Multifamily Asset Classifications
For many investors, classifying an asset is kind of subjective. It's sort of a look or a feel for an asset after years of experience. But because I love data and anything that involves an excel spreadsheet, I’m here to tell you that classifying multifamily assets is more of a science. Classifying assets shouldn't just be limited to class A, B, or C, because there's too broad of a difference between each one for any one investor to understand the true value of each asset. I track them as class A, B+, B, B-, C+, C, and C-. Now anything below a C- is going to be looking pretty ugly. Typically, those are boarded up or have really high vacancy rates, or might be in a terrible crime area. In my opinion, there are 5 determinants when applying a class ranking to a multifamily asset; there's location, how modern are the updates, the rents, price per unit, and of course age.
#1 – Location. Location by far is the #1 determinant of an asset’s classification. The reason is location sets the threshold that you could ever go to on a classification. For example, let's say that an asset is located in a less than perfect location. But it’s a newer property with great remodeling and updates, the rents might even be pretty decent, but it could never be a class A or probably even a B+ because its location can’t change. You can’t pick up the property and move it. On the flip side, if you had an asset in a phenomenal A location, but it’s older and hasn't been updated, it would still rank much higher in the classification because of its location.
#2 – Updates. The second thing I look at when I’m classifying assets is how modern are the updates. What are the kitchens and bathrooms like? The cabinetry, flooring, does it offer amenities like a pool & clubhouse, is the landscaping fresh and updated, are the roofs newer. All of these factor into the classification of an asset.
#3 – Rents. The third determinant in classification is rent. Obviously the higher the rents, the higher the likelihood the classification will be higher. Watch the video in the link below to see my spreadsheet of actual rents by classification which will give you an idea of what I’m talking about.
#4 – Price per Unit. Price per unit is very similar and tied to the rents. Obviously, the higher the rents, the higher its selling per unit price will be and therefore will rank higher on the classification schedule.
#5 – Age. Typically, properties ages in the 1950s 60s, and 70s fall in the C-, C, and C+ range. Assets aged in the 1980s, 90s, and up to mid-2000s fall in the B-, B, and B+ range. Finally, class A assets are typically five or so years old up to new construction.
The idea here, and why it’s important to understand classifications, is that it will help you determine which assets to buy. There are significant benefits and profits to be made by taking a lower-class property, doing some updates to increase the properties class in order to gain an increase in rents. Moving around in the C class or even moving a C class to a B class is possible. However, I hardly ever see ever to go from a B to a B+. The locational difference between a B and B+ is typically not that different in the real world. And because I already know where your head is going, I know you’re thinking, “can we go from a B+ to an A?” Yes, it’s possible but very difficult to do. Like the difference between B and B+, A and B+ locations are typically very similar. The difference is the B+ has improvements that are probably 10 to 15 years old and they need to be massively updated in order to compete with the brand-new state-of-the-art complexes that offer all the coolest appliances, amenities, grounds, flooring, and all that. As long as the B+ has a location that is as good as the A, then it's just a matter of spending the bucks to compete on the updates inside and outside the complex. And I would argue you may have to offer even better improvements than class A because people still choose the newest project. Now if you want to see how I track classifications within my own markets and how I came up with these different spreadsheets, watch the video below. So now, whenever a listing hits the market and the broker or seller says, "hey come buy this class A or B+ asset" you'll know whether or not they're just full of…
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