Multifamily Acquisitions: Buying Class

classy jet and car

People within the industry have strong opinions about asset class differentiation.  I”m referring to designating assets as Class A, B, or C.  For the institutional buyer, any deal under 200 units is considered non-institutional and, therefore cannot be considered an acquisition candidate.  Another easy qualifier for institutional deals is the ceiling height. Assets, regardless of size, without nine-foot ceilings, are screened out by many corporate buyers of multifamily assets.

Class reaches beyond age and condition.  It includes size, demographics, operational efficiencies, quality of construction, quality of interior and exterior finish work, and rents. Following is a synopsis of multifamily assets and distinctions between A, B, and C.

Class A.  Always the newest product in the market, offering the latest amenities built-in.  Offered at the highest rent per square foot.  Differentiation is created by emphasizing being “best in class” and being the new kid on the block.  Class A assets provide a sense of place; they represent an ambiance beyond just the address. They provide services, also offering a place of residence.

Class B. Represents various degrees of product type regarding age, but are usually well maintained and in good condition. Class B may rent for $500 or $2,500 a month, depending on the market.  Institutional professionals will place an age limit on Class B, often stating that anything over 20 years old falls out of the category. This is a very narrow classification because assets from Appleton to Pasadena that is substantially older represent solid B quality assets.

Class C. Known as “workforce housing.”  Substantially functional but with deferred maintenance apparent.  The credit quality of the resident base is less than perfect, and turnover is usually higher than for A and B assets.  Class C fills up after lower-tier Class B assets are already full.  Using age as a qualifier, again, would suggest that any asset older than 30 years old is Class C. This is closer to the truth for C quality than for B quality. There are exceptions, but fewer exceptions than for Class B.

Everything else.  Everything else is those assets that fall outside of the prior definitions. Such as the 1950s built duplex, a four-story walk-up in a major metro (meaning no elevators), or converted basements rented as living quarters.

Many non-institutional buyers look at assets from a market-specific perspective rather than through the lens of class.  Class alone does not have to be your watermark for acquisitions, but it’s good to have a working knowledge of class to assist in defining competitive forces.

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

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  1. Bernard Robertson

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