How objective or subjective is apartment classification (A,B,C)?

Question

Hello BP,

Are there any specific set of features that must be present or absent in a certain apartment class?

Here are few items that I sometimes get confused about:

• Age: 0-10 - "A", 11-20 - "B", 21+ - "C" - this is a general rule for a generic apartment complex in a suburban area and does not apply to places like SF or NY where location trumps age. I get that. However, I often see 15+ y/o properties offered as "A" class. Can a once-upon-a-time "A" property still be considered "A" 15 years later comparing with "B" and renovated "C" properties?
• Amenities: I was once presented a 20+ y/o property in Ohio that had in-windows A/C units. The deal sponsor marketed it as a "B" class. Yet, here in DFW, many "C" properties have standalone A/C units. Should a "B" class property have standalone A/C units as a rule?
• Appearance: a property looks like a "C" class from the outside and based on age but some units have really good interiors and the property is deemed "B" by the sponsor.
• Expenses: does it cost less or more to run an "A" class property than a "C" class? I saw "A" being underwritten to lower expenses than a "C" class. Does it make sense?

So, is there a set of rules to classify apartments or for the most part the beauty is in the eye of the beholder?

ThanksNick

Brad T. · Answer

Great question and one that I have struggled with also, Nick. So far, I like the way Axiometrics defines the classes best. It lets renters determine the class by how much they are willing to spend to rent the units. You can use a website like rentometer.com to check where a unit ranks.

A Class = Top 20% of rent price in it's area

B Class = 20-80% of rent price in it's area

C Class = Bottom 20% of rent price in it's area

A Class = Top 20% of rent price in it's area

B Class = 20-80% of rent price in it's area

C Class = Bottom 20% of rent price in it's area

Christian Brodin · Answer

Nick,

Every year I screen 150 to 200 deals. In my experience a lot of the classification has to do with the overall quality of the building and amenities. In addition to the location.

So there are two essential parts: Location and Quality of the building and amenities

Quality of the building and amenities

When it comes to the Quality of the building and amenitieshere is how I would approach it.

A Class, also referred to an institutional product (meaning that a REIT, a Pension Fund etc. would buy this property)

If you have a new apartment complex (less than 4 years old), with high end finishes in the units (Bluetooth speakers in the showers anyone?) and amazing amenities like climbing walls, resort style pools, rooftop gardens, AND renters that are willing to pay top dollar for rents you have an A Class building.

Ceiling heights will be 9’, and most new apartment complexes will have a parking garage vs ground floor parking.

Most professional real estate investors look for the exit (who will buy the property at time of sale) when they build or buy apartment buildings. If you are in the A class property game your most likely buyer would be an institution that want no hassles and as close to a stable performance as possible.

B Class

Age of the apartment complex will typically be 5 to 10 years, the building is of good quality, but is "dated". Building techniques changes a lot, and over the years you will see a marked difference in the way the buildings were built. So does style of interiors and amenities too. It used to be that people wanted tennis courts, now a new buildings comes with climbing walls and Crossfit gyms. Some properties also have fitness instructors, spinning class rooms, yoga studios, you name it.

Interiors will also differ. A lot. Older properties tend to have carpets, and dated kitchen counters/cabinet. Appliances might be your typical white or black standard quality. My guess is that rents will be 15-25% lower than A class.

So, if you want to know what a B class properties are, think of them as (slightly) dated A class properties.

C Class

Now we are talking buildings that are 15+ years old. Styles and construction techniques will vary greatly. Many buildings in this era were built with a floor plan layout that doesn’t match the need of more modern generations. , i.e. 2 bedroom 1 bath instead of 2 bedroom 2 bathroom. Ceiling heights will be 8’ vs new buildings with 9 feet ceilings.

Finishes are dated. Typically these properties will be of the garden style type, where 2-3 floor buildings are spread out over a greater area. Parking is typically a big open space. Upgrades may or may not have been done over the years, but have long passed, and upkeep is kept at a minimum.

You might encounter aluminum electrical wiring, galvanized steel plumbing, led paint and even asbestos because of the age of the property.

Because rents are substantially lower the income demographics of the residents may be towards the lower end too.

D Class

Now we are talking C Class properties where the owners for various reasons have not maintained the property. The quality is noticeably low and it is in need of immediate, and substantial repairs.

In my experience these properties are located in areas with very low income demographics.

