Exploring the Four Multifamily Asset Classes

[Jorge Abreu]

When evaluating multifamily properties, a grading system is used to classify different assets. Just like a report card, multifamily assets get a letter grade, ranging from an A to a D.

Class A Multifamily Assets 💵

Let’s start at the top, with Class A. Class A is the top tier. These are the luxury apartments. They are located in the most highly desirable neighborhoods, with the best school districts. The interiors will have hardwood floors, granite countertops, and stainless steel appliances. Bathrooms will likely include beautiful tile work, and maybe even a rain shower.

Class A apartment communities often include top quality amenities as well. Full service gym, resort style pools, clubhouse, rooftop patios, dog parks, picnic areas, and covered or garage parking. For all this luxury, you will be paying much higher rents.

Class B Multifamily Assets

These assets tend to be in nice neighborhoods as well, often around the corner from a Starbucks or Target. Often, you’ll find hardwood look-alike flooring (high quality vinyl or laminate), black or stainless appliances, solid surface countertops, and nice cabinetry. Class B assets tend to be a bit older, built within the last twenty to thirty years, the buildings tend to have little to no deferred maintenance. Amenities can vary. Often times they are similar in scope to Class A Amenities. As you can imagine, rents for Class B apartments are lower than Class A apartments, so these assets tend to appeal to more of a working class tenant profile, which can be a huge benefit to investing in Class B assets.

Class C Multifamily Assets

They often tend to be in more developing neighborhoods. They don’t particularly stand out when you drive by them. They’re not falling apart, but they’re not sparkling either. There is typically some or a lot of deferred maintenance (e.g., older roofs, peeling paint, etc.). Inside these units, you’ll often find more dated kitchens and bathrooms, as well as laminate flooring or carpets and they are usually sporting “vintage” appliances.

Class D Multifamily Assets

At the bottom are Class D assets. These are the types of places you would normally avoid. There’s typically a lot of deferred maintenance and neglect, which is apparent even from a distance. They are in sketchier areas of town, where you probably wouldn’t want to be caught alone after dark. The interiors of these units, as you can imagine, are consistent with the exteriors. Dated, worn, and poorly constructed.

To summarize, Class A apartments are the highest quality apartments you can find. They’re in the best neighborhoods, with the best finishes, but also cost the most. On the opposite end of the spectrum, Class D apartments are those you wouldn’t want to touch with a ten-foot pole. The buildings are often falling apart and are located in rougher areas of town. In the middle are Class B and C assets.

If we invest in Class B and C multifamily assets is because they provide the most potential value for investors, as well as the greatest potential impact for communities. Perhaps the biggest reason we invest in Class B and C multifamily assets is because of the opportunity to add value. We look for properties that don’t have huge maintenance issues, like the need for roof replacements and foundation fixes.

Perhaps the favorite aspect of investing in the commercial real estate space is the value-add strategy, as it gives us more control over the value of the property. Rather than relying solely on the market to appreciate, we can be proactive in improving the property, raising rents to market values, and thereby increasing the equity in the property.🙌

👉What are your thoughts on that?

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