Investors looking to put their money into multifamily real estate can better inform their decisions by learning about the different multifamily real estate investment classes. Each class carries different risk factors, potential rewards, and unique characteristics. While there is no one class that’s ideal for every investor, some classes may be more attractive, depending on your financial goals and risk tolerance. Here’s a closer look at each of these multifamily real estate investment classes.
Class A refers to properties with luxury amenities and/or are in the most attractive locations, which often garner the highest possible rents. They are also known as core investments, known for their lower financial risk and reliable cash flow. For some investors, owning a Class A property is the ultimate goal, but there are some drawbacks for both renters and owners/investors. In times of economic uncertainty, renters in luxury apartments may look to save money by ending their current leases and moving to Class B properties. Investors with Class A holdings may also find very little room for growth, particularly when inflation and economic stressors make it difficult to increase rental rates.
Class B properties are those in need of some capital improvements or that are slightly outside of the more desirable city center. Also known as core plus investments, they carry some risk for investors but can still be considered solid additions to a portfolio if handled properly. Renters of Class B or core plus properties trade off access to luxury amenities and nearby attractions to save a bit of money. Investors like these properties because they can improve them and increase rents without having to undertake massive renovation and renewal projects. Class B properties can be improved while maintaining affordability for tenants, but investors can also put a bit more money into them to upgrade to a Class A designation. Investors look to Class B assets for their affordability, potential for dependable cash flow, and minimal need for renovations.
Class C refers to properties that are in less desirable areas or those that are in serious need of repair and renovation. You may also hear these properties referred to as value-add investments, or those that carry higher risk and may be in need of significant management changes and capital improvements before turning a profit. Investors can purchase these assets at a considerable savings, but they will most likely need to spend quite a bit of money on repairs and filling vacancies. The location and state of the properties can also limit the potential for growth through increased rents. However, it is possible to find a great Class C property and give it enough TLC to make the jump to a Class B asset.
Current economic conditions can have an impact on the decisions renters and investors make. In times of uncertainty, such as with the current inflation crisis and potential recession on the horizon, renters of all classes may look for ways to save money. For renters of Class A properties, this often means ending their leases and looking for more affordable Class B options.
Today’s multifamily real estate market also faces the issue of a potential surplus in luxury apartments, which many may no longer be able to afford. According to Fannie Mae, much of the rental surplus in the U.S. is concentrated among luxury units in just 15 metro areas (including New York, Washington, D.C., and Los Angeles. This means that the surplus is only accessible to a limited few, while renters in other secondary and tertiary markets are left looking for available units. Class B investment properties can fill this need, giving investors the potential for profits while making affordable housing more accessible to those looking to move out of Class A properties and pricing.
Class B or core plus properties are in a unique position in the current economy, providing more affordable housing opportunities in more communities when compared to their Class A or core counterparts. Investors can purchase these assets at a lower price, albeit with some increased risk, and help meet the housing demand that exists in the market today. With the right capital investments, these assets can be more attractive to renters than even some luxury apartment offerings.
Class B or core plus multifamily real estate assets meet a need in today’s housing market, helping bridge the gap for those who want to save money and make more conservative financial moves in times of uncertainty. If you are looking to begin investing in multifamily real estate, there are many opportunities to diversify your portfolio with Class B assets. You can learn more about DiversyFund’s offerings and how they can fit into your plan for building wealth here.