Now that you’ve narrowed down your real estate focus on multifamily, it’s important to be able to categorize this asset class further to help you decide where you want to invest your hard-earned money. Understanding the difference between Class A, B, and C will help you do just that, and we’ll walk through the differences in this brief article.
All three class types can make great investments, but the business plans look very different. Here’s some general differences:
Class A Properties
These properties are usually new or recently rehabbed and have the nicest amenities. They are generally in the best areas and can attract the best tenants and rental rates. Class A properties are also usually near the best transportation, employment centers, and are quite often considered the “safest” investments albeit not always the best returns.
Class B Properties
Properties in this class quite often were the Class A properties of yesteryear. They probably have original finishes and are showing the normal signs of the 20-30 years of tenants moving in and out. These are your standard workforce housing properties that provide a safe, clean, living environment for the blue-collar workers of our communities. From an investment standpoint, Class B properties provide excellent upside as there is a “value-add” component that can be leveraged to improve these to Class A type properties.
Class C Properties
Class C properties, as you might expect, have started to really show the wear and tear of the 20-30+ years in service, and there is likely some deferred maintenance. These are usually owned by “mom and pop” landlords that are tired and have not put much energy and effort into the property for many years. These properties most likely have some questionable tenants as well since the owners have been a little more lenient in their rental and collection practices. While these can also be a great investment, it’s important to know that it will take time to get the right tenants in place, there is possibly some crime in or around the property, and many of the systems will likely need significant repair or replacement.
As you can see, all three class types offer their own unique benefits and challenges, and it’s possible to have excellent results across them all. The most important factor when choosing one of these is to make sure your team is equipped to handle the unique challenges and opportunities associated with the property you choose. We’ll dig into the main areas of due diligence in future articles to help you gain confidence choosing your first deal.
