When choosing a multifamily apartment building for investment, options range from undervalued buildings in less developed neighborhoods to luxury, high-rise developments in the most coveted neighborhoods. Read on to learn about the four multifamily asset classes so you can decide which best meets your investing aspirations.
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Class A Multifamily Assets
The characterization of Class A multifamily assets is almost instinctual. They are identified by all the things that signal that a building is luxurious, exclusive, and of course, expensive. Expect high-end finishes and luxuries that make living there an experience rather than just a place to hang your hat. These buildings are usually built within the last 10 years—but highly renovated older buildings can also fall into Class A.
Class A buildings often meet all of a tenant’s needs by including amenities like a pool, gym, and sometimes even a wine cellar onsite. Some provide concierge and valet services to coordinate daily chores like laundry and dog-walking services. Regardless of the exact menu of options, Class A buildings must have superior amenities to fall into this tier.
One of the best parts of Class A buildings is their location. They are found wherever real estate is most desirable in any given area. Oftentimes, that is downtown in a city’s central business district, but they can also be in other upscale parts of town. Look for areas with stunning views or in close proximity to trendy dining, shopping, and entertainment.
Tenants who choose to rent in this niche are renting by choice rather than requirement and appreciate the conveniences and lack of maintenance responsibilities afforded to those who forgo home ownership.
Class A buildings command the highest rent but have the lowest cap rates. Most investors choose these assets with an eye toward appreciation rather than adding value or relying on rent revenue for profit.
Class B Multifamily Assets
Class B multifamily housing is not quite as new, shiny, or luxurious as Class A buildings, but they are still lovely places to live and are distinctly middle-class.
These properties are well-maintained, modern, and come with amenities that most people consider standard for apartments now—like gyms, pools, and safe places to receive packages. Some Class B properties have amenities that rival Class A properties.
Class B assets are still in desirable parts of town and often crop up in suburbia around shopping areas. The building age is usually less than 20 years, but older properties with renovations may also fall into this class.
Tenants looking for Class B properties may be renting for convenience or during transition to home ownership and are often working class. Because so many developers focus on building high-end Class A buildings, Class B buildings often have very high occupancy rates due to low inventory.
Class C Multifamily Assets
Class C multifamily properties could benefit from some renovation and repair, which is exactly why investors like them. They offer a good opportunity to add value through updated finishes, building repair, paint, and new appliances. Work that is mostly cosmetic can lead to higher rent, increased occupancy, and even increased property value.
Class C assets are over 30 years old, and consequently lack all the bits and baubles that seem commonplace in newer Class B buildings. The quality and style of finishings and fixtures reflect the age and lack of remodeling. Finishes will be lower end, so you are more likely to see laminate countertops and older carpet than stone islands and hardwood flooring or fresh carpet.
Beyond cosmetic work, deferred maintenance may be an issue in Class C buildings. The roof or windows may need to be replaced, and they could likely do with a good coat of paint. If the new investor chooses to continue to deter the maintenance, a Class C asset can slip down to a Class D.
Class D Multifamily Assets
Class D multifamily assets serve those at risk for housing insecurity and generally only appeal to tenants who would otherwise be homeless. Beyond aesthetic concerns, of which there will be many, Class D buildings may be severely neglected and in dire need of repairs and maintenance.
These buildings are located in the least desirable areas, which can be afflicted with high crime, many empty buildings, and a lack of convenient access to grocery stores, higher-paying jobs, and good schools.
Class D assets are usually at least 40 years old, and they see a high proportion of tenants that qualify for subsidized housing. These developments can be among the most challenging to own and manage due to ongoing maintenance issues and challenges in collecting rent.
How to Use the Multifamily Asset Classification System
Use the multifamily asset class system to narrow your search for a new investment opportunity and to find a property that best aligns with your goals and finances. The classification criteria for multifamily assets has room for subjectivity, but it does give investors an early idea of the condition of a property, an indication of financing options and possible revenue, and even insight regarding how hands-on management of the property will be.
Class A and Class B properties in highly desirable areas are favorites for REITs, real estate ETFs, and pensions, and this interest leads to more financing options at lower rates. These high-value properties also serve as the primary collateral for the projects, often removing the need to personally guarantee a loan.
Class C and D properties have fewer financing options, and often local banks are the only institutions interested in the loan. Plan for higher rates, shorter fixed terms, and the requirement of a personal guarantee.
Final Thoughts
Multifamily housing remains an ever-popular investment thanks to fairly predictable and steady revenue from tenant rent payments and increasing property values. This reliability is reflected in low cap rates, and many investors appreciate low cap-rate properties for lower risk investment with the opportunity for monthly passive income.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
