For passive investors, there are many different types of multifamily property investments to choose from. These properties can be separated into different property classifications or property classes. Passive investors should learn property classifications to make more informed decisions before investing.
Although property classes are only meant to be a guide rather than a strictly imposed categorization, certain factors can still affect an investment property’s classification. This guide will explore all those different factors. First, we will give you a brief insight into property classes and how they could influence your investment decisions as a passive investor.
WHAT ARE PROPERTY CLASSIFICATIONS?
Property classifications quickly communicate the quality of a property and are used in multifamily real estate as well as other investment types. An investment property’s classification can give investors an idea about its condition, price, location, age, rental income, etc. [1]
Passive investors can use this to gauge whether a specific investment property meets their particular needs.
Property classes are also referred to as asset classes, and they can be used for multifamily, industrial, hospitality, retail, office, and other types of real estate. Investment properties may fall under one of these classifications: Class A, B, or C—although Class D is also used in some cases. Subcategories like Class A- or Class B+ are sometimes used to provide a more accurate property description. [2]
These property classes can help novice and experienced investors narrow their options quickly. Some investors only go for Class A properties, for example, because they are known for being of higher quality. They generally make for strong investments because they are often highly desirable properties where renters want to live.
On the other hand, some investors focus on Class B and C properties to upgrade them to a higher class through renovations, repairs, and repositioning.
It all depends on an investor’s preferences and investment strategies.
Class A multifamily properties are well-located—typically in a nice neighborhood with a low crime rate and easy access to shopping centers, transportation, universities, recreational activities, etc. They are also often newly constructed and offer plenty of amenities.
Class B and C properties may not be in the top tier, but strategic renovation and repairs can enhance their value and appeal, potentially resulting in reclassification to a higher tier. Class B properties are often well-located but are generally older or may lack the high-end finishes and amenities found in Class A properties. Class C properties are older, typically more than 30 years, with dated infrastructure and minimal amenities in less desirable locations. These properties often require significant capital improvements to increase their appeal.
WHAT IS MULTIFAMILY REAL ESTATE?
Before understanding the various factors influencing an investment property’s classification, let’s define a multifamily property. Multifamily investment real estate includes residential and commercial properties. Residential multifamily properties must have four or fewer housing units but more than one (e.g., duplex). Five+ housing units is categorized as a commercial multifamily property.
Multifamily real estate may take many forms. The term “multifamily” simply differentiates it from single-family homes. [2]
Multifamily real estate may fall under different classifications as well. Class A multifamily real estate buildings tend to be more expensive because of the number of units, but investors don’t necessarily have to acquire them alone. Multifamily private placement, also called syndication, is one way for investors to invest in a Class A multifamily property without shouldering the responsibilities of an owner/operator, such as managing/maintaining the property and handling residents.
Multifamily private placement (syndication) is when multiple investors pool their money to purchase a single asset or portfolio. An owner/operator (syndicator), such as BAM Capital, structures the investment and partners with investors seeking to invest in the syndication. Through multifamily syndication, they can enjoy a passive real estate investment and a continuous cash flow, capital appreciation, or both without becoming a landlord, depending on the fund structure. [3]
Investors who want to try multifamily syndication should consider working with BAM Capital. BAM Capital handles all steps of the investment life-cycle, from purchasing to remodeling to management, often yielding a higher return for investors.
WHAT FACTORS AFFECT PROPERTY CLASSIFICATION?
No standardized definition is used to determine an asset’s classification, but widely accepted parameters help guide classifications. A property possessing many desirable qualities may fall under Class A. However, if specific issues make the investment property less appealing, it may fall into a lower classification.
Location
Location is one of the most—if not the most—important factors to consider in all real estate investment types. Therefore, an apartment in a less-than-desirable neighborhood, such as one with a high crime rate, likely would not be categorized as a Class A property. This also means that neighborhoods can influence real estate property classes. Class A neighborhoods can appeal to residents because of their location and proximity to malls, parks, schools, hospitals, and major employers. [2]
Properties in less-than-desirable locations—for example, one with a higher crime rate—may fall under Class B, C, or even D. These are generally lower-income neighborhoods with fewer amenities and employment opportunities.
