Looking at multi-family properties. How does one define just what makes a property a particular class. I realize it's a subjective decision, but could a section 8 be a class A or B for example?
As you already know it is subjective. The classification of multifamily properties is not set in stone.
Some people look at it by Construction Year exclusively, and others weigh in the Property Conditions, Ammenities, etc.
Here is a very general classification by construction year:
Class A: 0-15 years old
Class B: 16-29 years old
Class C: 30+ years old
Class D: 30+ years old in high crime areas.
To answer your specific question about section8 being a Class B or A, I’d say it is not likely.
Although I know a few class A luxury apartment complexes that offer Section 8 type programs. Not educated in those programs enough to provide further info though.
What works for me is; it is always 2 letters lower than how the seller describes the property. Seller says B then I know it is low C maybe D. Works all the time!
@Lennon Lee has it right--that's how most people see it. But you are also right, @Peter Martin , that it is a subjective observation. And @Bjorn Ahlblad brings up a great point about sellers (and even more so, brokers) tending to overstate by a grade or so.
But now things are even more complicated in that using Lennon's grading scale a class B property could be built in 2002. But I think very few buyers and absolutely zero brokers would classify most 2002 vintage properties as B class. In fact, many late 1990s vintage property could also still be A class.
So in response to this you now see brokers inventing new classes. Now you are seeing AA class, AAA class and I've even seen AAA+ class! This is born from the industry trying to distinguish a 2001 suburban garden-style class A complex from an urban core mid-rise that just finished construction.
So I guess that brings us back to the subjectivity of it all. So maybe you disregard the vintage and think of A class as where you want to live, B class is where you would be willing to live, C class is where you would live if you had to and D class is your housing of last resort and where you'd only go outside in the daytime.
As to your question about A class section 8--yes this does exist. Some properties are purpose-built for income restricted residents which could include everything from voucher tenants to folks paying the freight themselves but meeting specific household income limits. These are typically built with some type of government subsidy or incentive such as tax credits for the developer in exchange for the leasing restrictions.
Everyone thinks they have a B class property...
You can have a property built in 1920 that has been rehabbed to be a class A property. To me it depends on the condition of the property, amenities AND surrounding properties and residents. Building a million dollar home in the hood where everyone is section 8 makes your newly built home a class C or D property. Why? Because the demand for it will be low.
Likewise you can have an older building that needs work, but in a GREAT neighborhood where everything has been rehabbed, and the area residents are all executive level professionals, and it can make your property a class B or A property. Why? Because the demand will be high, even though it needs work.
I also think grading properties for rental is different from grading real estate for purchase.
Thank you all for the insight! It certainly helps to hear what others are thinking! Much appreciated!
I would build on Lennon's point by saying that a lot of this classification is also highly dependent on location. A 50 year old building on Park Avenue is always going to fetch a higher rent than a brand new property in a suburban area in the Midwest.
Location is the biggest driving factor.
I would tag on what @Brian Burke , @Omar Khan and @Ray Harrell stated. I like to look at it as to what type of tenant would this property and neighborhood attract. An old 100 old Victorian house in a gentrified area might attract a high income tenant. In apartments, the A tenant will expect all the latest amenities and the best location. B would be a step down from that and typically will at least have a pool and gym, maybe a little off the prime location. These might attract less affluent white collar tenant, such as nurses, new doctors, new lawyers and accountants. C is going to be blue collar, and service people. D is the last option for those that cannot afford anything else. Typically high crime in the D properties and areas.
Of course, this varies by location, and this is just my opinion.
In my opinion, even a class A condo property with 50% or more rental is automatically class B. I have no research or white paper, but based on value to purchaser, people are less willing to owner occupy a building where most other residents are renters.
Classes in my opinion are determined by class of renters, amenities afforded, and location.
I don't think age of property should be your first criteria. As someone already mentioned, you could have an older building that has now been rehabbed to be a luxury style apartment.
Class A apartments demand the highest rent for the market so that eliminates your section 8 tenants. The government is not putting them up in a room with their own jacuzzi tub.
Class A apartments are normally located in area of city closest to best restaurants, shops, etc. Inside of apartments expect granite countertops, hardwood floors, new appliances.
Class B are properties are still a great place to live and is where majority of your working class tenants are looking to live. They are slightly older in terms of remodel and amenities they provide.
Class B are located in low to mid crime area.
Class C apartments if you are using A-C scale would be your lowest class you would consider (there are D class and F class but for the sake of this thread I'm assuming no one is interested in that headache.)
These class apartments are normally located in medium to high crime areas. Lots of deferred maintenance.
Don't write off these properties. They can have good cash flow and plenty of room for value add opportunities. Just be sure you have a property management company that specializes in managing these type of assets.
Hope this helps @Peter Martin ! I am working on an article describing this more in detail and the opportunities each class affords. Ill be sure to post in thread when finished. Cheers!
Last thought as a quick reference in your search
Class A- place where you hope to live
Class B- place where you would be ok living
Class C- Only living there if times were really rough
Class D- hell no, I'm sleeping in my car
Class F- i might as well be dead.