What is a Class C Multifamily Property?
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For first-time investors, the numerous real estate terms can be intimidating. The real estate industry uses a lot of lingo that can be daunting, but they can help paint a clearer picture of how various properties are different from one another. For example, by learning about the different property classes, investors can make better decisions on which real estate properties to put money into.
One example that investors may encounter while looking for an ideal investment property is the term “Class C multifamily property”. Although it may sound complicated at first, it actually gives you an idea of what the property looks like with just a simple description.
What is a Multifamily Property?
A multifamily property is a residential building where more than one family lives. Multifamily properties have multiple units that can be occupied by renters. This includes duplexes, triplexes, apartment complexes, and condominiums. The number of units does not matter. As long as multiple families can live in separate units within one property, it is considered a multifamily property. [1]
The term “Class C multifamily property” refers to the property class of that specific multifamily property. To understand this, we have to take a closer look at property types and what they mean.
What is a Class C Property?
Property class is determined by the location, age, condition, and the amenities offered by the property. Based on these factors, a property may fall under one of three categories: Class A, Class B, and Class C—with Class A being considered the best. Class C properties are on the lower end of the spectrum in terms of the aforementioned criteria, while Class B properties are somewhere in the middle.
Sometimes sub-categories like Class A- or Class B+ are used to provide a more accurate description of a particular property.
While there are no strict rules that determine a property’s classification, the terms Class A, Class B, and Class C are used in the real estate industry to quickly describe a particular property and communicate its value.
If a listing says that a property is Class A, it likely means the property is in a good location and has plenty of amazing amenities, among other great qualities. Class B properties are not necessarily bad, but they are considered “second best” or less than ideal. With a few upgrades and improvements, they could easily become Class A.
Finally, Class C properties may range from being in fair to poor condition. They are typically older—mostly over 30 years old. They are therefore considered the riskier investment. That said, their acquisition costs are lower and they have great potential cash-on-cash returns. [2]
Class C properties make tricky investments because they tend to have lower cash flow and higher rates of vacancy. They also have fewer amenities, if any, which means they are hard to market. These properties have a difficult time attracting new tenants due to a combination of factors such as poor condition, bad location, etc.
An old four-story apartment that has not experienced any major renovations in recent years and has outdated amenities is one example of a Class C property as the property is trending towards obsolete.
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. [2]
Being considered the “least desirable” out of all the property types, Class C properties may not be the top choice for investors and tenants alike. But given their benefits, they should not be underestimated. Some investors who decide to put money into Class C properties often do so with renovation in mind. These real estate properties represent a significant value-add opportunity. Some Class C multifamily properties are actually well-located but not well-maintained, which means they can easily be improved through renovations.
Investing in a Class C Property
Since Class C properties are considered risky, investors need to look at some key variables before making an investment or purchasing a property.
First, you need to take a look at the acquisition cost. Class C properties typically have the lowest barrier to entry, which makes them accessible to individual investors as well as multifamily syndicators. [2]
Class C properties have good cash flow potential, but usually have lower appreciation potential compared to Class B and especially Class A properties.
But one of the biggest factors that investors should consider before taking on a Class C real estate investment is risk tolerance. 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 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 Multifamily Growth & Income Fund II does not offer Class C properties because of their risky nature. This Fund 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 will arrange the syndication deal and also handle property management, so you don’t have to worry about the usual responsibilities associated with real estate investing. You don’t have to take on the role of a landlord. Multifamily syndication is a passive investment approach where you can get money from the cash flow and the equity once the deal is done.
Investors can enjoy BAM Capital’s investment strategy that creates forced appreciation. BAM Capital’s vertical integration model also mitigates investor risk.
For investors who want to explore multifamily real estate investing, there’s no need to go through all that hassle. You can work with BAM Capital and invest in high quality real estate opportunities that can help make you money. [3]
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.
