You know who it is: Mashvisor the Real Estate Guru is back and better than ever! We know you missed us, so we’re here to talk to you a little more about how to buy multifamily properties.
“A, B, C, D, easy as 1 2 3” Come on, sing it with us. You may be asking, “Mashvisor Guru, what in the world do the ABC’s have to do with buying multifamily properties?”
To answer your question, oh young one, it has everything to do with your multifamily home purchase. There are four different multifamily home classifications to choose from. All offering you different things, all with very different needs.
To buy multifamily properties considered to be the best of the best, you have to choose the most suitable classification, as well as the best real estate tools. Guess what? Both of things are found right here on Mashvisor!
We’ll talk a little more about those classifications down here! Keep reading, you won’t regret it, oh real estate investor.
Consider the Mashvisor Numbers to Buy the Multifamily Properties
You need to know if the multifamily homes you are looking to buy are able to make you some money. Realistically, as a real estate investor, your main goal is making money in real estate. Whether you’re a beginner in real estate or a savvy property investor, you have the same motive.
You’re on the same team, and Mashvisor is the coach of that team. We give a real estate analysis along with property valuation, in order for you to know your property investment inside out. Cash on cash return, cap rate, and potential rental income are only some of the metrics we are able to provide you.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
You hear that sound don’t you? We know you can. That is the sound of cash flow. Positive cash flow, to be exact. Negative cash flow is a foreign sound to us, what even is that? Long story short, use Mashvisor to buy multifamily properties. Any properties, at that.
Grading Methodology to Buy Multifamily Properties
Now, we’re going to be speaking generally here because every investment property is not going to fit into one of these categories. Every real estate market differs from the other, but we can do our best to discuss the general description of the classes. Here are the types to consider when you want to buy multifamily properties:
Class A, B, C, D
To go ahead and buy multifamily properties considered a class A means you’re getting the highest quality buildings in both the market and area they’re a part of. These are usually newer properties that:
- Are built within the last 15 years with top amenities
- High-income earning tenants
- Low vacancy rates
- Demand the highest rent
- Little to no maintenance issues
- Usually professionally managed
A, Class B, C, D
The runner-up, Class B, includes properties that are older than Class A. The criteria includes:
- Low income earning tenants
- Rental income a bit lower than Class A
- Some deferred maintenance issues
- Have a higher cap rate than an A property, as they are viewed riskier than class A
These are good investments if you’re an investor after a “value-add” approach as there is room for area improvements. You may even be able to upgrade it to Class A, or a B+.
A, B, Class C, D
Class C multifamily properties are:
- usually more than 20 years old
- Located in places that aren’t considered very desirable
- Probably requires renovation, including updating the building infrastructure to bring it up to date.
- lowest rental rates in a market with other Class A or Class B properties
- Most likely will need some extra elbow grease. Class C properties need significant reposting to get to steady cash flows for you.
Related: Understanding Multi-Family Investment Property Returns and Benefits
A, B, C, D Class
These are nicknamed the “war zone” of income generating assets. Why?
- They are over 30 years old
- Challenge to collect rent there and the crime rate is generally high.
- Low construction quality and condition
- On the lower side of the market unit rent range
- D class buildings are a great buy for repositioning or if you think the quality of the area is becoming better
Your Perfect Fit to Buy Multifamily Properties
Financing Comparison of Classes to Buy Multifamily Properties
Class A Income Properties and Class B Assets (in major markets)
These typically are asking for it when it comes to lenders. Their higher purchase price can bring:
- More financing options
- Lower rates
- Longer fixed rate terms and amortizations
- Higher leverage (up to 80% with options for mezzanine debt or equity)
- This asset is the primary source of wealth. The risks will be tagging along, as nothing is guaranteed in the real estate business.
- Lower debt service coverage requirements (as low as 1.15:1)
- Cap rates in the 4%-6% range, but this all goes back to the U.S. housing market itself
Class B and C Investment Properties
These investment properties tend to lose some interest from institutional investors and lenders. These two classes usually obtain financing from banks, agency lenders and specific purpose REITs. This basically means:
- Fewer financing options
- Slightly higher rates
- Fixed rate with balloon payment terms or 5 year resets
- 75% leverage with no flexibility for secondary debt
- Cap rates could be in the 6%-8% range
Related: How to Buy a Multifamily Property With No Money
Class C and D Assets
Offer the opportunity to be financed by local banks with little to no interest from secondary market lenders. This results in:
- Very limited financing options
- Shorter fixed or floating rate terms
- 65% (75% for strong sponsors in major markets) leverage with no option for secondary debt
- Depending on the market, cap rates around, or a little above of 8%
Whoa, That’s a Lot
We know Mashvisor Guru has stuffed that real estate investing mind with A LOT of information at once. However, it will benefit you. Knowledge is power. With these facts, you really need to implement them into your real estate investment strategies in order to succeed. To buy multifamily properties that will succeed and bring you profit, choose the right class.
More than one class may match your goals regarding investing in real estate. In that case, take a look at the financial comparison. Which way do you prefer to finance your investment property? What is the best way to finance a rental property?
Ask yourself these questions when you’re out to buy multifamily properties. Mashvisor the real estate investing guru will be back in no time. We’ll be giving you the tips and tricks AND the real estate analytics.
Related: 6 Questions to Ask Yourself Before Buying Multi Family Homes for Investment