August 29, 2022

How Are Multifamily Assets Classified and Their Value

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Eric Wilson

How Are Multifamily Assets Classified and Their Value

Diversification & Cash Flow

If you’re looking for diversification and a stream of stable cash flow by investing in Real Estate, then choosing multifamily properties can be a good idea.

Before you get started you should understand there are 4 different types of multifamily asset classes categorized from A to D. They differ from each other based on a number of factors such as age and quality. We’ve explained each category in detail so you have a better understanding of each property class and are able to make an informed decision.

Class A Properties

Class A Properties are the most expensive and premium category of real estate. They happen to be desirable partly because of their location which is usually one of the most expensive areas. These neighborhoods happen to have amenities close by and are often connected to all other parts of the city.

Class A Properties usually comprise of luxury, high-end apartments and are part of the best school districts. They are recently built and are not more than 10 years old. There will be facilities such as on-site gym, covered garage parking, family and dog parks nearby. In addition, you will also find pools and patios with these properties.

Most of the properties that fall in this category are equipped with the latest technology and have an environmentally sensitive design. Because of the sheer amount of facilities they come with, the rents are high and their aesthetics are luxurious.

Class B Properties

One step below the Class A properties, this type of Real Estate is slightly lower in terms of quality. They are often great for those tenants belong to the working class and want to have access to public transport. The neighborhoods they are located in are decent if not premium. The best part about them is that facilities such as schools, hospitals, the local superstore, and bus stops are in close proximity.

The amenities accompanying Class B Properties are very similar to those that are in Class A properties but are not as new. There is little or almost no deferred maintenance work and the rents are fairly high because of the ease the housing provide to its inhabitants.

The apartments that lie in this category are not older than 20 years of age.  

Class C Properties

As we move down classes, there are properties that are 30 to 50 years old. Because of their age, the facilities accompanying them are not fancy or new. The buildings will also have outdated technology and amenities, however, the construction quality is great. There is quite a bit of deferred maintenance that these properties come up with especially in terms of roof repairs, flooring, paint jobs, and electrical appliances.

Properties that are part of this category are known as the bread-and-butter of the value-add model because they are accessible in terms of money and with a few upgrades here and there, they can become top-class in terms of quality. In fact, you can make improvements to the extent that a rent closer to that of Class B Properties can be charged.

In short, they don’t sparkle but with a little time, effort and money, the income earned on them can be increased.

Class D properties

We mentioned that multifamily real estate is categorized in classes because of their quality. Class D is the lowest of them because the buildings are old, worn out and the locality is below average. Because their construction is poor and their interiors are outdated, there is a lot of upgrades and work required by these properties.

There is also a lot of neglect and deferred maintenance that accompanies Class D properties and their rent is cheaper. If you are thinking of investing in a similar property, make sure the deal sponsor has experience in operating this type of asset otherwise, it will require a lot more effort than what you’ve assumed and waste your energy.

Why we recommend properties where value can be added?

Class B and C are perfect types of real estate properties where value can be added and you can generate a good stream of income. They are lucrative when it comes to value addition and require a very basic amount of work. Once you have cleaned up the place, upgraded the interiors, and looked after maintenance that it requires, the rent you can command can be close to the market value. Also, the operational expenses will decline that have accrued over the years because of the mismanagement of the property. That sounds ideal, right?

One good thing about value-added investment is that it gives you control to improve and upgrade the place to your heart’s content and have it pay off for you. We don’t recommend going for a property that requires substantial repair and maintenance work. It’s a lot of effort and the money that you invest in improving the place may not give you return you hoped for.

How to reduce risks when it comes to investing in multifamily properties?

All markets are subject to fluctuation and if they decline, people lose their livelihoods. Usually, when this happens, the Class A properties fall to the same category as Class Band Class B downgrades to Class C. During these times, you will find that the demand for Class B and C properties increase. The labor and construction costs rise which is why developers start to put in their time and effort on Class A projects. As a result, Class B and C properties have a fixed supply and perform well in the market.

The best thing about Class B and C properties is that whatever the market conditions are, they perform well and move smoothly in the industry increasing the equity of the investors.

The multifamily investment market is often affected by trends on macro and micro level, therefore it is always a good idea to review the historical and projected net operating income before making an investment.

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