Buying Multifamily Class A vs Class B and C

Managing real estate investments smoothly is all about making the best possible choices. You will have to choose not only the market and the property type but also which building class you want to purchase. I agree that things quickly can get confusing when you have no idea what any of it means. That's why you should take some time and discover the differences between the different property classes or deals.

Properties are categorized into the classes - A, B, and C according to their characteristics such as the location, age of the building, income levels, value add opportunity, etc. The class of a building is a crucial aspect for an investor to consider since it helps understand if the property fits well with their strategy of work, and what type of risks they will have to face to earn profits out of them.

Buying new deals - Class A.

Class A buildings represent the fully finished, highest quality buildings on the market, that have been built within the last 15 years, compared to the other classes, which is considered the newly built. These buildings also stand out with high rental income, good location, and typically are much more expensive than others.

Investors tend to invest their capital in Class A buildings to avoid any updating processes, and they pay a high price for it. Considering that these buildings aren't just expensive to purchase, but also pretty pricey to manage, compared to the other types of buildings like B or C, cash-flow isn't as excellent for investors, and often appreciation is the way of getting profits.

Another thing to have in mind is that the rental prices on Class A buildings are 15% or 30% higher, which might sound exciting. However, when it comes to renting multifamily properties, most of the tenants aren't willing to pay as much as Class A units cost, which means that finding tenants would be much harder.

Buying older deals - Class B or C.

Buildings under the classes B or C are often considered as properties with value add opportunities. The homes are sold for affordable prices, and in most cases, need improvements such as repairing, repainting, etc.

Class B - 15-25-year-old buildings that are mostly located closer to the Class A buildings. Although these properties are older than class A, they don't require any extreme foundation or structural renovations, and often, they would only need slight updates to grow their value.

Class C - Building between 25-45 years old. That often will require much more help and renovations than Class B or A buildings.

The average rental cost of value-add multifamily buildings is $1200 per month, and they have fewer vacancy rates, meaning that your class B or C units are most likely to be rented by tenants. Additionally, the whole idea of value-add properties is that you can renew them as you wish, to either update them to class B, B+ or even A (excluding the location), which are initially 20% or more expensive to lease.

Conclusion:

There is no right or wrong; everything depends on how you would like to manage your properties and your goals. If you are someone who would enjoy a monthly, stable, and safe rental income, and would love to renovate properties as you wish, class B or C buildings are most likely the best choices for you.