Age and Condition
The neighborhood influences the classification of a multifamily property, but the building’s individual qualities also significantly impact its classification.
Some properties may be Class B despite having an excellent location because the building is in fair or poor condition. A fully renovated Class B property is more likely to move up within its tier and achieve Class B+ status, despite a good location, as Class A is generally reserved for newer construction. [2]
Because Class A properties are usually new, they tend to need less maintenance than Class B or C buildings. While investors will pay more upfront for a Class A multifamily investment property, maintenance costs are lower in the first few years.
Class B and C properties are usually older, with Class C being over 20 to 30 years old. There is an exception to this, however. An older building could be considered Class A if it is a historic property in a prime location, has undergone substantial renovations, and has amenities similar to other Class A properties in its market. [2]
This means age alone cannot determine a multifamily property’s classification.
Amenities
Amenities are another factor that can influence asset class. Class A properties often have an impressive set of amenities. When it comes to multifamily real estate, amenities play a significant role in a property’s classification.
Renters typically expect amenities from Class A multifamily properties like an on-site fitness center, outdoor pool, doggy daycare, underground parking, concierge, etc. This is why investors look for those qualities as well. [2]
Larger apartment communities tend to have more robust amenities. Class B may have fewer or older amenities. Class C may not have any at all.
Occupancy
Occupancy is another key factor when it comes to property classification. This refers to the residents that the property tends to attract. The most attractive residents usually occupy Class A properties. This includes high-earning professionals with high credit scores. [2]
Class A properties tend to have low vacancy rates. Even if a unit becomes vacant, it may not remain because of the property’s appeal. This can make them a suitable investment for passive investors who want a continuous income stream.
Class B and C properties generally have lower-income residents with lower credit ratings. There is an exception to this rule, however. Class B and C properties may attract high-earning professionals who are more cost-conscious than their peers. They may rent more affordable apartments while saving up for a down payment on their home. [2]
Class B and C properties also have variable occupancy levels, depending on the apartment’s condition and neighborhood.
CAN A PROPERTY CLASS CHANGE?
A real estate property’s classification can change over time. For example, if a property is neglected as it gets older, then even a Class A property can downgrade to a Class B. Similarly, a Class C property can move up a class if they are repaired or renovated. Some investors go for Class B and value-add multifamily buildings to renovate. These property improvements may take a significant capital investment, but this due diligence can help investors earn more in the long run.
These are factors that affect a multifamily apartment’s classification. Consider these as you look for investment opportunities in various real estate markets. Investing in Class A real estate has clear benefits, but don’t underestimate Class B and C properties. Your investment in real estate should depend on your particular goals, risk tolerance, and present economic conditions.
WORK WITH BAM CAPITAL
Working with BAM Capital allows investors to enjoy a passive investment through multifamily private placement (syndication). BAM Capital has a Midwest focus and prioritizes Class A multifamily properties. Multifamily private placement/syndication is one solution for investors who do not want the responsibility of being a landlord while still enjoying a passive real estate investment. [3]
BAM Capital will arrange the syndication deal, so there is no need to purchase an asset on your own. Due to the vertically integrated business model, BAM Capital will also handle property management.
Investors love BAM Capital’s vertical integration model, which can mitigate investor risk. To date, this Indianapolis-based company has successfully managed over $1.7 billion in assets across ~9,000 apartment units. [3]
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.
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]: Medium. (2019). “ABCs of Multifamily Investment Classifications.” https://medium.datadriveninvestor.com/abcs-of-multifamily-investment-classifications-2fa557cef63f
[2]: Gower Crowd. (n.d.). “Understanding Class A vs. B vs. C Multi Family Real Estate.” https://gowercrowd.com/real-estate-investing/class-a-b-c-properties
[3]: BAM Capital. (n.d.). “Current Portfolio.” https://bamcapital.com/
