What is an Asset Class?

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First time investors may have the perception that commercial real estate is complicated and confusing based solely on some commonly used industry terms. This may lead some people to shy away from investing in real estate.

Terms such as “multifamily properties” and “asset classes” are unfamiliar to most people outside of the real estate industry, but these jargons are easy to understand once you have taken the time to read up on them.

Investors who familiarize themselves with these terms will be able to make more informed investment decisions in the future, which is why these are worth discussing.

What is an Asset Class?

An asset class, also known as a property class, is a group of investments that have similar characteristics. This means they are comparable in terms of age, condition, location, and number of amenities provided, among other factors. [1]

Class A, B, C, and sometimes even D are used to categorize certain assets. Sub-categories like Class A- or Class B++ are also used occasionally to provide a more accurate description of a property. Class A properties are considered the best across the board, while Class D properties may be old or in poor condition.

The most important thing to remember about asset classes is that there are no strict rules when it comes to determining a property’s classification. There is no specific process or guideline that dictates which asset class should be assigned to a property.

These classes are meant to be used as a guide for investors so they can quickly describe what a commercial real estate property looks like to someone who has not seen it before. It will give the other person an idea of what to expect when it comes to quality, location, and amenities.

Another interesting thing is that property classes are influenced by other properties in the area. The asset class system not only refers to the physical characteristics of a property but also its geographic and demographic qualities. [1]

It is possible for an asset class to change over time. Sometimes a Class B property would go up by one class after a few repairs or a renovation.

Investors sometimes have their preferences when it comes to property classes. For example, BAM Capital focuses on Class A, A-, and B++ properties because these are considered safe investments for multifamily syndication. However, there are also investors who focus on investing in Class B and C properties with the intention of renovating these properties to a higher class than when acquired.

What is a Multifamily Property?

A residential building that has multiple units that can be occupied by more than one family is considered a multifamily property. These include condominiums, duplexes, triplexes, and apartment complexes. The number of units does not matter. [2]

The term “multifamily” differentiates these properties from single family homes and other housing types that are owned by only one household. [1]

A multifamily syndication deal is when multiple investors pool their money together in order to purchase a single asset. A syndicator, such as BAM Capital, puts the deal together and looks for investors to join in the syndication. Investors enjoy a passive real estate investment that is free from the usual responsibilities associated with being a landlord such as managing tenants and handling emergencies. Instead, they get a continuous cash flow and also earn money from the equity once the deal is finished.

What is a Class A Property?

Class A properties are considered some of the safest investments from a risk perspective because they are well-located in primary markets wherein the underlying economics are strong. These properties are typically located near universities, hospitals, major employers, shopping centers, and cultural activities. They also have good access to highways and/or public transit. Class A properties are where people want to live. [1]

Aside from being in a good location, these properties are also in good condition. They are either newly constructed or newly renovated. Class A properties have plenty of amenities that can attract potential renters. For this reason, properties in this class rarely have vacancies. Even when they do, the vacancy does not last long. Investors who love Class A properties can enjoy a continuous cash flow.

These properties tend to be in high demand among investors because of their quality. Class A properties can often drive prices that are beyond the means of the average investor.

It is not necessary for investors to buy a Class A multifamily property by themselves. Multifamily syndication is one way to invest in Class A assets.

In a multifamily syndication, a sponsor locates the deal and manages the investment once the deal has closed. This sponsor serves as the general partner who coordinates the transaction throughout the process. [3]

Investors who want to try multifamily syndication should work with BAM Capital. BAM Capital handles all steps of the investment life-cycle, from purchasing to remodeling to management, yielding a higher return for investors.

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What is a Class B Property?

A Class B multifamily property may not be in the best condition or in the best location. However, they still possess a lot of good qualities that can attract renters and investors alike. With a few repairs or renovations, Class B properties can move into Class A. Unlike Class C properties, no major renovations or repairs are usually necessary for Class B properties.

A lot of Class B assets have good amenities. The one quality that may be pulling it down is the age or the condition of the building.

Class B properties usually have the best balance of risk and return, which makes them a smart choice for all kinds of investors.  Even though they are not the best of the best, they are still great for investors who want an investment with a low barrier to entry and good value.

