What makes an investment property A-grade?
When we talk about investment properties, more especially, commercial real estate, we use classifications such as Prime, A-grade, B-grade and C-grade. What do these classifications mean and how should they influence your property purchases? In this article, I focus on residential A-grade properties as these tend to deliver better rental yield and capital growth over time.
What is an A-grade investment property?
An A-grade investment property offers a combination of strong capital growth potential, consistent rental income and minimal risk. These properties are typically located in desirable areas with high demand for rental properties, and they have a proven track record of attracting and retaining tenants. Bear in mind, though, that a B-grade property can become an A-grade property if it’s in the right location and the area is rezoned.
Key characteristics of an A-grade investment property
- Location: The property is located in a desirable area with a strong economy, good schools and access to shopping, medical and open space. These areas are often characterised by low vacancy rates and high rental yields. Keep in mind that although the suburb might be desirable, most suburbs have pockets that aren’t as highly sought-after. A-grade properties will not be on busy streets or next to schools or shopping centres or on streets where lots have been subdivided.
- Condition: An A-grade property is ‘move in ready’ and shouldn’t need major repairs or renovations in the near term.
- Size and layout: While size doesn’t always matter, functionality does. An A-grade property has a practical layout with a clear flow through the home. If room functions aren’t obvious to the potential tenant, renters are less likely to want to rent the property. The property should feel spacious and have enough bedrooms, bathrooms and reception areas to suit a variety of potential tenants.
- Appeal: We know what attracts and retains quality tenants. A modern kitchen and bathrooms, some outdoor space, features such as reverse-cycle air conditioning, ceiling fans, a dishwasher and a washer/dryer and plenty of storage will entice tenants. Off-street parking is a must for most areas.
- Scarcity: When suitable properties are in limited supply, you can ask more for your rental property. Capital growth is assured in highly desirable suburbs and regions.
- Rental history: An A-grade property has a demonstrated history of attracting and retaining high-quality tenants. A solid rental history shows the demand for the property and that it will continue to generate consistently high rental income.
- Potential for capital growth: The property should be in an area with strong potential for capital growth. While you can’t always buy the worst house on the best street, you might be able to secure a property on a commercial fringe, for example. Potential rezoning could mean a huge increase in your property’s value as rezoning opens the possibility of combining lots for redevelopment. However, all A-grade properties are characterised by a steady increase in the property’s value, which is attractive to investors.
- Cash flow: Generally, an A-grade property has negative cash flow but the trade-off is superior capital growth.
- Low risk: A-grade properties, almost by definition, are low-risk investments where the investor is assured the property will be unaffected by market cycles or economic conditions.
Here are some examples of A-grade investment properties:
A modern two-bedroom apartment in a trendy inner-city suburb within walking distance of public transport, amenities and open green space.
A renovated heritage townhouse in a sought-after area with original features, high ceilings, and a courtyard.
Remember ‒ what makes an A-grade property in one area might not mean A-grade in another suburb. If the area consists of freestanding homes with heritage features on large blocks, a two-bedroom apartment built in the 1960s won’t be considered A-grade although it’s in the right location.
Where to find A-grade properties in Australia
As we in the industry say, Australia isn’t a single market and you’ll find A-grade properties in many locations. For this article, I’ve focused on capital cities; however, regional towns like Bendigo in Victoria, the Southern Highlands of NSW and Mount Gambier in South Australia, for example, are great locations for finding A-grade investment properties.
1. Melbourne: Melbourne, ranked as one of the most livable cities in the world, attracts a growing population and a strong demand for rental properties. A-grade investment properties in Melbourne are often found in established suburbs with good reputations (Toorak, Brighton, Kew) and inner-city suburbs such as Carlton and Fitzroy that are close to employment hubs and higher educational institutions and offer a great lifestyle. Other suburbs like Parkville, with a majority of residents who work as professionals, are desirable because of a mix of old and new properties and good access to open green space as well as public transport.
2. Sydney: Sydney, a global financial and cultural centre and a prime destination for overseas investors, has many locations offering A-grade investment properties. Waterfront suburbs like Mosman, Balmain and Birchgrove offer good opportunities as long as you steer clear of luxury properties that tend to lose value faster in a downturn. Other suburbs with potential include established suburbs like Newtown, Leichhardt and Crows Nest. Suburbs like these are considered to be close to the city, relatively affordable and close to amenities, which means good rental demand.
3. Brisbane: Brisbane is riding the wave of their hosting of the 2032 Olympics and is experiencing rapid growth. You can find suitable A-grade investment properties in established waterside suburbs like New Farm and Hamilton. Inner-city suburbs like Milton, Paddington or Bardon combine a vibrant inner-city lifestyle with strong rental returns and potential for capital growth.
4. Perth: Perth is attractive to those working in the mining industry, as well as immigrants from the UK and South Africa. Anywhere on the coast is a great place to start for A-grade properties. Look at Scarborough, Subiaco and Mount Lawley, which provide access to beaches, parks, and amenities. Suburbs like Waterford or Dalkeith are also considered to be eminently liveable and close to universities.
5. Adelaide: Adelaide is known for its relaxed lifestyle, festivals and affordable housing costs. To find A-grade investment properties in Adelaide, look at suburbs like North Adelaide, Unley, Croydon and Norwood or coastal suburbs like Glenelg, which offer a mix of character, convenience and rental appeal.
Where to find A-grade properties in Australia
Investing in A-grade properties requires thorough research, careful consideration of financial goals, and expert advice from financial advisers. Let me help you help your buyer’s agent clients with careful market analysis and more.