First-time investors may perceive commercial real estate as complicated and confusing, largely due to the use of some commonly used industry terms, which can deter some people from investing in real estate.
Terms such as “multifamily properties” and “asset classes” are unfamiliar to most people outside the real estate industry. Still, this jargon is easy to understand once you have taken the time to read up on it.
Investors who familiarize themselves with these terms will be able to make more informed investment decisions in the future, which is why it is worth discussing them.
WHAT IS AN ASSET CLASS?
An asset class, also referred to as a property class, is a group of investments that share similar characteristics. This means they are comparable in terms of age, condition, location, and the number of amenities provided, among other factors. [1]
Classes A, B, C, and sometimes even D categorize certain assets. Subcategories like Class A- or B++ occasionally provide more accurate property descriptions. Class A properties are considered the top tier, while Class D properties may be old or in poor condition.
The most important thing to remember about asset classes is that there are no strict rules for determining a property’s classification. Investors, lenders, and brokers can designate an asset’s property class. However, no specific process or guideline dictates which asset class should be assigned to a property.
These classes are meant to guide investors so they can quickly describe what a commercial real estate property looks like to someone who has not seen it before. This will give the other person an idea of what to expect regarding quality, location, and amenities.
Another interesting thing is that other properties influence property classes in the area. The asset class system not only refers to the physical characteristics of a property but also its geographic and demographic qualities. [1]
An asset class can change over time. Sometimes, a Class B property can go up by one class after a few repairs or renovations.
Investors sometimes have their preferences when it comes to property classes. For example, BAM Capital focuses on Class A properties because these are often considered safe investments for multifamily private placement (syndication). However, some investors focus on investing in Class B and C properties with the intention of renovating these properties to a higher class than when acquired.
WHAT IS A MULTIFAMILY PROPERTY?
Multifamily real estate consists of residential properties with two to four housing units and commercial properties with five or more housing units. A smaller building with fewer units, like a duplex, would be categorized as residential. However, a more sizable operation, like an apartment community, would fall under commercial multifamily real estate. The defining characteristic of multifamily real estate is that income is generated by renting individual units within a property to residents rather than single-unit or single-family properties.
The term “multifamily” differentiates these properties from single-family homes and other housing types that are detached residential properties designed for a single household or family. [1]
Multifamily private placement (syndication) deals involve multiple investors pooling their money to purchase a single asset. An owner/operator (syndicator), such as BAM Capital, puts the deal together and looks for investors to join. Investors enjoy a passive real estate investment free from the usual responsibilities of being a landlord, such as managing residents and handling emergencies. Instead, they can enjoy continuous cash flow and earn money from the equity once the deal is finished.
Class A Property
Class A properties are considered some of the safest investments from a risk perspective because they are well-located in primary markets with strong underlying economics. These properties are typically located near universities, hospitals, major employers, shopping centers, and cultural activities. They also have good access to highways and/or public transit. Class A properties are where people want to live. [1]
Aside from being in a good location, these properties are also in good condition. They are either newly constructed or newly renovated. Class A properties have plenty of amenities that can attract potential renters. For this reason, properties in this class rarely have vacancies. Even when they do, the vacancy does not last long.
Because of their quality, Class A properties are in high demand among investors. However, their prices can often exceed the average investor’s means.
Investors don’t necessarily need to buy a Class A multifamily property by themselves. Multifamily syndication is one way to invest in Class A assets.
In a multifamily syndication, a sponsor locates the deal and manages the investment once the deal has closed. This sponsor serves as the general partner who coordinates the transaction throughout the process. [2]
Investors interested in exploring multifamily syndication should consider working with BAM Capital. BAM Capital handles all steps of the investment life cycle, from acquisition to remodeling to management, yielding a higher return for investors.
Class B Property
Class B multifamily properties may not be in prime condition or location. However, they still possess many desirable qualities that can attract both renters and investors. With a few repairs or renovations, Class B properties can move into Class A. Unlike Class C properties, no significant renovations or repairs are usually necessary for Class B properties.
Many Class B assets have good amenities. However, the age or condition of the building may be dragging it down.
Class B properties typically offer the desired balance of risk and return, making them a smart choice for a wide range of investors. Although they are not the crème de la crème, they are still an option for investors who want a low barrier to entry and good value.
Class C Property
Class C properties may range from fair to poor condition. They are typically older, with most being over 30 years old. This is why they are considered riskier investments. Still, their acquisition costs are lower, and they can have attractive potential cash-on-cash returns. [1]
Class C properties tend to have lower cash flow and higher vacancy rates. They also have fewer amenities, if any. Therefore, they are harder to market. They may have difficulty attracting new residents because of their poor condition or less-than-ideal location.
Investors wanting to take on a Class C property must make significant capital investments upon purchase. If you improve or renovate it, you may have to spend even more money to make it marketable. That said, Class C properties can be marketed to a broader range of people because of their lower rents. [1]
Investors who typically choose Class C properties do so with renovation in mind. Because these properties represent a significant value-add opportunity, some investors still select them.
CHOOSING AN ASSET CLASS
Every investor is different, and choosing an asset class depends on your specific goals and needs.
Class A properties are considered the most desirable. So, they tend to attract the most desirable renters, including six-figure earners and long-term residents willing to pay a premium to live in these attractive apartment communities. [1]
Investing in a Class A property initially involves fewer major repair and maintenance bills. However, Class A properties are well-suited for multifamily syndication because they allow multiple investors to pool their resources and invest in a property they otherwise wouldn’t be able to.
Class B properties may be considered inferior, but can offer more growth potential. They also have a lower barrier to entry, making them accessible to more investors. These properties are seen as “value-add” investments. A few upgrades can elevate them to Class A. Additionally, Class B properties tend to be purchased and sold at lower prices and higher capitalization rates.
Finally, Class C properties are the easiest to acquire because they have the lowest barrier to entry. They are accessible even to individual investors because they have the lowest acquisition cost. However, the investor may need to spend more money to make the property appealing, as it requires additional repairs and upgrades.
Class C properties have good cash flow potential but usually have lower appreciation potential than Class B properties, especially Class A properties.
Most risk-averse investors will avoid Class C properties. Only experienced investors who know precisely what they are doing should consider Class C properties because they may not give you the desired returns if you don’t renovate or take care of the property.
In fact, BAM Capital does not offer Class C properties because they can be risky. Instead, it prioritizes Class A properties when looking for investment properties because they are safer for investors.
It is important to remember that these classifications do not fully reflect a property’s value because many things must be factored into the equation. These property types are intended to serve as a guide, but it is not always straightforward. Properties will fall within these categories, but you can still make your own assessment based on condition, location, age, amenities, and even subjective opinion.
WORK WITH BAM CAPITAL
BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying assets targeted as having strong profitability potential and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while mitigating investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units.
Remember that no investment is without risk. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.
For additional multifamily real estate insights, visit Pathways to Passive Wealth, BAM Capital’s new platform designed to make real estate investing more accessible, transparent, and achievable for aspiring and experienced investors.
Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect BAM Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. BAM Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.
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SOURCES:
[1]: GowerCrowd. (n.d.). “Understanding Class A vs. B vs. C Multi Family Real Estate.” https://gowercrowd.com/real-estate-investing/class-a-b-c-properties
[2]: The Motley Fool. (2024). “How to Start Investing in Real Estate: The Basics.” https://www.millionacres.com/real-estate-basics/real-estate-terms/investing-multifamily-syndication/
[3]: BAM Capital. (n.d.). “Current Portfolio.” https://bamcapital.com