Location:

The second criteria that I look for when I classify an apartment complex is location. Location is in my opinion maybe more important than the quality of the building at the time of purchase (of course within reason).

A location.

A location is the area where you are getting premium rents. There is no shortage of renters willing to rent at this location, and they are willing to pay up to live in this area.

It will usually be in an area with plenty of amenities like shopping, restaurants, bars, or other features like great schools. Weather you have a C class asset, a B class asset or an A class asset you get the highest rents in the area. In my opinion an A location can be in cities like New York and San Francisco, and in other markets too like Chattanooga TN, or Milwaukee, WI.

I guess I can tack on the notion of super A locations. Like Park Avenue in New York where ultra-high net worth individuals would buy million dollar condos, but this is far beyond the A location that I typically use for an apartment complex.

B location

A B location might be an area that is up and coming, and where people are moving too. Or it could be a more suburban area that still see nice homes and strong home prices, but further away in terms of amenities.

Schools are good to very good and it still has a lot of amenities. Rent levels are strong and stable, and have potential to grow. Income demographics would be mixed between good paying blue collar jobs and white collar jobs.

C location

A C location would be an area with lower income demographics, schools will probably be in the mid to lower range. (You can use Zillow.com to look for school classifications/rankings).

Rents are generally lower, and vacancy might be higher due to higher turnover of residents.

Amenities are not great, and might have more fast food chains, car dealerships and pawnshops that other businesses.

D location

A D location is to say it bluntly a low income demographic area, and will very often be marked by high levels of crime, poor schools, abandoned buildings, and sprawl.

Regardless of the quality of the building and amenities, and the location, I have met, and continue to meet investors who specialize in all sorts of locations and with all sorts of buildings and amenities. And they are successful at what they do.

Some investors prefer the stable returns of A class apartment complexes in A locations, and some people prefer the more management intensive buildings in D locations.

In this blog post my intention was to clarify how you can classify an apartment complex and a location. I hope I have managed to do that in an easy-to-understand way.

I would love to hear your thoughts, and get your input if I left something out.

Thanks,

Christian

Account Closed · Answer

I'm not a big apartment investor but I think that both neighborhood and property condition matter. For example, if you take a rundown property in the ghetto and upgrade to resort style amenities, does that make it a A property?  Unlikely considering you won't get A renters to move there. OTOH, if you find a run down property in a nice suburban neighborhood close to major employers and upgrade it can it become a A or B property? Possible.  I think the rent as percentile of rents in the region is a good way to think about it.

Account Closed · Answer

The actual definition and meaning of a property classification may vary based on who is developing the classification. Methodologies could often vary drastically. Be sure you are aware how any particular classification is derived.

Luke Holcomb · Answer

I am in Chattanooga, if you are interested in any further info on properties around here feel free to reach out. We can generally get 'B properties' in the 1.5% (cost to rent ratio) range. and C properties in the 2% range. There are also plenty of opportunities for passive investing with rates of return starting at 8%.

Good luck and enjoy!

thanks,

-Luke

Nick B. · Answer

Thank you Christian. This is the most comprehensive and detailed description I've seen.

Kalo (Kyle) Atanasoff · Answer

A,B,C and D...just a way to classified. However the property itself is classless. You can classified the area and the people who are leaving to leave in, not the property.

You might have 1920 bungalow in Malibu - class A (because of the area and the people), and 2015 modern 3/2 SFR in Compton classified as class C (again, because of the area and the people).

Account Closed · Answer

A,B,C really is a measure of applicable cap rate.  A Class "A" property will almost always have a lower cap rate than a Class C property. As for quality within those classes, we have developed a rating/inspection matrix that helps us define our investments within what our normal target might be. I have attached a link to this pdf for those that are interested. http://www.ahccapital.com/#!forms-and-downloads/cbe6

On the matrix portion, there is a number that we have  that reflect what the total number for the matrix is for our investments, yours may differ.The form has a lot more items relating to an inspection but it does give you a good overview of the quality so as you can compare. Feel free to contact me if you have any questions or can't get to the download. ( no sale or self promotion just sharing some helpful info).

Kalo (Kyle) Atanasoff · Answer

There is no class property. There are class people who are wiling to leave in the property.

Chris Field · Answer

Its all about location and price, A is the best location, and they go down from that.

How objective or subjective is apartment classification (A,B,C)?

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