In the world of real estate investing, multifamily real estate investing is considered one of the safest asset classes to invest in. Everyone needs a safe place to live, which creates a demand, hence why there is less risk to invest in this asset class. They are several attributes to why commercial real estate investing has generated wealth for its investors: tax benefits, steady cash flow, and a strong asset appreciation.
Each of these attributes can vary depending on the asset class you invest in. In multifamily real estate or apartments, the asset class is separated into four distinct groups: Class A apartments, Class B apartments, Class C apartments, and Class D apartments. In the evaluation of multifamily assets, there are some primary factors to consider. They are evaluated based on their location, age, amenities, and the level of rental income.
You as a real estate investor it is important that you understand each asset class type to determine which property type fits with your investment strategy and goals.
Class A Apartments
- Brand New apartment complexes built within the last 10 years
- Located in the most desirable areas.
- Have the highest price per door.
- Market cap rates are generally lower than the other multifamily asset classes
- Have the most luxurious amenities
- In most cases investors purchase for appreciation.
- Little to no value add component in this asset class to increase appreciation.
Class B Apartments
- Built within 15-20 years.
- Well maintained but with less amenities compared to Class A.
- Cap Rate or value is between Class A and Class C apartments.
- Similar to Class A apartments, in most cases investors purchase for appreciation over cash flow.
- Generally a marginal value- add strategy or forced appreciation through operational efficiencies, renovations and rebranding.
Class C Apartments
- Typically built over 30 years old
- Have below- market rents
- Have outdated interiors, exteriors and require a higher capex or renovation budget
- Most residents/tenants in Class C buildings rent out of necessity
- Provides the best cash flow for investors
- Most real estate syndicators or deal sponsor team use a value add strategy to force the appreciation via renovations, operational efficiencies and rebranding.
Class D Apartments
- Generally over 40 years old
- Usually considered a run down apartment
- Located in high-crime areas.
- High vacancies may occur
- High delinquencies
- Poor Management
- Most challenging asset on the property management front.
- Takes an experienced deal sponsor team to turn around this type of property.
- Typically no cash flow while repositioning the property
WHICH MULTIFAMILY ASSET CLASS INVESTMENT PROVIDES THE MOST LIQUIDITY?
In most cases, Class C investments offer the real estate syndicator and investor the highest cash flow and the greatest opportunity to force the appreciation higher. For many real estate investors, Class C properties can be performing at the top.
Class C apartments can be the first to appreciate if they are purchased correctly in a rising market.
When analyzing which multifamily asset class to invest in, the LOCATION is paramount. Here’s a blog on how to identify a good market and submarket.
Every asset class comes with its benefits and risks. Before investing analyze which asset class fits your desired risks and returns.
If you have any questions, please reach out and we will be happy to help you. If you want to invest with us please follow this link: www.whitewaterequity.com/investwithus.