Multifamily real estate is one of the best investments you can make to diversify your portfolio.
But no two properties are alike. Properties can be grouped into entirely different asset classes that bring distinct opportunities and risks.
In this article, we’ll walk you through the different classes of multifamily real estate so you can make an educated decision for your portfolio.
What is an Asset Class?
An asset class refers to categories of investments with similar characteristics, risk profiles, and performance.
Multifamily real estate is broken into distinct asset classes (more on these later) to help investors understand and compare different types of properties based on factors such as age, condition, location, target tenant demographic, and potential returns.
Asset classes are useful for evaluating a property and understanding how investment opportunities stack up against each other. This allows you to align your choices with your financial goals, risk tolerance, and management capabilities.
Ultimately, asset classes give you a better sense of the risks and rewards of a particular investment opportunity and help you make an informed decision.
The 4 Multifamily Asset Classes: From A to D
There are four primary multifamily asset classes you will encounter. They are:
- Class A
- Class B
- Class C
- Class D
Let’s walk through each one.
Class A Multifamily Real Estate
Class A properties are the cream of the crop in the multifamily sector.
These are typically newly constructed or recently renovated buildings (usually less than 10 years old) and are located in prime urban or affluent suburban areas. Class A properties boast high-end finishes and cutting-edge amenities like smart home technology and rooftop lounges. As a result, Class A multifamily real estate attracts high-income tenants.
Examples of Class A real estate include luxury high-rises in downtown areas or new garden-style apartments in upscale neighborhoods. Investors are drawn to Class A for its stable cash flow, appreciation potential, and lower maintenance costs. However, these properties require a significant initial investment and typically offer lower cap rates of 4-5%.
Class B Multifamily Real Estate
Class B properties occupy the middle ground of the multifamily market.
Also called value-add, they may not be brand-new like Class A real estate but they are often well-maintained buildings (usually 10-20 years old) in good locations.
Class B properties offer decent amenities but aren't as luxurious as their Class A counterparts. Class B attracts middle-income tenants and appeals to investors seeking a balance of cash flow and appreciation potential.
While no investment is “recession-proof,” Class B real estate offers a bit of extra security. In “boom times” people often upgrade by moving into Class B properties, and in recessions, many downgrade into them as well.
With cap rates typically between 5-7%, these properties often present opportunities for improvements. We have a history of purchasing class B multifamily real estate and making targeted enhancements to force appreciation of our properties. From new clubhouses to fitness centers, we’ve revitalized many properties over the years to generate returns for our investors.
Class C Multifamily Real Estate
Moving down the spectrum, we find Class C properties.
Class C properties are usually older buildings (20-30 years old), often located in less desirable areas, and need repairs or renovations. They offer basic amenities, if any, and cater to lower to middle-income tenants.
Investors are attracted to Class C for its higher cap rates (usually 7-9%) and significant value-add potential through renovations. However, these properties come with higher risks, including increased turnover rates, more intensive management requirements, and potentially higher crime rates in the surrounding areas.
Class D Multifamily Real Estate
At the bottom, we find Class D properties.
These are the oldest multifamily buildings (often over 30 years old) and are located in economically challenged areas. They typically require significant repairs or renovations and offer minimal to no amenities.
While Class D properties present the highest potential returns if successfully renovated and repositioned, they also carry the highest risk. These investments demand extensive capital for improvements, face challenges in traditional financing, and require intensive, hands-on management.
Which Class is the Best to Invest in?
Ultimately, this is a personal decision you will need to make. Investors choose different classes based on their investment goals, risk tolerance, available capital, and expertise.
Some investors may prefer the stability of Class A real estate, while others seek riskier options. We recommend you determine your risk tolerance and balance your portfolio risk and returns. Ultimately, each class offers unique opportunities and challenges in the multifamily real estate market.
We specialize in value-add real estate to force appreciation for our investors and improve chances of profiting on sale. Read on to see why.
Why We Choose Class B through A-
There are many benefits to investing in value-add real estate (Class B through A-), some of the most prominent we’ve seen over the years are:
- Cost-effective to acquire: Compared to newer properties in city centers, value-add multifamily buildings in secondary markets are more cost-efficient investments for investors.
- Forced appreciation: By making improvements to the property, investors can proactively increase its value, rather than relying solely on market appreciation. Stable core assets gradually compound their rate of appreciation annually. Value-add multifamily properties boost the investors’ return on investment (ROI) compared to core properties.
- Higher rental income: Upgrading units and amenities allows investors to charge higher rents, resulting in increased cash flow.
- Improved occupancy rates: Enhancing a property’s appeal can attract more tenants and reduce vacancy rates, further boosting income. Investors can expect 90-95% occupancy rates, especially when the property is in a strategic location.
- Potential for substantial returns: Successful value-add investments can generate strong returns through a combination of rental income, forced appreciation, and eventual sale profits.
Thanks to these benefits, value-add multifamily real estate presents an attractive opportunity when compared to other options.
Interested in Investing In Multifamily Real Estate? Download Our Free Guide
Asset classes are just one piece of the puzzle when investing in multifamily real estate. You also need to determine which markets you invest in and how you will invest (either through a REIT, syndication, or something else).
The options can quickly become overwhelming, so we recommend downloading our free guide to multifamily investing. You’ll learn the ins and outs of multifamily real estate, such as:
- The tax benefits of investing in multifamily
- Which markets to invest in
- How to evaluate an investment firm
And more! Fill out the form below to get your free guide.
