Understanding Multifamily Investment Property Classifications

If you are new to real estate investment and you are considering buying your first multifamily properties, you will likely hear the terms Class A, Class B, and Class C used to describe those properties. Understanding the differences between these three classifications can help you make better purchasing decisions – and it can even help you better understand your financing options. 

What Are These Classifications?

The Class A, Class B, and Class C designations are property classifications that lenders and brokers developed in order to communicate the overall rating and quality of any given property more efficiently and effectively. Though they were developed by lenders to help understand the risks of lending as compared to the returns for a specific property, investors should also take heed. Understanding these classifications and what each one means can help you strategize your investments and make better overall choices. 

What Each Class Represents

Properties are graded as Class A, B, or C according to a variety of characteristics, including their physical properties, locations, and more. Some of the factors that go into determining these grades might include everything from the average income levels of the tenants to the age of the building itself – and even things like nearby amenities may be a significant consideration. 

  • Class A – A property is deemed Class A if it is one of the best buildings to invest in for any particular market or area. Though there are some exceptions, these properties are almost always less than 15 years old, and the tenants have relatively high incomes. They’re located in strategic areas, fetch the highest rents in those areas, and have very low vacancy rates. 
  • Class B – Class B properties are a little older, and the tenants usually have moderate incomes. Despite the age of the buildings, they tend to be well-maintained. Many investors and lenders see Class B properties as some of the better values, especially among new investors, because a few simple upgrades could tip the property into the Class A designation with time. Lenders do consider these properties to be riskier than their Class A counterparts, so interest rates may be a little higher. 
  • Class C – Finally, a Class C property is one that is considered less than ideal for most investors. These buildings are often 25 or more years old and located in not-so-popular neighborhoods within their local areas. Most of the time, Class C properties need significant renovations – sometimes to the point that units are vacant due to disrepair. Tenants are often low-income, and rents for Class C properties are among the lowest in their areas. However, with some work, it is possible to generate a significant income by boosting a Class C property into Class B territory. 

Multifamily investment property classifications are a very simple way for investors and lenders alike to assess risk versus reward. As an investor, you will pay more for a Class A property than a Class B or C, but there’s less risk involved. On the other hand, you may be able to acquire a Class C property for a bargain, but there’s a significant risk that the significant renovations, poor locations, and tenant incomes may limit your earning potential.