SS10: Understanding Multifamily Real Estate Property Classifications

SS10: Understanding Multifamily Real Estate Property Classifications

Charles discusses the different property classifications of multifamily properties.

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Talking Points:

  • 4 Main Property Classifications (A-D)
  • Class A
    • Newest and most expensive luxury properties
    • High-income tenant base
    • Usually, $125,000+ per unit and up
    • Typically constructed within the past decade
    • If constructed more than 10 years ago; they have been fully renovated
    • Very high level of construction
    • Best locations – close to shopping, offices – downtown areas
    • Nicely landscaped
    • If less than 10 years old, they will have all amenities (dog park, pool, gym, valet trash service, covered parking, electric vehicle stations, pool tables, outdoor kitchens, spas) – similar to living in a resort
  • Class B properties
    • Properties that were usually built in the past 20-30 years
    • Middle-class tenant base
    • There usually have been some updates since construction
    • Minimal deferred maintenance
    • B+ property will differ significantly from a B- property
    • Well-constructed properties
    • Nicely taken care of – good curb appeal
    • Minimal functionality issues – not enough parking or narrow hallways or small bathrooms – small windows – low ceilings
    • Larger B properties will usually have some amenities
    • These properties are located in steady neighborhoods with a demand
  • Class C properties
    • Properties that were typically built 35-60 years ago
    • Functionality issues of some sort
    • The tenant base is middle class
    • Vacancy rates and the property’s appreciation are average (5% vacancy and appreciation of 3%)
    • Typical good cash-flowing properties
    • Usually, they are outdated and require renovation
    • Minimal amenities
    • The areas they are located in are steady or possibly the area is declining
  • Class D properties
    • Very rough neighborhoods – bad locations
    • 40+ years old
    • A lot of illicit activities occur on them or around them
    • These properties are poorly constructed – in need of major renovation but there is no upside after performing major renovation – the only exit strategy is cashflow and headaches
    • Never any amenities or if there are, they are not functional
    • Major functional obsolescence
  • How do you know the class of the area? Your broker should be able to tell you but by driving it you will know
  • You want to be focusing on purchasing outdated properties in good neighborhoods and markets
    • Think outdated C-class properties in B neighborhoods
    • You want to drive the neighborhood and see work being done on other properties; some properties are already renovated – areas where money is being invested so you can ride the wave of gentrification

Transcript:

Charles:
Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing, understanding multifamily real estate property classifications. So if you’ve listened to the show, you understand that I always throw out and talk about with other interviewees A class B class C class. So what are these well, there’s four main property classifications A to D. Now starting off with class A the nicest they’re the newest and most expensive luxury properties. They have a high-income tenant base, usually $125,000 per unit. And up typically constructed within the past decade. Now, if they’re constructed more than 10 years ago, they’ve been fully renovated. You’ll find this a lot in New York city in Boston, where you have older properties that have been fully renovated with high-end finishes. They have a very high level of construction, best locations, close to shopping offices, downtown areas. They’re very nicely landscaped.

Charles:
If less than 10 years old, they’re going to have all the amenities that one would want. Dog parks, pools, gyms, valet, trash service covered parking electric, vehicle stations, pool tables, outdoor kitchens, and spas. It’s really similar to living in a resort. When you see these class a properties that are newly built now, class B properties, they’re properties that were built in the last 20 to 30 years middle-class tenant basis. They’re usually have some updates since construction and there’s minimal deferred maintenance, which means that they’re in good condition B plus property will differ significantly from a B minus property though, but they’re well-constructed properties they’re nicely taken care of and they have good curb appeal. Now there’s minimal functionality issues. So there might not be enough parking or there’s narrow hallways, or there’s the bathrooms are smaller than on class, a properties or smaller windows or low ceilings.

Charles:
Then what might be typically the, a hot part of a new construction larger B properties will usually have some amenities, right? So they might have a pool. They might have some sort of gym. This is normal for these types of properties, but you’re not going to have the full services and amenities of a class. A property. These properties are located in steady neighborhoods with demand. So they’re very stable, steady property neighborhoods and markets. Now with a class C property they’re properties that were typically built in the last six 35 to 60 years, they have functionality issues of some sort like going back. They might have a smaller windows, narrow hallway, small bathrooms not enough parking, which is which is a big thing. You find these are going to be properties that are going to require a little bit more work.

Charles:
If you want to bring them up to the a B plus and above level. The tenant base is middle-class as well. Vacancy rates in properties appreciation are average, maybe 5% vacancy. You could pencil in, in your underwriting and a appreciation of 3% every year. They’re typically cash flowing properties. Usually they are outdated and require renovation, which is great for us real estate investors, because this is what we’re looking for. So we can do some work to the property. We can boost the value. They’re gonna have minimal amenities. Maybe you see that they have a pool, but they’re not having a gym, or they might have a gym, which was an old office that they turned into it, but they’re not going to have a fire pit. They’re not going to have a spa. These are amenities that just aren’t in normal C class properties.

Charles:
The areas they’re looking to are steady as well. And possibly the area is stagnant or declining. So it’s something that when you’re getting into C class, you have to be careful on what you’re buying now, class D properties. And I have to say this, do please avoid these properties. You do not want to be buying in these areas. They’re very rough neighborhoods. They’re bad locations. They’re 40 plus years old. There’s a lot of illicit activities that occur on them or around them. These properties are poorly constructed in need of major renovation. But there’s no upside after performing those major renovations. And the only exit strategy is really cashflow and headaches. So when you’re selling a property, you can’t tell somebody, Hey, this property is going to appreciate it’s great. You’ve got a lot of you know, single professionals coming in and, and on and on because the only thing you can sell them on is, Hey, it’s got great cashflow.

Charles:
And that’s a mistake that a lot of new investors make is they’re looking for properties that have a high cap rate, and they get caught by that. Don’t get caught by that. You want to find properties in better locations, but with D properties, there’s going to be major functional apps lessons, which means that there’s gonna be major things that you can’t change. There’s going to be a wall where you don’t want it and you can’t move it within reasonable pricing. So it’s something that you’re in avoid and you just have to rent it as is. And that’s going to obviously hold back the properties performance. How do you know the class of the area? Well, your broker should be able to tell you about it by driving it. You will know. And you want to be focusing on purchasing outdated properties in good neighborhoods and markets think outdated C class properties in B neighborhoods. You want to drive the neighborhood and see work being done on around the properties, which is something I always like. You want to ride the wave, right? And you want properties that are already, you want to see some properties that are already renovated in the neighborhood, and you want to see areas where money is being invested so you can ride the wave of gentrification. So please review, subscribe and submit comments and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you, then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

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