When you are dealing with multifamily properties, it is very important to understand the different classes of properties. The class that a property is assigned can tell you a lot about the property and if it is worth your time and money to invest in. There are four different property classes: A, B, C, and D.
Property Classes are really set by the conditions of the property and where it is located. They are not set by the appraisers. The classes are not something that is formally defined but more of something that is set in the vernacular.
Class A properties, naturally, are the cream of the crop. These apartments are newer and have a higher rent than apartment buildings that are in the other classes. You can actually have a new Class A property in a Class B area. They are classified as Class A because they are new but they have lower rents than other Class A properties because of their location.
Class B properties are multifamily properties that are 10 – 15 years old, well-kept and are in the “middle class” part of town.
Class C properties are in low to moderate income or blue collar neighborhoods. They range in age from 30-40 years so they have usually been through at least one rehab. The average rent for a one bedroom is $400 – $425.
Class D properties are in very bad neighborhoods. These are in high crime neighborhoods; neighborhoods where you do not want to get out of your car. You generally do not want to work with Class D properties.
If you are going to do Class D properties, you need to be in that niche. You are not going to turn around a Class D property without turning around the neighborhood that it is in. Class D properties are suffering from a neighborhood problem and not a property problem.
Class D properties are bought only because they are cash flow machines. You will not get any appreciation on them. They require intense management and heavy security.
Class C and lower Class B multifamily properties are your bread and butter and they do not offer many amenities to tenants. The further you go down from Class A to Class D, the better your cash flow. The premium deal is finding a Class C property in a Class B area that you can reposition.
If you could find a property that is considered a Class D because of its condition but it is in a Class C neighborhood, you would have a great deal. In this case, you can come in and clean up the property by either making a physical change or a security change to it. You can buy it low, make the changes that are needed and then sell it for a great profit.
Your understanding of the property classes enables you to effectively assess the potential value a multifamily property has as an investment for you. You can then more easily decide if it is deal that you would like to pursue or not.