Understanding Multi-Family Property Classifications: A, B, C, and D – Which One Is Right for Your Investment Strategy?

March 8, 2023

As an investor in the multi-family real estate market, it’s essential to understand the different classifications of properties available. The classifications are based on various factors such as age, quality of construction, amenities, and location. In this article, we’ll provide a clear overview of the different classifications of multi-family properties, which will help you make an informed decision about your investment strategy.

Class A Properties

Class A multi-family properties are typically newer buildings, less than ten years old. If the building is over ten years old, it should have undergone extensive renovations to maintain a high standard of quality. The fixtures and fittings in Class A properties are of the best quality, and the amenities are comprehensive and luxurious. These properties tend to generate a lower yield percentage than other classes, but they tend to hold their value well, even during major economic downturns. In terms of investment profile, Class A properties are considered to be core assets.

Class B Properties

Class B properties are older than Class A properties, usually built within the last 20 years. While the quality of construction is still high, there may be evidence of deferred maintenance. The fixtures and fittings in Class B properties are of slightly lower quality than those found in Class A properties, and the amenities are more limited. These properties are suitable for a core-plus investment strategy, meaning they offer a slightly higher yield percentage than Class A properties, with slightly more risk.

Class C Properties

Class C properties are generally built within the last 30 years and will show signs of deferred maintenance. These properties are in less favorable locations and may not have been managed optimally. The fixtures and fittings in Class C properties are outdated and of low quality, and the amenities are very limited. Class C properties are suitable for a value-add investment strategy, meaning there is an opportunity to increase the tenant occupancy and receive a higher return on investment by updating the property’s deferred maintenance and upgrading the interior or exterior. This strategy carries a higher risk due to the moderate to high leverage required to execute it.

Class D Properties

Class D properties are generally over 30 years old and are showing signs of disrepair. The quality of construction is inferior, and the location is less desirable. These properties may be suffering due to prolonged and intense use, with high occupancy levels. Class D properties are suitable for an opportunistic investment strategy, meaning that major renovations are required. This strategy carries the highest risk, but it can also yield the highest returns.

Which Class of Multi-Family Property Should You Invest In?

The class of multi-family property you should invest in will depend on your investment goals and risk tolerance. If you prefer a conservative investment strategy, Class A properties are the best option, as they are considered core assets and have a lower risk profile. However, if you’re looking for a more aggressive strategy with the potential for higher returns, you may want to consider Class B, C, or D properties, depending on your risk tolerance and investment goals.

In summary, the US multi-family real estate market offers excellent returns for well-informed investors. Understanding the different classifications of multi-family properties is crucial to developing a successful investment strategy. By considering the age, quality of construction, amenities, and location of each property, you can make an informed decision that aligns with your investment goals and risk tolerance.