My apartment grade is what!?

Not all real estate is created equal!

By Sean Flanagan

Do you remember when you were in school and got a quarterly report card?

I do. I could often know if I was going to get “spoken with” by my parents based on how my grades were. Good grades great no issues, low marks or bad grades definitely not a fun conversation.

It’s the same in commercial real estate. Apartments are categorized into different grades to help classify and distinguish the different asset classes. The categories are:

Class A

Class B

Class C

Class D

Any you thought you would never have to think about grades again after school!

Anyway the categories are mainly used by investors, brokers, & lenders when breaking down the asset. So why not just only focus on Class A properties? Class A obviously must be the best? It all depends on the deal and what the individual investor or investment firm’s goals are.

Let us look further into the different classes:

Class A:

These are the best apartment communities in their respective markets. The apartments are newer builds and under 15 years of age from when they were constructed. These apartments provide luxury amenities to the residents. The type of renter profile here is more of a high wage earner (white-collar). These apartments communities usually trade at a premium price with a lower cap rate. 

Class A apartments do not cash flow as much as other classes can. These deals are great for preservation of wealth (REMEMBER IN REAL ESTATE ONE OF THE THREE LAWS IS TO PROTECT YOUR CAPITAL). However, a benefit of investing in a Class A apartments is they have greater appreciation in the future. 

Class B:

These apartment communities are usually a step behind Class A apartments. Class B apartments are usually built within the last 20 years. The tenant profile is a mix of both high wage earners and every day hard working Americans (blue-collar). These apartment communities will have fewer amenity options to residents. Class B properties are usually looked at with the intention of a “value-add” strategy at acquisition time. The properties provide cash flow with the potential for appreciation. 

Class C:

This is where a lot of real estate investors cut their teeth. The price point found with these apartment communities is noticeable lower than a Class A or even Class B apartment building. These communities usually have noticeable differed maintenance and usually are ran as a small “mom & pop” operation. These apartment communities have the highest risk when investing due to the issues either with operations or the physical property suffering years of neglect. However, for the right investor who is able to stomach the risk the upside can be rewarding. 

Class D:

This class of property is the lowest grade of asset class. Think of apartment communities with extreme vacancy issues, criminal activity, and bad locations. These properties are found in markets that have experienced economic contraction. Maybe jobs have left the area or the population of the city is contracting. 

As you can see there’s a lot more involved than just going online and searching apartment buildings for sale. You need to know what type of product you are looking for and where to look for it. It’s all too easy to think you’re getting a “good deal” only to find out the property is in a bad location and has many issues with operations you weren’t prepared for. 

As to which asset class is the best? It all depends…. Everyone is different and has different investment goals. If you were to ask me right now today? I would focus on Class B & Class C properties. I would already know going in I will renovate the properties to force appreciation. If you ask me 10 years in the future, maybe I would only buy Class A. However, whenever we buy  properties at Jameson Asset Management we always ALWAYS invest for cash flow & appreciation!

The best investment on earth is earth!

~ Sean

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