Several hopefully not too random questions...

[Michael Klinger]

I have a building that has been my owner/operator facility in Los Angeles for my small business in a sector that is going through hard times for brick and mortar. I've owned it for 14 year and have significant equity from both pay down and appreciation. I tried selling 3 years ago and the market wasn't ready for my expectation on price. 

Things are better now and I plan to put it on the market again very soon. When it sells it will likely also be the closure of my business, and so I will be relying initially almost entirely on the rent that I would generate from whatever I end up with in my 1031 exchange, so income versus other ways to gain in real estate is my initial priority.

In thinking about it and looking at options and poking around for the last couple of years, I am strongly leaning towards multi-family. Since my initial goal is income, I am attracted to cap rates that can't be found in CA and hard to find in New England where I live 1/2 time. Instead I keep circling back to the offerings I see in places like Ohio and Indiana. Obviously this means I would be an out-of-state owner and would be relying on good advice from brokers/property managers, etc to choose wisely.

But I am hands on person as well and the idea of being able to make later decisions about the property to help improve its return is also attractive to me, compared to a NNN lease on some other kind of property.

I'd say that I would be perfectly comfortable with a working class property that is just a middle of the road workhorse. No war zones, and not in need of rehab or re-boot, ready to go as-is, but could using some tinkering over time.

My random questions are:

1) How is building class really determined -- aside from the obvious? I often see warnings to stay away from certain classes (if not to state the obvious on war zone class). I see classes listed sometimes in listing, often not. I can see pictures and get an impression on my own. I've seen guides that base classing basically on age, but that measurement seems out of step with the age of most buildings out there in 2017. A huge number of building are old and getting older, but still totally viable properties. I visited several of these cities during a cross country trip and that does a lot of good for "gut feelings" so it seems somewhat random what class a property ends up with sometimes. Thoughts? Importance?

2.) Similar question about the specific quality of a neighborhood. Eventually a visit is in order, but before that step, are there  recommended resources for getting the scoop on particular neighborhoods within a city? Someone in this forum linked to a guide one done by someone for Cleveland and that was excellent, but I think I've ruled out that city for me. I'd be interested in a similar resources for other cities.

3.) Should there be concern about cities that are declining in population? For example Indianapolis and Columbus and Lousiville are growing, but Cleveland, Cincinnati, Dayton, Akron and St Louis are are shrinking.

I have a lot of questions, but don't want to overstay my welcome. So that's it for now.

Thanks,

Mike

[Ryan Cox]

Hi Michael,

Good questions!

1.

Class A
These buildings represent the newest and highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high-quality building infrastructure. Class A buildings also are well located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.

Class B
This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Oftentimes, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovations such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.

Class C
The lowest classification of building and space is Class C. These are older buildings and are located in less desirable areas and are often in need of extensive renovation. Architecturally, these buildings are the least desirable, and building infrastructure and technology is outdated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.

The above is just a general guideline of building classifications. No formal standard exists for classifying a building. Buildings must be viewed in the context of their sub-market; i.e., a Class A building in one neighborhood may not be a Class A building in another.

2.  I think the best city guide is through the local investment, brokerage community and any personal contacts you have living in the city in which you are looking to invest.  Understanding how the professionals and residents of the city view the submarket or neighborhood will help you stay informed about the state of the market.

3.   Yes.  Two important factors in multi-family are population growth & job growth. 

Good luck in your next investment! RC