THE ABCs OF MULTIFAMILY PROPERTIES
Do you know your ABCs?
You probably know the alphabet, learning it when you were a youngster.
In multifamily properties, when we refer to the ABCs we are talking about the various classes of properties. Four factors determine what class a property might be – the age of the property, the amenities, the quality of the materials used to build the property, and the location.
The A properties are the most expensive to buy and the most expensive to lease and the D properties are the least expensive to buy and usually have the lowest rents. Kind of like grades in school, properties get a grade.
A CLASS PROPERTIES
The most expensive properties to buy and lease are the A properties, which were built in the last 10 or 15 years. The amenities are going to be very nice, the latest and greatest that people are looking for. They will frequently have a fitness center, meeting rooms, a pool or two, and in some areas covered parking or garages. They may be a gated community with security, a dog park, and planned activities through the week.
Class A properties cater to people who are willing to spend more money on their place to live.
You will likely find granite or quartz countertops, more expensive light fixtures and floors, modern baths and kitchens. The newer high-rises in the city are likely class A properties as are some that are in resort areas.
Some older properties can be renovated into Class A apartments. If the location is right and the amenities are added and the high-quality interiors are provided, this is possible.
We might liken it to Class A neighborhoods, the high-end neighborhoods.
B CLASS PROPERTIES
The B Class properties are usually older. Many would have been Class A when they were built. They might be 15 to 30 years old, all the way back to the 1990s. They may have some of those amenities, such as pools and meeting rooms, but not as much as the A class. They are not as nice; the quality of materials will be good and solid, but probably not include the granite countertops. And they have good locations.
The rents in Class B properties are a bit lower than those in Class A properties. They serve professionals or urban couples and singles. Lifestyle and location are important for the residents of Class A and B properties. They are a good value for the dollar, both buying them and living in them.
We like B Class neighborhoods and find B Class properties attractive. They can be purchased at a lower price per door than A Class properties and can be a bit more stable when the economy goes up and down.
C CLASS PROPERTIES
Cs tend to be even older, probably 30 years old and older. Amenities are limited. They may have a laundry room, may or may not have a pool. As to the quality of materials, we are going down a little bit here. Formica countertops and simple light fixtures are typical.
The focus is on cleanliness rather than amenities. They may be located a bit further away from city centers and night life. Affordability is key, for more budget conscious people. We look for a location near a bus line or near public transportation so they can get to work easily.
Class C apartments serve working class people, maybe some managers, teachers, firefighters, but you may also have some receiving Section 8 or veterans assistance.
We look for C Class properties in B Class neighborhoods. We can purchase them at lower per-door prices often and are able to increase their value with appropriate renovations.
D CLASS PROPERTIES
The lowest class is the D Class property. They are a lot cheaper to purchase, but they come with a lot more problems to them. They are probably in a rougher part of town, a little bit harder to collect rents, have a bit more crime in these areas, and are just more difficult properties to manage.
And again, if they had a pool, it’s probably been filled in or isn’t working. And the quality is not there. They haven’t been taken care of.
COMPARING THE DIFFERENT CLASSES
But why would some investors choose As over Bs, or Cs or Ds? Why are we focusing on Cs and Bs?
Each of these classes do have their own benefits when it comes to investing.
The A’s have safer, more consistent returns, but they are lower returns. They cost a lot more per door to buy. Since they are newer properties, repairs will likely be needed less often, but the materials costs are higher. Insurance companies, hedge funds, real estate investment trusts and others who are looking for long term stability and have a lot of capital to park somewhere will buy Class A properties. They value stability, probably more than the actual return itself.
There is not much value an operator can bring to an A Class property, other than improved management efficiencies.
The D Class properties are the least expensive to purchase on a per door basis but they carry the risks of rougher neighborhoods. The return on cash invested might be higher on paper, which some see as an advantage.
THE SWEET SPOT
The Bs and Cs present a unique opportunity because they have a nice amount of room for improvement. One can find a property and make improvements to that property, so that it becomes desirable to other people wanting to live there.
By bringing additional value, an operator is able to raise rents, which, in turn, increases the value of our property.
Attune Investments focuses on B and C Class properties that are in B Class neighborhoods on a path of progress in a market area. We look for properties that would benefit from renovations for which the residents would be willing to pay higher rents.
We call them “value-add properties”. We can add value to them, we can add the value of good management, and we can add the value of renovations to the property. And that is our sweet spot. They don’t cost as much per door as the Class A properties and they have a higher potential return on investment.
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