Multifamily Property Classes (Explained)

[Grant Cardone]

Let's quickly cover the property classes. Property classifications were created to make it easier to communicate among investors and lenders to the quality and rating of the property amongst themselves. The class can refer to the property and the location. 

A Class - Newest, shiniest asset and represents the highest quality building in the market. These are generally newer buildings under 15 years of age and contain many amenities catering to white-collar workers. Expect lower cap rates, around 2% to 4% on this asset. 

This class of asset won't generate as much cash flow but has the ability to appreciate greatly. Class A Properties are great for preserving wealth, while investors wait patiently for appreciation. This investor has a reduced need for cash flow.

B Class - One step down from A and built within the last 20 years. This class caters to a mix of white and blue-collar workers and the property may show a bit of deferred maintenance, but overall, it has a nice mix of cash flow and potential appreciation. Look for returns on cash invested of 5% to 7%, before appreciation.

C Class - My first real estate broker defined C Class properties as "crap" properties, but loved their ability to generate substantial cash flow. I tend to agree with his candid analysis. 

These properties are usually 25+ years old and have deferred maintenance issues and are located in more difficult areas as well as needing big capital expenditure investments (new roof, interior remodels, etc.) to remain competitive. Look for cash on cash returns on cash invested of 8% and above on these properties, before appreciation. 

D Class - The lowest class of properties usually located in cities with lower employment opportunities making it more difficult to collect the rent and more difficult to exit but greater cash flow for your trouble. 

These properties are highly management intensive, and the tenant base is often difficult to deal with. Investors get lured into investing in these properties due to the low prices, but soon realize they got more than they bargained for. 

The assignment of Property Classes A, B, C & D are complete arbitraries and these descriptions are generalizations used more to communicate than anything. This is more opinion and less science and should only be used to give you an idea of the quality type and the location rating of the property. 

Sometimes whether you are buying or selling impacts the property class used to describe the property. When I am buying the A Property, I see it as a B Property for negotiating purposes, and when I am selling, I described it as an A+.

-GC