Multifamily real estate investment in the US has shifted to class B and C properties over recent periods. An oversupply of class A properties, along with a decline in demand for the higher-end units and the escalating cost of home ownership, have made B and C class properties increasingly popular with investors. Additionally, the entry of millions of millennials into the rental market looking for starter-home rental rates have infused the B and C class multifamily investment market with fresh incentives.
At lower prices to access the market, naturally class B and C multifamily real estate assets offer potential for the strongest ROI. So, unsurprisingly, investors in major markets such as New York, Los Angeles, Boston and Seattle are seizing opportunities in B and C class multifamily investments.
Here's the basic breakdown of property classes, to serve as a brief guide to the distinctions between multifamily real estate asset classes:
A Class Multifamily Rental Properties
Properties in class A are comparatively high in quality of construction and finishes, with upscale features, amenities, and resident services. Properties are usually located in fully established affluent neighborhoods. Lease rates are high. Income tends to be relatively stable, with properties yielding reliable returns between 3-8%, depending on the market cycle.
C Class Multifamily Rental Properties
Class C properties are often over 20 years old and have substantial amounts of deferred maintenance. These properties often require major renovation, possibly including significant structural repairs and/or replacements, in order to realize more reliable cash flow. Ultimately, C class properties present considerable investment upside if effectively renovated but at a higher risk threshold than either B or A class.
B Class Multifamily Rental Properties
Class B multifamily properties are often older and have deferred maintenance, but they're typically in good enough order to generate cash flow in their current condition, albeit at less than market rates. Because rental rates are lower in class B than in A Class properties, they’re accessible to a far wider pool of the population base. Properties in this class can be positioned to offer investor’s significant returns through a value add strategy while providing some level of protection against risk through their current cash flow and valuation.
What Makes B Class Properties Appealing To Today's Investors
Class B multifamily assets are especially attractive to knowledgeable investors, due to their comparatively high potential for those buyers pursuing strategies to add value to the properties. The B class assets can normally generate cash flow as-is, and they frequently offer investors among the most economically practical and affordable vehicles for access to the market.
C class properties offer the highest overall potential ROI of these three multifamily investment classes. However, turning C grade properties around requires an investment strategy that demands a much more involved approach to asset rehabilitation, marketing, lease sales and property management. Alternatively, due to factors explained above, B class multifamily properties, both in primary and secondary financing markets, tend to outperform class A properties on ROI.
Prospective investors should be cautioned about the commensurate risk with each real estate investment class. For example, the greatest potential ROI is arguably in the C class investment during market growth periods, but that class presents the greatest risk of significant losses during economic downturns, when class A properties offer the most stable returns.
Therefore, as with most types of investment portfolios, a realistic mix is the soundest course. However, multifamily real estate investors seeking the strongest potential returns do lean toward greater investment in the class B and C assets.