What is a Class C Property?

Class C properties may range from being in fair to poor condition. They are typically older—mostly over 30 years old. This is why they are considered the riskier investment. That said, their acquisition costs are lower and they have great potential cash-on-cash returns. [1]

Class C properties tend to have lower cash flow and higher rates of vacancy. They also have fewer amenities—if any. Class C assets are therefore harder to market. They may have a difficult time attracting new tenants because of their poor condition or less than ideal location.

Investors who want to take on a Class C property will have to make significant capital investments upon purchase. If you want to improve or renovate it, you will have to spend even more money to make it marketable. That said, Class C properties can be marketed to a wider range of people because of their lower rents. [1]

Investors who go for Class C properties typically do so with renovation in mind. These properties represent a significant value-add opportunity, which is why some investors still put money into them.

Which Asset Class is the Best Investment?

Every investor is different, and it depends on your specific goals and needs.

Class A properties are considered the best of the best, and so they tend to attract the most desirable renters, including six-figure earners and long term tenants who are willing to pay premium to live in these attractive apartment complexes. [1]

Investing in a Class A property means there are smaller repair and maintenance bills at first. Class A properties are also the best for multifamily syndication because they allow multiple investors to pool their resources and invest in a property that they otherwise wouldn’t be able to.

Class B properties may be considered “second best” but they can offer more growth potential. There is also a smaller barrier to entry, making it accessible to more investors. These properties are seen as “value-add” investments. They can be upgraded to Class A through a few upgrades. Additionally, Class B properties tend to be bought and sold at lower prices and higher cap rates.

Finally, Class C properties are the easiest to acquire because they have the lowest barrier to entry. They are accessible even to individual investors because they have the lowest acquisition cost. The investor may have to spend more money to make the property appealing, however, because they require more repairs and upgrades.

Class C properties have good cash flow potential, but usually have lower appreciation potential compared to Class B and especially Class A properties.

Most risk-averse investors will avoid Class C properties. If you want to avoid risky investments, Class A is the best choice for you. Only experienced investors who know exactly what they are doing should consider Class C properties because they may not give you the desired returns if you don’t renovate or take care of the property.

In fact, BAM Capital does not offer Class C properties because of their risky nature. BAM Capital prioritizes Class A, Class A-, and Class B++ when looking for investment properties because they are safer for our investors.

It is important to remember that these classifications do not fully reflect a property’s value because there are a lot of things to be factored into the equation. These property types are meant to act as a guide, but it is not always cut and dry. Properties will fall within these categories, but you can still make your own assessment based on condition, location, age, amenities, and even subjective opinion.

Work with BAM Capital

BAM Capital offers a safe and passive investment for investors in the Midwest who want to put money into Class A properties but do not want to be a landlord. As an investor looking into Class A real estate investing, there is no need to purchase an asset on your own. BAM Capital will arrange the syndication deal and also handle property management due to our vertically integrated business model

Our investors love the low-risk investment approach that creates forced appreciation. Investors can pool their resources and get money from the cash flow and equity once the deal is done.  BAM Capital’s vertical integration model also mitigates investor risk. [4]

BAM Capital works with accredited investors and negotiates the purchasing and financing of high quality multifamily real estate properties on their behalf. This Indianapolis-based company currently has $650M AUM and 5,000 units. Schedule a call with BAM Capital and invest today.

BAM Multifamily Growth & Income Fund III

BAM Capital created this fund in order to yield consistent and reliable cash flow, long-term appreciation, and accelerated tax benefits. The fund aligns with BAM Capital’s demonstrated track record of successful multifamily investing by continuing to implement our signature investment thesis, now in fund format. The fund aims for greater overall returns and lower risk through a multi-asset diversification strategy.

  • Consistent passive income
    Lower-risk assets with in-place cash flows with the ability to distribute preferred return after acquisition.
  • Significant tax benefits
    A cost segregation analysis allows for accelerated deprecation to years of ownership. This large passive loss gets passed onto investors through a K1.
  • Vertically integrated company
    In-house property management and construction allow for predictable cost reduction and value add.

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