The A, B, Cs, and Ds of Property Classification
Multifamily investment properties have four main classifications – A, B, C and D. These classifications are used by investors, lenders, and brokers to help communicate the quality of an investment property or area. While not hard and fast rules, there are several key indicators that help distinguish between the different classifications. Factors that go into multifamily property classifications include things such as age, the income of tenants, area growth, appreciation, rent rates, amenities, and construction quality.
Class “A” Multifamily Properties
Class A properties generally have been built within the last 10-15 years and will be in top condition with no deferred maintenance. The tenant grade will include higher income earners and will demand higher rents. The landscaping, rental office, club building and other amenities will be above that offered in all other classifications. The cost per unit will be the highest in the area and the property will have a low Capitalization Rate (CAP Rate). They are often owned by Institutional investors. Class A properties generally won’t cash flow very well starting out but will have a high appreciation potential.
Class “B” Multifamily Properties
Class B properties typically have been built within the last 15-30 years. They will have rents lower than what is found in Class A properties with a mix of white collar and skilled blue collar workers as tenants. Often there is found a low amount of deferred maintenance and a more moderate amenity package – both of which can provide opportunities for improvement projects. Their cash flow potential is usually better than Class A properties, they will still have appreciation potential, and will typically include a higher cap rate. Class B properties are often owned by Institutional investors, high net worth individuals, or private investment groups such as Master Multifamily.
Class “C” Multifamily Properties
Class C properties usually were built 30+ years ago. They will have dated exteriors and interiors with limited to no amenity packages. Rents will be lower than that found in Class B properties. Class C properties will have some deferred maintenance and lower occupancy rate. Tenants may include mostly blue collar workers and could include government-subsidized tenants. These properties will often be owned by private investors and private investment groups. Class C provides higher cash flow and CAP rates but will have lower appreciation potential.
Class “D” Multifamily Properties
Class D properties are older buildings in mediocre locations with potentially dangerous neighborhoods. They will have a high amount of deferred maintenance with no amenity package. The construction is typically poor quality. The various system components will often be at the end of their lives. Tenants will include low income earners and generally government-subsidized individuals. Due to the tenant mix, Class D properties can have challenging tenant and management issues. The rents will be on the lower end of the market and will be subject to higher turnovers. These properties will usually have high CAP rates without much appreciation potential. Though they will have a high amount of cash flow, these are often diminished by repairs and other tenant related expenses.
The various classifications can be generally stated as follows:
A – newer growth areas
B – older, stable areas
C – older, declining, or stable areas
D – older, declining, potentially rapidly declining areas
Master Multifamily targets to acquire multifamily apartments with significant appreciation potential that are attractive to renters. Appreciation potential directly relates to increasing revenues or lowering operating costs because multifamily apartment values are a function of net operating income. The sweet spot for favorable economic characteristics is apartments fitting within the C+ to A- quality range.