As you begin investigating the ins and outs of multifamily properties, you will hear terms referring to the types or class of property. Do not let the terms make you nervous. Once you understand these terms, they will help you to understand the assets of a particular property and enable you to make quick decisions. Below you will find a guide to property classes and what they mean for you as an investor.
Class A: Class A properties are new, upscale apartment buildings. Average rents are high, and they are generally located in desirable areas. Class A properties have the highest valuations per door and the lowest market cap rates. Their main attraction is their area appreciation.
Class B: Class B properties are usually around 10-15 years old. They are well kept and have middle class tenants. They will have cap rates higher than Class A but lower than Class C properties. However, they are primarily appreciation, rather than cash flow, vehicles.
Class C: Class C properties generally have blue-collar and low to moderate income tenants. The buildings are 30-40 years old, and the rents are low. Class C buildings are very attractive to cash flow investors because they offer the best cash flow. This is compared to Class A and Class B. And they can be the first to appreciate in a rising market.
Class D: Class D properties are in shady parts of town. The neighborhoods feel like war zones and are plagued with violence. Class D properties can be cash flow machines, but they do not appreciate because of their condition and where they are located. Owners of Class D properties have to spend more money on management and security.
These class distinctions are part of the vernacular; they are not set rules used by appraisers or banks. Investors use them as a way to immediately understand the state of properties.
The important thing is to educate yourself about these terms and to be familiar with how they are applied to properties. Once you are armed with this knowledge, you will be able to more effectively evaluate properties and zone in on which ones will be of greater value for you to go after.
To summarize, Class C properties are the bread and butter of the apartment industry for the cash flow investor. The best deals occur when an investor finds a Class C property in a Class B area and makes improvements to it. Likewise, finding a Class D property in a Class C area and repositioning it to generate more income through higher occupancy or increased rents can reap great rewards in equity.
Lance Edwards is living proof of his mantra that you don’t have to “graduate” from single family to multifamily – you can start with multifamily; using none of your own money and not dealing with tenants and toilets. For FREE information, visit Apartment Wealth Machine