Apartment construction Classifications

Lender Ratings of Residential venture Properties

Lenders have advanced general classifications of apartment structure so that they can recapitulate among themselves and other members of the manufactures with some level of uniformity. The classifications are Class A, Class B, Class C, and Class D.

Jumeirah Essex House New York

Grade 1. Class A.....Newer, Institutional
Grade 2. Class B.....Older, Institutional
Grade 3. Class C..... Older, Declining Area
Grade 4. Class D......Older, Declining Area, Poor Condition

Class A Apartments - Institutional buyers like new, larger apartments in prime locations because of low deferred maintenance. These properties are typically occupied by white collar workers and have amenities such as garages, in-unit washer/dryers, pools, spas, rehearsal gyms, the most recent technology, etc. They are typically between 1-10 years old. Typically they are in the path of improve and as of this writing (July 2008) can be bought at cap rates of 7%. They will likely have less cash flow than properties with higher cap rates but will have greater appreciation potential.

Class B Apartments - Class B structure are in good areas with many of the same amenities as Class A properties, but Class B structure are 10-20 years old and occupied by both white and blue collar workers. Class B properties are often owned by venture groups, such as little partnerships and little liability companies. As of this writing (July 2008) they can typically be bought at cap rates of 8% - 9%. These properties will have decent cash flow and decent appreciation potential.

Class C Apartments - These apartments are older properties built within the last 21-30 years in working class areas typically occupied by blue collar workers and even some Section 8 tenants(please see my description on Section 8). The properties may be in declining areas but not necessarily perilous areas. The units in Class C structure are smaller than those in Class A and B structure and the projects have fewer amenities. The occupancy rates are typically higher than Class A 0r B because they are more affordable. Individuals ordinarily own Class C properties, which as of this writing (July 2008) can be bought at cap rates of 10%. These properties will have decent cash flow but little opportunity for appreciation.

Class D Apartments - These structure are older, in declining and even perilous areas and as a follow may have high vacancy rates, deferred maintenance, functional obsolescence and ask a high level of hands-on administration from their private owners. As of this writing, they can typically be purchased for cap rates of 12% but may generate less revenue than other properties despite their higher cap rates because of higher maintenance and administration demands.

Rules of Thumb:

1. Class A & Class B properties are purchased for appreciation potential.
2. Class B & Class C properties are purchased for cash flow
3. Unless you are an experienced investor, don't buy Class D properties.

The goal is to buy a particular class of property in the same area class. In other words, buy a Class B property in a class B area. Alternatively, buy a lower class property in a higher class area. In other words, buy a Class C property in a class A area or one in the path of progress. The thinking is so that you can perhaps convert the Class B property bought at higher cap rates (lower in price) into a Class A property which can be sold for lower cap rates (higher prices). This "infill opportunity" is typically only inherent if the area is good than the property. For a good understanding of cap rates, please read my numerous other articles which give detailed facts on the subject.

Apartment construction Classifications