Are you thinking about investing in a Class A Multifamily property but you’re not sure if that’s the right investment? If so, you’ve come to the right place.
Even though Class A Multifamily properties are desirable, the reality is that there are other types of multifamily properties on the market today including Class B and Class C properties as well.
Are Class A Multifamily properties a good investment? In this article, we will answer this question and offer you some tips on investing in Class A Multifamily properties.
What Are Class A Multifamily Properties?
Class A Multifamily properties are newer properties that were built within the last 10 years and depending on the location, these properties are often considered to be luxury apartments because they typically have the most amenities.
In most cases, Class A multifamily properties are typically occupied by white-collar workers, or high net worth renters who are renting by choice and want the most amenities for their money.
Besides investing in a Class A building, these properties typically have low vacancy rates and are often in choice locations that are close to excellent local amenities and recreational options.
Class A multifamily investment properties are generally considered one of the “safest” investments from a risk perspective. One of the reasons for that is Class A properties are usually well-located in primary markets, and in areas where the underlying economics are strong.
These properties tend to be located near major employers, universities, hospitals, and arts and cultural activities. They will usually have good access to highways and/or public transit. In other words, these are considered “safe” investment opportunities because Class A multifamily buildings are located in areas where people generally want to live.
Another distinguishing factor among Class A properties is their condition. Many Class A buildings are newly constructed and feature high-end finishes and abundant tenant amenities, but this is not always the case.
A property need not be new to be considered Class A. An older building, perhaps a historic property, that has been gut renovated and fully rehabbed in line with new construction can just as easily classify as Class A.
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Are Class A Properties A Good Investment?
Back to the question of are Class A Multifamily Properties a good investment? The answer to this question is yes. These properties are a good investment because they are the most desirable properties that most renters want but there are also some risks involved with owning this asset class.
One of the biggest risks involved in the potential of the rental market going south as it did in 2008 and 2020 when renters who were in Class A properties lost their jobs then downgraded to Class B rentals.
Yes, the risk is part of being an investor but it’s something that you must be prepared for because it’s possible to lose tenants seemingly overnight, especially if we have another outbreak of COVID-19.
Value-add strategies can include simple cosmetic fixes like painting, landscaping, and signage, or extensive structural renovations like upgrades to kitchens and baths, new carpeting, or a new gym or clubhouse. The more extensive the renovation, the more it will cost. In addition, there are repairs to consider, like new roofs, HVAC systems, or plumbing upgrades.
For the most part, Class A buildings are also not good candidates for value add, since they are already upgraded and charging top rents. On the other hand, Class B and C properties — apartment buildings that were built decades ago — offer the most potential for increasing income by improving those properties. Value-add strategy is well worth the effort. The reason for that is that new improvements equal higher rents, and higher rents equal higher net operating income (NOI), and this, in turn, has a major impact on the appreciation. By doing so, you can basically “forced appreciation” because you improve the property and positively impact its value (in addition to organic growth in the market).
Boosting The Net Operating Income
Compared to building a multifamily property from scratch, investing in an existing asset that has ongoing cash flow is a smart move. An A property generally has a high property tax, which will increase the front-end building costs significantly. On the other hand, making value-add improvements like minimal exterior and interior changes to a Class B are relatively inexpensive.
The modest returns of a Class A property with a single-digit to the low-teen internal rate of return (IRR) just isn’t enough when compared to the high-teen IRR results obtained when value-add is completed on Class B and C properties. After all, the goal of any multifamily investment is to increase the NOI, and this is accomplished by either increasing the property’s revenue or decreasing expenses. Improvements made to value-add properties will significantly boost the NOI. That’s because once the improvements are made, rent increases generally follow, and cash flow increases
Just how important is it to increase the NOI? Let’s say your property has 100 units, and this year you’re increasing rents by $40 per month. That amount represents an increase in revenue of $48,000 per year ($40 x 100 units x 12 months), as well as an increase in the NOI by $48,000.
What Other Multifamily Classes Should You Consider Investing In?
Besides Class A multifamily properties, there are also Class B and Class C properties for you to consider.
Both property types come with advantages and things that you should seriously consider before you decide to ‘pull the trigger’ and invest in them.
These properties are one step down from Class A and are generally older, tend to have lower-income tenants, and may or may not be professionally managed. Rental income is typically lower than Class A, and there may be some deferred maintenance issues. Mostly, these buildings are well-maintained and many investors see these as “value-add” investment opportunities because the properties can be upgraded to Class B+ or Class A through renovations and improvements to common areas. Buyers are generally able to acquire these properties at a higher CAP Rate than a comparable Class A property because these properties are viewed as riskier than Class A.
Class C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of renovation, such as updating the building infrastructure to bring it up-to-date. As a result, Class C buildings tend to have the lowest rental rates in a market with other Class A or Class B properties. Some Class C properties need significant reposting to get to steady cash flows for investors.
Contact Trier Capital
At Trier Capital, we save investors the time, money, and hassle of investing in multifamily properties themselves.
We do all the hard work to find and acquire ideal properties, and then oversee asset management after purchase, while our investors sit back, relax, and receive tax-advantaged passive cash flow.
If you’re an accredited investor who is ready to get started with investing in multifamily properties, contact us today by calling (630) 229-2383 or click here to connect with us online.