
Characteristics of Class D:
- Cash Flow vs. Appreciation: Expect purely cash flow with minimal to no appreciation.
- Vacancy Rates: Risks are high, with vacancies and tenant defaults exceeding 20%.
- Tenant Pool: Typically have credit scores below 560 (30% default probability). Expect collections, charge-offs, and recent evictions.
Who Should Invest?
Investors willing to take on significant risk and actively manage properties daily may find returns in Class D rentals. However, this class is not recommended for those new to property management.
Why Understanding Property Class Is Key
When venturing into unfamiliar markets, your first step should always be researching the submarkets for each property class. Here’s why this matters:
- Precision Matters: Even within a single area like Metro Detroit, neighborhoods vary widely. For example, North End has pockets that are trending toward Class B while others remain firmly Class C.
- Tenant Expectations: Class mismatch leads to unmet expectations. A Class A business plan won’t succeed with Class C tenants, leaving your bottom line in trouble.
- Risk Management: The level of vacancy, tenant default, and repair risk varies significantly by property class. Knowing what to expect lets you plan for these challenges instead of being blindsided.
Final Thoughts
When deciding where and how to invest in rental properties, don’t fall for the “location, location, location” mantra alone. Successful investments come from matching the right property class to your goals and then finding the locations that support those choices.
Metro Detroit’s market illustrates how different Class A, B, C, or D strategies can be. Apply these insights to your target area, and you’ll be better equipped to make logical, profitable decisions that align with your expectations.
Have questions about property classes and their dynamics? Contact us and we’d be happy to answer any of your investment concerns!