When you talk to a real estate syndicator, they should be focused on a specific property class asset. At Growth Vue we place our focus on B Class apartments with 100+ units that were built between the years of 1981 and 2009, as well as C Class properties with 250 units are more with room for value add. Before we dig into why we focus on these specific assets, let’s discuss 4 different property classes.
These properties are the highest quality buildings in prime market areas. These assets are typically newer and built within the last 15 years and generate the highest rents. Class A Properties are in great condition, and have very low vacancy rates. They are lower risk assets, with little deferred maintenance issues, and have lower cap rates than other asset classes. You may even see some Class A broken into AAA or AAA+ to further describe newer or best Class A Properties.
A step down from A, Class B assets have slightly lower income and in fairly good areas, but the buildings are older, and may have some deferred maintenance. These assets are commonly viewed as “value add” opportunities by multifamily investors. Class B has a higher cap rate than Class A, and can be brought up to class A standards over time. Class B properties tend to deliver stable results for investors with a slightly higher risk investment.
These assets are typically over 30~ years old and need substantial updates and repairs. Class C is also in less desirable locations compared to A and B class. With lower rents, and higher vacancy rates, these properties usually need some attention and care to be brought up to class B. Class C assets can deliver great cash flow if managed correctly, but often have the lowest rental rates. Often Class C properties can be marketed as Class B, so make sure to do diligence when investing and pay attention to the detail sponsors put into describing assets.
These properties are typically in the roughest areas and need a substantial amount of work. Crime is common and rents are low. Tenants can turn over often and rents can be late or unpaid in these areas which introduces more risk. The property manager and team who oversees these assets will typically have much more work to do. Older properties tend to have lower Class ratings so be on the lookout for the years built.
So why at the Growth Vue do we focus on Class B, 100+ unit garden style apartments, and C Class Value Add??
When the economy slows down, Class A tenants tend to live more within their means, and move to Class B. This creates higher quality tenants for Class B multifamily assets and rewards investors who are patient to find the right deal. Class B also has great value-add opportunities, especially when finding apartments under market rent, that have not been kept up and have deferred maintenance. Many class B assets from the 90’s and early have not been upgraded with newer cabinets, granite countertops, and other features that people enjoy in their living spaces.
One of the top reasons we choose Class B is because these are the median income earners and these tenants take great care of the properties. Class B also tends to follow the trends in appreciation of Class A, where Class C and D can often lag behind while introducing more potential risk.
We hope this was a helping introduction into different property types when evaluating commercial multifamily investments, or other commercial deals.