Real estate assets are graded into three classes: Class A, Class B and Class C. They are aimed at aiding property investors in deciding what specific properties will fit into their overall investment strategy and goals. The letters are assigned to properties after considering a combination of factors including the following: Location of the property, rental income, tenant income levels, growth prospects, the age of the property appreciation, and amenities.
Each grade represents a certain level of risk as well as potential return. As an investor, it is essential to consider a property’s class because it helps them recognize how each property fits within their investment strategy, level of risk involved, and which risks they are willing to accept in order to achieve those returns.
Class A Properties
A Class A property is generally a luxury property that is either newly constructed or less than ten years old. A property that has significantly been remodelled or renovated within the past decade can also be classified under class A. High-quality construction, gated entrances and manicured landscaping are some of the exquisite features of Class A properties. Class A multifamily properties fetch higher rents than both B and C class properties. This is because of their extremely desirable custom interior options, locations, top-quality management, and amenities.
For example, a lot of Class A multifamily properties have a gym or a health and wellness center, a swimming pool, tennis courts, a clubhouse, and other high-end amenities. Chances of Class A properties needing significant renovations in the foreseeable future are meager. Market experts aver that in 2016, the average rent for a Class A apartment in 100 large U.S. metro areas was just above $1660 per month.
Class A properties attract high-quality tenants and residents with high credit scores and stable jobs. They also increase in value at a higher rate than B and C class properties. Investors of Class A multi-family properties prefer to develop rather than acquire as development can be more profitable.
Class B Properties
These properties are a few years older than Class A apartments; say typically less than 20 years old and often in a desirable location. Most of them are located very near to Class A buildings, meaning they are equally exposed to economic growth. Even though they are older than Class A, Class B properties should not need structural repairs; however, general maintenance remains essential.
While they may have fewer amenities than Class A, the facilities often bear proof of the age of the property. There is however no need to set aside enormous costs for major repairs such as plumbing. They can also be managed by the investors, investment management firm or property management company.
In terms of the value of an investment, Class B multifamily properties are more attractive investments especially when there is an opportunity to reposition it to a Class A asset. This then means as an investor you can collect Class A rental income. Class B properties would be a good investment plan if the surrounding area is growing or has the potential to grow.
Class C Properties
Class C properties are properties that are usually older than 30 years and are characterized by dated interior and exteriors. If they have amenities, then they are very few. The Class C properties still have original appliances and light fixtures. They might also have structural and foundational problems and any improvements made over the years still require extensive repairs. That is why some investors usually replace plumbing and electrical wiring.
Most real estate investment management companies do not manage Class C unless under peculiar circumstances such as when the property is undergoing a significant repositioning. This means that properties are usually managed by the investor or someone they hire directly.
While many investors shy away from Class C properties, it takes the few who are open minded and with the ability to strategize wisely to embrace Class C properties through repositioning in order to realize impeccable returns. If the property is located in a location that is experiencing growth, all an investor needs to do is upgrades, repairs and some new additions. Smart investors are skilled at buying Class C properties at a discount to reposition and ultimately enjoy a higher monthly profit margin or sell for a capital gain.
When it comes to choosing the best multifamily asset for you, consider your investment style financial resources and goals. Also, consider working with a trusted management firm with a national operating platform like Alliance.