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What Factors Affect Multifamily Property Classification?

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For passive investors, there are many different types of multifamily property investments to choose from. These properties can be separated into different property classifications or property classes. This is essential for passive investors to learn so that they can make more informed decisions before investing their money.

Although property classes are only meant to be a guide rather than a strictly-imposed categorization, there are certain factors that can still affect an investment property’s classification. This guide will explore all those different factors. But first we will give you a brief insight on what property classes are and how they should influence your investment decisions as a passive investor.

What are Property Classifications?

Property classifications are used to quickly communicate the quality of a certain investment property. This is used in multifamily real estate as well as other investment types. An investment property’s classification can therefore give investors an idea about its condition, price, location, age, rental income, etc. [1]

Passive investors can use this to gauge whether a certain investment property will be able to meet their particular needs.

Property classes are also referred to as asset classes and they can be used for multifamily, industrial, hospitality, retail, office, and other types of real estate. Investment properties may fall under one of the following classifications: Class A, B, or C—although Class D is also used in some cases. Sub-categories like Class A- or Class B+ are also used sometimes to provide a more accurate description of a property. [2]

These property classes can make it easier for novice investors and experienced investors alike to narrow down their options quickly. Some investors only go for Class A properties, for example, because they are known for being the best of the best. They generally make for safe investments because they are often highly desirable properties where renters want to live.

On the other hand, there are also investors who focus on Class B and C properties with the intention of upgrading them to a higher class through renovations and repairs.

It all depends on an investor’s preferences and investment strategies.

Class A multifamily properties are well-located—typically in a nice neighborhood with a low crime rate and easy access to shopping centers, transportation, universities, recreational activities, etc. They are also often newly-constructed and offer plenty of amenities.

Class B and C properties may not be the “best” but they can be taken to another level by investing on renovations and repairs. Smart investors will not completely brush them off because they often have potential—they just require a bit of extra work. Class B properties may be in a good location but they are older or in poor condition. Or perhaps they don’t offer as much amenities as Class A properties.

What is Multifamily Real Estate?

Before getting into the various factors that influence an investment property’s classification, let’s define what a multifamily property is. A multifamily property is any residential building that has multiple units that can be occupied by more than one family. This includes condominiums, duplexes, triplexes, and apartment complexes. The number of units does not matter. [3]

Multifamily real estate may take many forms. A duplex is the simplest form of multifamily housing because of its two-unit setup within a single building. The term “multifamily” simply differentiates it from single family homes. [2]

Multifamily real estate may fall under different classifications as well. Class A multifamily real estate buildings tend to be more expensive because of the number of units, but investors don’t necessarily have to purchase it all by themselves. Multifamily syndication is one way for investors to invest in a Class A multifamily property without shouldering the responsibilities of being a landlord, such as managing the property and dealing with tenants.

Multifamily syndication 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. Through multifamily syndication, they can enjoy a passive real estate investment and a continuous cash flow without having to become a landlord, depending on the fund structure. They can also earn money from the equity once the deal is finished, depending on the fund structure. [4]

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, often yielding a higher return for investors.

What Factors Affect Property Classification?

There is no official way to determine an asset’s classification, so this is mostly based on the opinion of investors, as well as the various factors listed below. If a property possesses many desirable qualities, they may fall under Class A. But if there are certain issues that make the investment property less appealing, they may fall into a lower classification.

Location

Location is one of the most—if not the most—important factors to be considered in all types of real estate investment. Therefore if an apartment is in a less than desirable neighborhood, such as one with a high crime rate, it probably cannot be categorized as a Class A property. This also means that neighborhoods can influence real estate property classes. There are Class A neighborhoods that are very appealing for renters because of their location and proximity to establishments like malls, parks, schools, hospitals, and major employers. [2]

Properties in less than desirable locations—for example one with a higher crime rate—may fall under Class B, C, or even D. These are generally lower-income neighborhoods with fewer amenities and employment opportunities.

Age and Condition

The neighborhood influences the classification of a multifamily property, but at the end of the day, the building’s individual qualities also have a significant impact on its classification.

Some properties may be Class B despite having an excellent location because the building itself is in poor condition. Similarly, a fully-renovated property is more likely to achieve Class A status than one that is old and weathered. If an investor puts in the money and effort to make the necessary structural and cosmetic improvements, then a Class B property can become Class A even if it is in a less desirable neighborhood. [2]

Because Class A properties are usually new, they tend to need less maintenance than Class C buildings. While investors will have to pay more upfront for a Class A multifamily investment property, they won’t have to worry much about maintenance costs in the first few years.

Class B and C properties are usually older, with Class C properties being over 20 to 30 years old. There is an exception to this, however. An older building can still be considered Class A if it meets the other criteria and/or if it is a historic property. Older buildings that are Class A regularly get renovated to include high-end finishes. [2]

What this means is that age alone cannot determine a multifamily real estate’s classification.

Amenities

Amenities are another factor that can influence asset class. Class A properties often have an impressive set of amenities. When it comes to multifamily real estate in particular, amenities play a big role in a property’s classification.

Renters typically expect center amenities from Class A multifamily properties like an on-site fitness center, outdoor pool, doggy daycare, underground parking, concierge, etc. This is why investors look for those qualities as well. [2]

Larger apartment complexes tend to have more robust amenities. Class B may have fewer amenities, if any. Class C may not have any at all.

Occupancy

Occupancy is another key factor when it comes to property classification. This refers to the tenants that the property tends to attract. Class A properties are usually occupied by the most attractive tenants. This includes high-earning professionals with high credit scores. [2]

Class A properties have very low vacancy. Even if a unit becomes vacant, it doesn’t stay that way for too long because of the property’s appeal. This is what can potentially make them such a smart investment for passive investors who want a continuous stream of income.

Class B and C properties generally have lower-income tenants with lower credit ratings. There is an exception to this rule, however. Class B and C properties may attract high-earning professionals who are more cost-conscious than their peers. While saving up for a down payment on their own home, they may rent more affordable apartments in the meantime. [2]

Class B and C properties also have variable occupancy levels, depending on the condition of the apartment and the neighborhood itself.

Can a Property Class Change?

It is possible for a real estate property’s classification to change over time. If a property is neglected as it gets older, even a Class A property can downgrade to a Class B. Similarly, a Class B or C property can move up a class if they are repaired or renovated. Rarely, developments in a certain area can improve the entire neighborhood and help properties reach a higher classification.

Property classes can change. In fact, some investors go for Class B and Class value-add multifamily buildings to renovate the property and upgrade them to Class A. These property improvements may take a significant capital investment, but this due diligence can help investors earn more in the long run.

These are factors that affect a multifamily apartment’s classification. Keep these in mind as you look for investment opportunities in various real estate markets. Investing in Class A real estate has its clear benefits, but don’t underestimate Class B and C properties either. Your investment in real estate should depend on your particular goals, your risk tolerance, and present economic conditions.

Work with BAM Capital

Working with BAM Capital allows investors to enjoy a safe and passive investment through multifamily syndication. BAM Capital has a Midwest focus and prioritizes properties that are Class A, A-, and B++. Multifamily syndication is the best solution for investors who do not want the responsibility of being a landlord while still enjoying a passive real estate investment. [4]

BAM Capital will arrange the syndication deal so there is no need to purchase an asset on your own. BAM Capital will also handle property management due to the vertically integrated business model.

Investors love BAM Capital’s vertical integration model that mitigates investor risk.

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 over $700M 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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