Real estate asset classes help property investors determine whether or not specific properties will fit into their overall investment strategy and goals. Asset classes are assigned based on property age, location, management, rental income, and amenities, and each represents a certain level of risk and potential return. In order to properly evaluate multifamily real estate and determine which properties are best suited to your needs, you should understand the three primary multifamily asset classes, as well as their benefits and challenges.
Class A Multifamily Asset Characteristics
In general, a Class A property is a luxury property that is new or less than 10 years old, or one that has been significantly renovated within the past 10 years. Class A multifamily properties command higher rents than both B and C class properties. In 2016, the average rent for a Class A apartment in 100 large U.S. metro areas was just above $1660 per month.
Class A properties fetch high rental rates due to their extremely desirable locations, custom interior options, top-quality management, and amenities. For example, many Class A multifamily properties offer a swimming pool, tennis courts, a clubhouse, a gym or a health and wellness center, and other high-end amenities. Some even offer attached golf courses. High-quality construction, manicured landscaping, and gated entrances are also hallmarks of Class A properties. The likelihood of Class A properties needing major renovations in the foreseeable future is very low.
Why Invest In a Class A Multifamily Property?
Class A multifamily property investors rely heavily on continued growth of the neighborhood and surrounding area to increase demand, and on rental income only increasing over time. Class A properties attract high-quality residents with stable jobs and great credit scores, and increase in value at a higher rate than B and C class properties. Many investors prefer to develop rather than acquire Class A properties, as development can potentially be more profitable.
Class B Multifamily Asset Characteristics
A Class B property is typically less than 20 years old and in a desirable location. Many Class B multifamily properties exist very close to Class A properties and, therefore, can often experience similar economic growth. In 2017, rental rates of Class B apartments grew by an estimated 2.9 percent, averaging $1,152 per month.
Class B properties, while older than Class A, should not require foundation or structural repairs. Interiors are typically not fully updated, however. General maintenance is necessary, of course, but there should be no need to allocate substantial cost to major repairs or replacement of large systems, such as HVAC or plumbing. Class B multifamily properties can be managed by either the investor themselves, a property management company, or a real estate investment management firm. Many Class B properties offer amenities, such as a pool or fitness center, but they often reflect the age of the property itself. You can expect the property to have nice landscaping, but not to match the ultra-high standard of a Class A properties.
Why Invest In a Class B Multifamily Property?
A Class B multifamily property is a more attractive investment when there is an opportunity to reposition it to a Class A asset and thereby garner Class A rental income. Repositioning can not only increase the income generated from the property, but also increase its value to a prospective purchaser. An investor would also choose a Class B property if the neighborhood or surrounding area is growing or has the potential to grow. An increase in demand would allow increases in rent and, therefore, increases in profit.
Class C Multifamily Asset Characteristics
A Class C property is typically over 30 years old, with a dated exterior and interior, and few, if any amenities. In 2017, Class C apartment rental rates grew by an estimated 3.0 percent, averaging $1,003 per month.
Many Class C multifamily property apartments still contain original appliances and light fixtures. Foundation and structural problems could exist, and any improvements that have been made over the years might require major repairs or replacement. It’s not unusual for investors to replace HVAC units, electrical wiring, and plumbing in Class C properties.
Class C properties are usually managed by the investor or someone they hire directly, as real estate investment management companies don’t typically work with class C properties unless there are unique circumstances, such as an active repositioning going on. Landscaping of Class C properties is maintained at a very basic level.
Why Invest In a Class C Multifamily Property?
While Class C property characteristics can force some investors to shy away, others who strategize expertly and with an open mind and wallet see tremendous upside potential through repositioning. After repairs, upgrades, and perhaps even some new additions, investors can profit, especially if the property is located in a growing area. Class C property investors are adept at purchasing those properties at a discount to reposition and ultimately enjoy a higher monthly profit margin or sell for a capital gain.
Which Multifamily Asset Class Is Best for You?
Choosing the multifamily asset class that is best for you will depend on your financial resources and goals, your investment style, and the amount of time and energy you have to expend on a particular property. For example, if you are about to invest in one property and another potentially better opportunity comes your way, you need to be able to accurately and quickly compare both choices before making a decision. When making important property investment decisions, always consider working with a trusted real estate investment management firm.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country, and employ a team of experts who can help you hone your investment strategy.
Contact us today to discuss which multifamily asset class is best suited for your needs.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.