Property Class Designations within Multi-Family Real Estate
When it comes to the various classes of Multi-Family apartment buildings, there are commonly referenced groups (or classes) of these assets. Specifically, these are typically grouped as A, B, C, and D. Let's review the differences here:
Class A
Age: Generally new construction or built within the last 10 years. Properties older than 10 years have been substantially renovated to modern standards.
Rents: Highest rent potential within a given sub market
Finish: Luxury and/or high end finishes
Return Potential: Lowest return potential of the 4 classes
Risk Profile: Generally the lowest risk of the 4 classes
Typically located in major markets
Typically good financing options exist with highest amount of leverage available and longer term fixed rates
Cost: Expect to pay the highest cap rates / pricing to income
Class B
Age: Generally 20-25 years old, some renovations may have been completed
Rents: 2nd highest rent potential
Most deferred maintenance has been completed
Finish: Good quality construction with some renovations completed
Return Potential: Good potential for returns, especially in a "value add" strategy where renovations are completed
Risk Profile: Good balance of risk/return, slightly increased from Class A in some cases depending on the sub-market
Traditional Financing options typically available with longer term fixed rates available, generally 20-25+% down payment required
Class C
Age: Typically 30+ years old
Limited, dated exterior with improvements needed
May show some signs of deferred maintenance
Rents: Commands rents below class B due to age and amenities
Finish: Majority of appliances and finishes may be original or slightly updated
Return Potential: Higher return potential vs. Class B, with increase in risk (noted below)
Risk: Increased risk from class B, especially if located in lower income areas
Slightly higher financing rates from lenders based on risk profile, still typically qualifies for longer term fixed rates and/or variable rates. May require a 30+% down payment
Class D
Age: Typically 35+ years old
Dated exterior and interiors in need of significant repair or upgrade
Marginal construction quality and shortest remaining lives of system components (roof, HVAC, appliances, etc.)
No amenity packages
Rents: Lowest of all classes
Finish: Original, dated
Return Potential: Highest potential for return, likely a candidate for asset repositioning, especially if the property is in a higher income area
Risk: Highest level of risk
At Redline Equity, we believe the best value balance of risk and reward is achieved through acquisition, professional improvement, and management of Class B and C assets. These tend to also attract quality tenants with a wide pool of potential candidates for investors.
To learn more about investing in Multi-Family real estate, subscribe to our website and contact us for a free consultation with absolutely no obligation.
Andrew Schutsky
Founder and CEO
Redline Equity, LLC
"We help busy professionals invest in real estate!"
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