Not all multifamily homes for sale are equal. This means that real estate investors must consider a number of factors to determine the viability of an investment property before making a purchase decision. One way that investors determine the potential of multifamily real estate is through classification. Property classes represent different levels of risk and revenue based on a variety of characteristics such as location, age, property condition, amenities, and tenant quality. However, to most beginner real estate investors, picking the right property class can be a daunting task.
So, which property class makes for the best real estate investment? For you to identify the property class that will bring you the best returns, it’s important that you have a good understanding of each class and how they differ from one another. So, let’s delve into the 4 property classes first.
Related: What You Need to Know Before Buying Multifamily Homes for Investment
Property Classes
As we go over the different property classes, it’s crucial to note that there is no hard and fast line between properties in each class. Moreover, the criteria for each property class may vary slightly depending on the real estate market. Without further ado, here is a list of the 4 major property classes and their characteristics:
1. Class A Property
- They are usually located in the best neighborhoods with good infrastructure, a good job market, low crime rates, good school districts, shopping centers, etc.
- The investment properties are newly built (10 or fewer years old) or have been fully renovated recently.
- They are in fantastic condition and tend to have no maintenance issues.
- They are luxury rentals with modern and high-end amenities and finishes.
- This property class attracts the most qualified and reliable tenants (high income, long-term leases, etc.).
- The property price is usually very high.
Class A properties are considered the safest types of real estate. These low-risk investment properties provide the highest and most stable rental income, even during tough economic times. However, they are usually the most expensive properties of all the classes. It’s hard for beginner real estate investors with limited funds or credit to afford them. Consequently, they tend to have a low cash flow and return on investment.
Related: How to Find Low-Risk Investments When Buying Rental Property
2. Class B Property
- Class B property will be located in a good middle-class neighborhood. Social amenities here are above average and the crime rate is fairly low.
- These investment properties are a bit older compared to Class A properties. They may be 10 to 30 years old.
- They tend to have above-average amenities, finishings, and fixtures.
- Their physical condition is fairly good. They are properly maintained and have no deferred maintenance.
- Property prices are lower than those of Class A properties.
- This property class tends to attract good tenants who are majorly middle-income earners.
Generally, Class B properties offer similar benefits to Class A properties. Their main advantage over Class A property is their higher real estate appreciation potential. With some value-add renovations, they can be upgraded to Class A. This allows for higher rents, meaning more cash flow.
3. Class C Property
- Class C property is usually located in undesirable neighborhoods with high crime rates and low wages.
- They are quite old (more than 30 years old).
- The physical condition is quite poor. The buildings often show visible deterioration and may have outdated amenities and systems. Therefore, they will often need repairs and updates.
- Lower property prices than Class A and Class B properties.
- These properties tend to attract low-income tenants with high job turnover. This raises the chances of evictions.
In the right real estate market, class C properties are usually the best cash flow properties. They also offer sizable appreciation and return on investment. However, they are fairly risky investments.
4. Class D Property
- Class D property will be found in very undesirable neighborhoods with severe poverty, poor public amenities, and high crime rates.
- May be the same age as Class C properties or older.
- They are distressed properties in a neglected state and in need of extensive repairs and renovations for them to become tenantable.
- They can be acquired at very low prices.
- It’s hard to find reliable tenants for this category of rental properties. They usually have low income or are under government welfare programs.
The upside of buying a Class D property is its high reward potential. However, they also come with a lot of risks. They are actually the riskiest type of real estate properties you can invest in. They have high vacancy rates and very low appreciation potential. Due to their poor condition, you may also have trouble finding financing. Unless you are very experienced and have a very high-risk tolerance, you should avoid these properties.
Related: Should I Buy a Rental Property in a Bad Neighborhood If It’s Really Cheap?
Which Property Class Makes for the Best Real Estate Investment?
When it comes to choosing the best real estate investments, you have to consider their risk and return potential and how that aligns with your financial goals. This means that there are no rigid guidelines on which property class to choose for investment. It’s actually possible for real estate investors to make money with any of the four property classes. You just have to find what is right for you.
If you are looking for low-risk investment properties with the best capital preservation potential and stable returns, a Class A property may be the way to go. However, you should also be able to afford them because they tend to be very expensive.
Class B properties are suitable for investors who want steady cash flow and a balanced mix of risk and reward. Generally, they offer a better return on investment than Class A properties but come with more risk. Among these 4 classes, Class B property is usually the most sought after property class. But real estate investors willing to take more risk in exchange for a high return potential may find Class C properties more attractive.
Using Mashvisor to Find the Best Real Estate Investments
When looking for multifamily real estate to invest in, investors should only use property classes as a quick guide to gauging the risk and reward potential of the investment property.
If you want to make the best real estate investment decisions, you should always base them on numbers. To find the best real estate investments, investors should analyze both the housing market and the investment property for sale. Here’s where Mashvisor makes your work easier. Mashvisor’s real estate investment tools allow you to easily access accurate and reliable data on markets and investment properties in the US housing market.
The Bottom Line
When buying multifamily homes, property classes can be used as a guide to identifying the best investment opportunities based on risk and revenue potential. The best property class for you will depend on your situation and investment goals.
However, since they should only be used as a guideline, you should always use Mashvisor’s real estate investment software to run the numbers before you make a final decision.