A building or complex of buildings consisting of five or more dwellings (units) is considered commercial multifamily. Any building with four or less dwellings is considered residential. 12M acquires multifamily properties consisting of 80 units or more. This allows for greater economies of scale and the ability to support on-site professional property management. In addition, an apartment complex with greater than 80 units reduces the risk associated with vacancy. For example, one vacancy in a fourplex is equal to 25% vacancy where it would require 20 vacant units in an 80-unit apartment complex to be 25% vacant.
Diving in further, Multifamily can be broken down into four separate classifications: A, B, C or D.
- “A” Class properties are newer properties built within the last 10 years with the most amenities; they have the highest income-earning tenants, lowest vacancies, and will typically demand the highest rents with no deferred maintenance. These buildings are usually owned by Institutional investors and demand the lowest Capitalization Rates (CAP Rates), highest per unit prices, and generally have the most appreciation potential, but lowest cash flow starting out.
- “B” Class properties consist of properties built in the last 11-35 years with some amenities; rents will be a bit lower than the A Class with little deferred maintenance. These buildings demand rents slightly lower than Class A, with a mix of white-collar workers and more skilled blue-collar workers. Class B properties are typically owned by Institutional investors and private investment groups, or very high net worth individuals. They are valued at slightly higher cap rates than Class A properties and usually have appreciation potential with decent cash flow on acquisition.
- “C” Class properties are typically older properties, built 35+ years ago with much fewer amenities, if any; rents are lower than B Class buildings and usually have more deferred maintenance and a lower occupancy rate. The tenant base will be mostly blue-collar service employees, and could have a mix of government-subsidized tenants. These buildings are usually owned by private investors and private investment groups, and provide for higher cash flow and CAP rates, but will normally have much lower appreciation.
- “D” Class properties are older buildings (35+ years) in challenging neighborhoods and potentially dangerous areas. They are older, with little to no amenities, large amounts of deferred maintenance, functional obsolescence, and the tenant base can be very challenging and very management intensive. These properties will usually have double-digit CAP rates and minimal appreciation potential. D Class properties are the most challenging, and definitely are not recommended for most investors, especially new investors. While they might look like cash flow kings, tenants often diminish the cash flow greatly due to repairs and lack of payments.
Our investment model and focus is in “B” Class properties. “B” Class properties are shielded from vacancy issues that “A” class is subject to as new construction hits the market. Additionally, in an economic contraction, “A” grade tenants will look to, more affordable, “B” Class properties to rent. One major advantage over “C” Class properties is that “B” Class does not have the environmental issues, such as asbestos and lead based paints, that can cost an owner a tremendous amount in remediation. While “C” class can provide excellent cash flow, you have to keep in mind that these risks can be extremely costly and impact the ability to update/upgrade the property as it ages and inherently affect cash flow.
