Investment Property Class – The ABCs of Determining Multifamily Class

Investment Property class – The ABCs of Determining Multifamily Investment Property Class

Investors, lenders, and brokers have developed multifamily investment property classifications to make it easier to communicate amongst themselves about investment properties and areas. The general property classifications or property class used are A, B, C, and D.

These letter grades are assigned to properties and areas by characteristics such as age, tenant income levels, growth areas, appreciation, amenities, and rental rates, to name a few. It’s important to understand property class and area class before investing so that you understand how they can affect your investments, and so you can meet and exceed your investment goals. You will also be able to effectively communicate with industry insiders what you are looking for.

While these letter grades can sometimes be more of an art than a science, the property class’s will typically be characterized by the following:

When you look at areas, the classifications are very similar, with the same A, B, C, and D area class as follows:

A – newer growth areas

B – older, stable areas

C – older, declining, or stable areas

D – older, declining, potentially rapidly declining areas

Have you determined what type of investment class you are looking for?

The key is to pick properties and areas that are aligned with your investment goals. You should pick a property class of equal to or better than the area (i.e. B Class property in a B or A area) and you want to avoid areas that are lower than your property class (i.e. A Class property in a C area). The area class you invest in is going to have a great deal of influence on the stability of your investment over time, as well as its growth or appreciation potential. Areas class’s with the highest appreciation potential are A and B class areas, while a C area class might be more sensitive to economic trends. Also, an A property class is going to have a much harder time performing like an A property in a C area class, and a C property class might perform better over time in an A area class.

For example, if you are looking for investments with the most appreciation potential, but aren’t worried as much about the initial cash flow, you’ll want to look for A and B Class properties in A and B areas or in the path of progress, and avoid C Class properties in C areas. If you are looking for investments with strong cash flow, but appreciation is less important, Class C and B properties in C and B areas would be the best fit.

Now that you’re more familiar with the ABCs of multifamily property and location classifications and how they can affect your investment, you will be able to more effectively communicate with others what you are looking for, and you can apply this knowledge to your investments so that you can meet and exceed your investment goals.

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