Why are multifamily properties classified?
Just as learning the alphabet creates a foundation for reading and writing, the ABCs of multifamily real estate serve as a foundation for the way investors, lenders and brokers communicate about the quality and value of a property. Similar to a grading system, properties are assigned a “grade” or class: A, B or C.
What you should know as an investor
As an investor, it’s important to understand property classifications because it will help you evaluate risk. A lot of factors play into property classification and evaluating real estate in accordance with this system will give you a better idea of where to set your financial expectations. Classification plays a significant role in the Timberland Partners Investments strategy, but more importantly, we seek the potential in every property, determining what it takes to increase the value.
Class A properties are typically luxury apartments built in the last 10-15 years. These properties are well-situated and attract white-collar workers who choose to rent. Class A apartment complexes feature high-end finishes and sought-after amenities, which allows property owners and managers to set higher rental rates.
Class B properties can be somewhat older, though not always, and are generally well-maintained. Many properties that fall into this category don’t have the high-end finishes or amenities of their class A counterparts. Class B properties are often sought by investors because they are in high demand and there’s a finite supply. Baby boomers, millennials and others are seeking class B apartments now more than ever before, with affordability being a key deciding factor. These cost-effective properties allow for added value through renovations, upgraded amenities and a streamlined property management approach. Class B properties are a stable long-term investment because they are an affordable option should financial times become volatile.
Class C properties are usually located in less desirable neighborhoods and tend to be 20-40 years old. These properties have the most affordable rent, generally because the buildings are older and do not include additional amenities. These properties have a moderate-to-low-income tenant base. While class C properties present an opportunity for growth, they are often limited by their location within the market. Class C properties in up and coming neighborhoods present the most potential to renovate and evolve into class B.