Updated: Jan 9
There are many different types of multifamily property investments available to the passive investor. That’s why it’s best to understand the different types of classifications in order to make an investment in the appropriate type of property that meets your particular needs, as well one that suits your specific strategy and investment goals.
The different classifications are provided based on a variety of factors including the property’s age, location, rental income, management and more. Each different classification represents a different type of risk as well as the potential return on your investment. We’ll look at the three primary multifamily classifications and cover their benefits as well as their challenges.
Class A Properties: New Construction, Often in the Most Affluent Neighborhoods
Class A properties are often called luxury properties, and for good reason. They’re the “cream of the crop,” and they’re either brand new or less than 10-years old. The classification is also given to properties that have undergone extensive renovation during the past 10 years.
These multifamily properties receive higher rents than Class B or C properties. According to Real Page, a real estate analytics company, Class A multifamily properties averaged $1,660 per month in the 100 largest U.S. metro areas. That amount is almost double than the average Class C property rental rates.
Why such a high disparity between Class A and Class C rental rates? Their location plays a significant role. The Class A properties are often located in the city’s most affluent neighborhoods, and feature expensive home prices in the immediate area. In addition to location, Class A multifamily properties feature high-end amenities, including custom interior options, tennis courts, a health and wellness center or clubhouse, swimming pools and more.
Another key to a Class A property is that they have top quality management in place. And there is a very low likelihood of the property requiring any type of major renovation in the near future. Thanks to their location and amenities, Class A multifamily properties attract the best tenants - ones who have professional jobs and superior credit scores.
These properties also tend to increase in value at a much faster rate than Class B and C properties. Rather than invest in Class A properties, many investors prefer to develop these type of luxury properties as the potential for profitability is much higher. On the other hand, investing in a Class A multifamily property means that there is already a steady cash flow in place. And since the tenants are stable with professional jobs, the likelihood of tenant turnover is low.
This is in direct contrast to developing a Class A property from scratch. Developing is a complex, long-term process that could face many delays, permit and environmental hurdles and cost overruns. Plus, there could be a long lease up after construction is completed. While it may be more profitable to develop this type of property, the risks to the investors are higher as well.
Class B Properties: 10-25 Year-Old Buildings in Safe, Middle-Class Neighborhoods
Most of the Class B properties are located close to Class A properties and neighborhoods, but their age is older. These properties are enjoying growth in value, but their rents are about 15%-30% lower than Class A properties, coming in at an average of $1,152 per month.