While there are no universal standards for property classification, multifamily real estate properties are split into lettered classes, though the most used are A, B, and C. Each offers different qualifications as well as unique investment risks and opportunities.
Let’s break down the multifamily asset classification system and analyze the differences in investment characteristics. Keep in mind, the current pandemic could change certain risk factors for any and all of these property classes, though multifamily housing as a whole is very resilient.
Class A properties are generally 10 or fewer years old, meaning they are considered “new”. They are usually in great condition and require little to no short-term maintenance. Common features in the area include good schools, easy highway access, and proximity to shopping and medical buildings. These areas are new hubs that are growing and expanding now and in the near future.
Class A assets are usually considered low-risk and in high demand, which means they will be the most costly in terms of the purchase price. The high demand means they are easy assets to sell. For first-time investors, the higher upfront cost may not be ideal, though the low maintenance costs could offset this.
Class B properties are very similar to Class A properties, but they generally are a little older (built in the last 10-30 years) and less pristine in terms of property quality and surrounding geographic area. Maintenance costs create the biggest difference between A and B: class properties require more upkeep, but if any major or substantive renovations are done, these can become Class A properties.
Because the requirement for maintenance is higher, Class B properties are almost always cheaper to purchase, though they are a bit riskier than Class A assets. This area is potentially the lowest risk investment for new investors, especially in the current climate, because tenants in this range are likely to be more rigorous in their rent payments, and the lower acquisition cost will offset the increased need for upkeep.
Class C properties are likely around 30 years old and have outdated plumbing or electricity features, visible deterioration, and located in a lower-income neighborhood than Class A or B properties. The crime rate in these areas is also higher, making consistent management a necessity.
The acquisition costs of these properties are much lower and though they can be very lucrative with a targeted strategy, they are still high-risk investments that will need updates and continuous management. The riskiest category during the pandemic, many tenants in this class of multifamily housing have likely experienced layoffs and job loss as COVID-19 shutdowns continue and even expand in some places in the U.S. These properties are best suited for experienced real estate investors.
It’s good to remember this classification system is relative: a Class A property in Washington, D.C. may not be perfectly comparable to a Class A in rural Ohio. Click here to read about why new investors should consider breaking into real estate.
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