Topic 1.1: Property And Area Types
You know what you are looking for in terms of asset class and location. At first glance, it seems like an area you would buy-in. However, the area you are buying is one of the most important aspects – if not THE MOST IMPORTANT ASPECTS – of underwriting. If you overpay for a deal in a good area, you can recover with time. However, if the property is in a poor area, overpaying will lose money for you and your investors.
Property and area classifications will reflect the risk and return of the deal because they are graded according to a combination of physical and geographical characteristics, respectively. The letter grades are subjective. They are given to properties by brokers, buyers, and sellers that consider the combination of factors like the age of the property, location, tenant income, amenities, and rental rate. This variety of items will drive the cap rate, that as you may already know will shift also with the supply and demand cycle of the market. But if you are in tune with your area, you can determine whether the asking price is in line with the market.