During your hunt for a new real estate investment, you stumble upon a listing marketed as a class B property. What is this property, and is it a good investment?
Property Classes Explained
Different properties can be given different class listings- such as class A, class B, and class C. But what do these different classes mean and why does it matter?
Real estate investors, brokers, and lenders have developed different property classifications to make it easier to communicate among themselves quickly. This real estate investing lingo makes it easier for all parties involved in a transaction to understand what kind of quality and rating a certain investment property has.
Understanding the different property classes is important for real estate investors for a big reason. Each property classification represents a different level of risk and return. It’s an important factor for investors learning how to evaluate property. Many different types of real estate property are on the market and property classes make it easier for an investor to weigh out the options based on chosen strategies and risk level preference.
With that being said, let’s dive in deeper on class B property.
What Is a Class B Property?
The next best quality asset. A class B property follows a class A as the second best thing. But why is that? Remember how we said each property class is associated with a different level of risk and return? Well, this is because investment properties are scored according to a combination of geographical and physical characteristics. So there’s a neighborhood classification involved and an analysis of the property itself. The class grades are assigned to a property based on several different factors, among them are:
- Age of Property
- Location of Property
- Tenant Income Levels
- Growth Prospects
- Appreciation Rate
- Rental Income
A class B property, based on the above-mentioned features, is a property that is generally older, typically has lower income tenants, and may or may not be professionally managed. However, none of this is necessarily bad. On the contrary, it’s what is in high investor demand. A class B property is viewed as riskier than class A, and therefore buyers acquire these properties at a higher cap rate than a comparable class A property.
These properties are still in a good location and are in good condition. They’ve proven to be quite desirable because they offer more growth potential. Investors see a class B property as a “value-add” investment opportunity because through some renovations, these properties can be upgraded to class A.
Class B Multifamily Properties
Multifamily investing has been on the rise, and a class B multifamily investment property seems to be the favored choice among real estate investors. Buying multifamily homes can be quite costly, so it’s important for investors to factor in classification. It can make a sizable difference in financing.
Many multifamily class B properties are located near class A properties, and therefore can experience similar economic growth. For example, in 2017, rental rates of class B apartments rose by an estimated 2.9%.
A class B property shouldn’t require major renovations. These properties aren’t quite on the same luxury level as class A multifamily properties are, but they’re close. With a class B property being typically less than 20 years old, there shouldn’t be any major repair costs. Usually, an interior update and some general maintenance should do the trick.
Why You Should Invest in a Class B Property
There are a couple of different reasons behind the high investor demand for a class B property:
- Class B properties typically offer the same benefits of class A, but at a generally better value.
- Typically offers best financing and rates
- Can attract good tenants willing to pay premium rents
- It’s a more attractive real estate investment when there is an opportunity to reposition it to a class A property, thereby achieving class A rental income.
- Tends to be bought and sold at lower prices and higher cap rates
- More growth potential, appreciation, and higher yields than class A apartment buildings, offices, and retail
- Are expected to offer the best balance of risk and return
At this point in the current market, investors should definitely start their search for a class B property. The commercial property market can expect some volatility and a correction in prices and demand. In this situation, a class B property can offer the best combination of wealth protection with reliable rental yields looking forward. If we continue to see growth in the market, a class B property will only increase in value and benefit from higher rents. If the markets contract or soften, these properties can hold their value and keep performing well.
How to Find Class B Multifamily Homes for Sale
All that’s left to do now is actually start your search for a class B property. Many online websites have made it easy for today’s real estate investors to cut their search time in half. But what if we told you that you can cut your search time down to only 15 minutes?
Well, with Mashvisor, that’s true. Our many search tools make it easier and faster than ever to find the right type of property that suits your investment portfolio and strategy. You can use our Property Finder Tool to find properties suiting your budget, property type, investment strategy, and more. Our Heatmap Tool will pinpoint the neighborhood that best matches your performance criteria.
It doesn’t just stop at finding the property. Mashvisor’s analysis tools can give you an accurate evaluation of your prospective investment property. For example, our multifamily investment calculator makes an investment property analysis more reliable and accurate than using spreadsheets. Find out if your class B property is a strong investment in your housing market. Do you have questions about Mashvisor? Read our FAQs and learn about our tools.