Just like in a classroom full of students, not all multifamily properties are the same or get the same grade. Multifamily properties get a letter grade based on their location, amenities among many other things. Investors need to be familiar with multifamily property classifications because they will help define their investment goals.
There are four multifamily property classifications investors need to know about.
CLASS A PROPERTIES
Class A properties are the newest and most modern properties out there. Think high-quality construction, beautiful landscaping, located in the best part of town, and with lots of amenities such as a gym and a pool. These properties are usually professionally managed and are very low maintenance. Even though visually appealing these might not be the best properties to invest in for cash flow because of their high purchase price.
CLASS B PROPERTIES
Class B properties are located in stable neighborhoods and serve middle-income tenants. These properties will be between 15-30 years old, have nice landscaping, and will have some amenities but not as much as Class A’s. Class B properties have a big client base, low vacancy, and the biggest potential for rent growth. Even though their cap rate will be higher than an A, Class B properties are a great option for a “value-add” approach.
CLASS C PROPERTIES
Class C properties are those that were constructed within the last 30-50 years. These properties will be outdated but they can be remodeled and look nice. Because of their age, you might find maintenance issues so be prepared to be more hands-on. These properties usually do not have any amenities. Class C properties will usually be located in a stable or declining area but will see good rental rates, average vacancy, and a wide rental market. If you are looking for a “value-add” option, Class C might be what you want if the area around the property is improving. Class C also has the highest potential for rent growth and the highest potential to increase value.
CLASS D PROPERTIES
Class D properties might be cheap and have good cash flow but beware- there is a reason why they are called “war zones”. These properties are located in the rough part of town and you will be dealing with violence, drugs, and prostitution in and around your property. Their construction will be poor and will have no amenities. Be ready to have high turnover and maintenance issues daily.
So now you know. There are four options you can choose from depending on your investment goals. Go look around some properties and see what letter grade you would give them. That will help you become a savvy investor when the time comes to choose a property.