Multifamily assets are often referred to as A, B and C quality assets. Apparently there is no failing grade in investment property when there is rental income. Categorical definitions of quality are a good starting point.
Buying multifamily requires knowing about the quality of the deal. Institutional standards within the multifamily asset class represent the normal first blush where people begin to form an opinion based on a single letter. Saying an asset is an A, B or C is just the beginning. Following is an abridged definition of widely accepted definitions of quality:
Class A. Always the newest product in the market offering the latest amenities built-in. Offered at the highest rent per square foot.
Class B. Represents various degrees of product type regarding age, but are usually well maintained and in good condition.
Class C. Known as “workforce housing”. Substantially functional but with deferred maintenance apparent. Workforce housing is the newest term for “affordable housing”.
Workforce housing. Workforce housing, for example, can be represented by a nice B building, but with subsidy. Per Wikipedia; “Workforce housing is generally understood to mean affordable housing for households with earned income that is insufficient to secure quality housing in reasonable proximity to the workplace.”
Let’s go a little deeper to understand the varying degrees quality beyond the broad descriptions noted above. The multifamily business has degrees of quality that include the following categories:
- in property location
- in quality of construction
- in property management
- in ownership sophistication
- in underlying financing
- in resident screening and credit quality
- in internet connectivity
- in reputation
- in submarket average household income
- in cell phone reception
It’s nice to know if an asset is A, B, C or workforce housing at the beginning of a review but by the end of your assessment you are required to discover degrees of quality that go well beyond a single letter or euphemism. Note that some of the items are subjective. This emphasizes the necessity to have an opinion and determine the impact on the presumed hold time of the new purchase. This is one category that makes each review as unique as the asset under consideration…each and every time.
This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. Multifamily Insight