If you’re thinking about just getting started with investing in multifamily properties, you may be thinking about investing in a Class A, Class B, or Class C multifamily property. There’s going to be a lot of properties for you to consider but the big question is which property will be the best for earning passive income?
In this article, I’ll break down the differences between Class A, Class B, and Class C Properties so that you will know for certain which property type will be the very best for earning passive income that you can depend on.
Best Multifamily Properties For Earning Passive Income
Class A Properties
When you talk to the average real estate investor, they will tell you that they want to invest in a Class A property because they think these properties as being the most ideal because they typically have the best amenities, newest features, and are in the best locations that renters want to live.
Class A properties are ideal because they’re typically occupied by white-collar tenants who work in the best jobs but, it’s also important to know that when the economy goes south, most Class A tenants typically downsize from Class A to Class B rental properties to save money.
A good example of this is Houston Texas, it’s not uncommon for there to be an over-supply of Class A rental properties every time the oil market dries up because those renters either go back to their home states, or they downsize to Class B properties.
Yes, with a Class A multi-family rental property you may be able to demand the highest rent, and have the lowest deferred maintenance costs but, if the local economy where the building is located is in a recession, you may have difficulty renting out those Class A units and you could have to lower rents to attract new tenants.
Class B Properties
Now let’s talk about Class B multifamily rental properties. These buildings are often located in what I would call ‘Class B areas. This means that they are close to industrial parks, employers, stores, and fun things that families like to do.
Most investors prefer owning Class B multi-family properties because most Class B properties have consistent tenants who often renew their leases and stay for more than one year at a time, compared to Class A tenants who may hop from one Class A property to another each year.
Consistency should be the number one goal of every investor because, when you have tenants who pay their rents on a consistent monthly basis and renew their leases every year, this provides investors with peace of mind and confidence in the income that they can earn from multifamily.
Some of the top cities in the United States for investing in Class B rental properties to earn passive income include Toledo Ohio, Austin Texas, Orlando, Florida, and Charleston SC.
Class C Properties
Last, of all, it’s important that we talk about Class C Multifamily Rental Properties. These properties are available in every location across the United States but, even though they may look like an amazing deal on paper, it’s important to know that these types of properties can come with major issues.
One of the first issues to consider before investing in a Class C multifamily property is the area where the property is located. Most often, these locations have high crime rates, bad school districts, and high unemployment.
Besides all the issues related to where the property is located, another reason to be apprehensive about investing in a Class C multi-family rental property is the deferred maintenance.
Since the average Class C multifamily rental property is going to be 50 years old, or older, if not uncommon for these properties to have major issues that the current owner has been putting off dealing with for years.
It’s quite possible that even though you may be able to invest in a Class C multifamily property for a low price, you may have to spend a lot of money on getting that derelict building in rent-ready condition before you could start renting out units to tenants.
Another problem with most Class C properties is that they often do not have any amenities other than a laundry room. This means that without amenities, there is no sense of community within that building and this often leads to a lack of pride of ownership among tenants plus high renewal rates.
With all the issues that most Class C Properties typically have, keep in mind that those issues may stop you from being able to earn the passive income that you need from a property
Some investors typically choose Class C multifamily Properties as the first property that they purchase because they think that they can live in one of the rentals themselves and be a ‘hands-on’ owner with their tenants.
Remember that the true definition of passive income is that you’re not having to work more than four hours per month to maintain that income stream so if you plan on investing in a Class C multifamily property, your goal should be to hire a property manager right away so that you’re not having to manage that property yourself.
Which property should you choose? Ultimately, the answer to that question is up to you. From an investing standpoint though, it makes sense to choose a Class B multifamily property, especially during recessions, since you’re going to find that Class B multifamily properties are in demand and are consistently rented when compared to class A and Class C and multifamily properties.
Contact Trier Capital
At Trier Capital, we specialize in helping our investor clients realize the dream of owning multifamily properties without having to do any of the work that’s necessary to source, acquire, or manage those properties themselves.
Multifamily real estate has the best risk-adjusted return of any real estate asset class, stocks, bonds, and REITs for the past 20 years.
To learn more about how we can help you build wealth by investing in multifamily properties, contact me today by calling (630) 229-2383 or click here to connect with me online.