If you’re just getting started with investing multifamily investment properties you will have heard references to the wide variety of multifamily classifications including Class A, Class B, and Class C multifamily properties.
It’s easy to get confused wondering what these different property classifications mean. This is why in this blog post I’ll break down each multifamily classification and provide you with insight into which type of property you should be investing in now.
Class A Multifamily Classification
Class A Multifamily properties are typically luxury apartments that were built within the last 10 years.
These properties are “upscale” and offer a wide variety of high-end amenities like a tennis court, swimming pool, spa, health or wellness center and more.
When Class A multifamily properties are built, they are typically constructed in highly desirable geographic areas that have a high percentage of white-collar workers who are choosing to rent by choice.
Rents in this multifamily classification typically average $1,600 to $2,000 (or more) per month depending on the location, age of the building and amenities.
Class B multifamily properties are typically buildings that appeal to both white-collar and blue-collar workers and these buildings have similar amenities as Class A multifamily properties, the only difference is that they are older and were built within the last 10-25 years.
What’s create about Class B properties is that they are more affordable renters since they typically rent for $1200 to $1,500 per month in most cities nationwide.
Class C multifamily investment properties are the foundation of many real estate investment portfolios nationwide because these properties are filled with long term tenants who are content to live in their units for life.
Unlike Class A and B multifamily properties, Class C properties don’t offer any amenities other than a swimming pool and onsite laundry facility but most owners who have Class C multifamily properties in their portfolios keep them clean, habitable and in good condition for their tenants.
With the Class C Classification, properties are often up to 50 years old, they can have deferred maintenance issues and the interiors of their units might need updating so it’s important for investors to be aware of what they are investing in before deciding to buy a Class C multifamily property.
How much do these properties rent for? It’s not uncommon for Class C properties to rent for $800 to $1,000 or more per month, depending on the area where the property is located.
Although rents have risen nationwide for every multifamily asset class in recent years, Class D properties are typically the most affordable to rent are often occupied by people who are on Social Security, Disability or SSI.
In many cities nationwide, it’s not uncommon to find Class D multifamily properties renting for well under $1,000 per month and it’s also important to note that these properties don’t offer many amenities at all and since they are typically around 50 years old, units in these buildings may have extensive deferred maintenance issues.
The good news with Class D properties is that you can increase asset appreciation and rent by investing in the property. Just make sure that you’re buying an asset that’s in a great location because it’s easy to waste money renovating a property that’s in a bad location.
Which Multifamily Property Type Should You Invest in During 2020?
Depending on your goals as a multifamily investor, each property type offers you long term benefits but the big question is where should you be investing in 2020?
Since coronavirus, the rental market has changed and the United States is seeing an unemployment rate that hasn’t been seen since the 1930’s but when all is said and done, people are still going to need a place to live.
Class A properties will always be appealing if those properties are located in the right areas but since the income disparity and wealth gap was widening in the United States before coronavirus, investors shouldn’t be looking at investing in Class A properties in 2020, they should be looking at investing in Class B and C properties.
Class B and C properties will always be in demand, regardless of what’s happening with the economy and the good thing about these properties is that when economic conditions improve, it’s possible to raise rents responsibly so that you can get the fair market rent for each unit in your Class B or C buildings.
Recession Resistant Properties
Want another reason to invest in Class B and C multifamily properties? You can invest with confidence because these properties can be classified as “recession-resistant”. Why? Since most class B and C properties are more affordable than Class A multifamily rentals, the average renter is going to seek out a rental in a Class B or C property to weather the economic storm of a recession.
Most economists have confirmed that we’re at the “top” of a recession cycle and this means that it could last for months or years so smart investors need to position themselves correctly now to avoid investing in Class A multifamily properties which may be difficult to rent in the months ahead.
Even though Class B, C, and D multifamily properties can be classified as recession-resistant, the same rules apply when choosing these properties. This means that you should research the area where the property is located, do your due diligence and take all of the steps necessary to make a smart investment.
There’s no denying that the economy is heading into a recession that may not end for another 12 months or longer. Although we can’t predict the future, it’s logical to think that the asset class that’s the most like to experience strain will be the one that’s priced higher than others so it’s a smart choice for investors to properties to invest in that will continue to experience demand during the economic downturn.