As the stock market quivers and stock market investors peer into the fog of the future trying to see where stocks, the economy, and earnings are going, up, down, or sidewise, real estate stands firm, on a block, in a neighborhood, around the corner from this or that, providing shelter to human beings. It might be old or new, trendy or dilapidated, occupied or abandoned, but it is real and panics are not going to move it, even if fire, earthquake, wind, or water might. Housing is still a basic need and if an investment fills a basic need, it is a safer investment.
An investment is not safe though if you do not do your research and match the facts of the property and area situation with your needs, expectations, and goals. When considering investing in multi-family properties, be sure to pay close attention to the quality of property management and to the location. This might be a good time to refresh your memory on investor shorthand for communicating with each other on property types. It really kind of easy, like: A, B, C, and D.
The letter grades are assigned based on property characteristics like, age, tenant income level, growth areas, appreciation, amenities, and rental rates according to ApartmentVestors.com. The grade isn’t there to scare you away from a certain property because it receives a low grade. (Although D areas in dangerous neighborhoods are not investments to be taken lightly or by beginners.) The property grade is there to help you set realistic goals for your investment and to communicate within the industry about what you are looking for.
Multi – Family Property Class A. Class A properties are newer, built in the last 15 years and have the most amenities, lowest vacancies, demand highest rents, and have less maintenance costs. These properties are above average in terms of design, construction, and finish; the tenants make above-average incomes, they are in desirable locations and they are accessible. These apartments are professionally managed by national or large regional management companies.
Investment sense: These buildings have the most appreciation potential but less cash flow starting out. Professionally managed and in desirable areas.
Multi – Family Property Class B
Class B properties were built in the last 15 to 30 years and have some amenities. The rents are average, a bit lower than Class A buildings. Tenants are usually a mix of corporate workers and skilled trades people. These apartments are in desirable places but do not have the design and finish reflective of the latest standards and preferences. The construction is adequate, and the buildings are generally well maintained by national or regional management companies; unit sizes are usually larger than current standards. These buildings have some appreciation potential and decent cash flow rates.
Investment sense: These buildings have the good appreciation potential and more cash flow than Class A. Professionally managed and in desirable areas.
Multi – Family Property Class C
Class C properties are older, built more than 30 years ago. They have fewer amenities, if any. The tenants are mostly service employees and you might have some government-subsidized tenants. Rents are below average, lower than Class B rents, and the occupancy rate is lower. These apartments provide functional housing, exhibit some level of deferred maintenance, are usually located in less desirable areas, and are generally managed by smaller, local property management companies and private investment groups. Cash flow is high, but appreciation is much lower than Class A or B apartments.
Investment sense: These buildings have the little appreciation potential, but cash flow is high. Property management varies because it is local and performed by smaller companies. It might be great, quirky, or terrible. Be sure to check. The location is less desirable but still safe.
Multi – Family Property Class D
Class D apartments are in challenging neighborhoods and potentially dangerous areas. They are older buildings, with no amenities, and high deferred maintenance. The tenants can be challenging, and management is intensive. Cash flow is reduced by lack of payment by tenants and repairs.
Investment sense: These buildings have no appreciation potential and cash flow is reduced. Property management varies because it is local and performed by smaller companies or it might not be performed at all. Be sure to look around carefully. The location could be dangerous, and it might be hard to attract tenants to the area.
Property and Area
When you are looking at buildings and the areas they are built in, apartmentvestors.com recommends that you pick a property in an area that has a higher class rating than the property. The area classes, like the property classes are A, B, C, and D. With A being a growth area, B being an older stable area, C being an older declining area, and D being older and declining, potentially rapidly declining area.
Apartmentvestors.com offers a strategy that suggests it is better to pick a D house in an A area because the area will have more influence over the stability of your investment over time. I would call this the domain of the fix-n-flip investor. As the deep urban areas or warehouse districts become more appealing to working professionals, a building that was once a C property in a D area might become a D property in an A area and be well worth renovating. But you need to be sure the area classification is really changing.
If you are a hands-off straightforward investor, not a fix-n-flipper, you might want to look only at the A and B properties in the A and B areas if you are taking a long-term approach and interested in appreciation in value. However, you might be more interested in cash flow. Then you might want to look at B and C properties in B, or C areas.
That is a lot of alphabet flying around.
If you have a multi-family property in mind and are ready to start negotiating or are ready to buy, send me an e-mail or give me a call and I can help the funding.
Pat St. Cin