Nice example of an A-Class property.
Allow me to describe for you the lifestyles that I have lived based upon the type of multifamily property that I have owned. Once you get a flavor for what each property entails, you will have a better understanding of which type of asset you should be focusing on.
Class A – Life is simple when you own Class A property. My A-property was built in the late 1990s, is beautifully landscaped, separately-metered utilities and is perfect for a potential condo conversion if the world ever sees those again. The level of capital improvements that takes place on that property is very low. I think the biggest unexpected expense I get is a broken water heater.
More importantly, though, is the quality of residents that I have living there. The police are never called for any crime issues and the last time they were called was because a resident had a heart attack. For a three-month period of time this year, this property had 100% occupancy and 100% collections. For those of you experienced in multi-family ownership reading this, you can close your mouths now. It is true. Evictions happen but very infrequently.
If you are looking to get into multi-family investing as a sideline to your day job and you would like to increase your chances of being successful, then only look at buying A-class property. It is more expensive, the returns are lower, and the up-front costs could be higher, but your lifestyle will not change and you will easily start looking for another property just like it.
Class B – This is where the best deals can be found for new investors. But make sure you know that the property you are buying is truly a B-class property and not a C-class in sheep’s clothing. (As you analyze the income and expense statement, you will see that there are indicators in the financials that will help you determine whether the property truly is a C or a B class asset).
My B-property is a nice property. It is a place that I would not mind living in if I needed a place to stay. The residents are nice people, the majority of them keep their residences neat and they enjoy staying there. There is some crime on the property but it is usually isolated to problems within the household.
The issues that I have with the property primarily stem from its age. It was built in the late seventies through the mid eighties. As a result of its age, things always need to be fixed. Twice in the last two years I have had to have my plumber come in and replace the water pipes from the street. (I love how it is never the city’s responsibility. Always mine). This just means that when you are calculating your budget, you need to make sure that you reserve enough cash to cover these types of expenses. B-properties burn through cash much faster than A properties. Be prepared. Regardless, if the property is purchased at the right price, B class property can be a great investment.
Class C– What follows is my own personal opinion learned from personal experience. I will never purchase a C-class property again. It may be right for some investors but it does not fit my investment strategy. As I now say, life is too short to own C-class property.
C-class property is a tough property to own both from a physical plant basis as well as a clientele basis. They are the oldest property and therefore have the most upkeep. There is always something going wrong with it. If you get into a C-class deal without having a large bucket of money to start rehabbing units and keeping the lights on while you do that, then you have just created a monster. That is the easiest recipe for disaster.
In addition, the mindset of the C-class property resident, if you are like most people, is like nothing you have ever known or been able to understand. You have to have a very strong back if you are looking to get into this side of the business. The only good thing that I can say about my experience is that I learned it early in my career at a time when I could recover financially from the disaster that it became.
Let me stress this again. This is my personal experience. There are many investors that make a great living investing in C-class property. I just learned very early on what my limitations were. If I had a contractor’s mindset, I would be able to walk into these types of properties and see dollar signs all day long. Unfortunately, I don’t. I see the financials of a property and base my decisions on that.
