There are many types of multi family real estate properties available to investors. That’s why it’s important for you to understand the different property classes so as to make an investment in the right property type that suits your investment strategy and goals. Property classification represents different levels of risk and potential return for multi family real estate. The classes are based on a number of factors such as the property’s location, age, amenities, rental income, and more. More than Class A and B properties, investment in Class C property has been on the rise throughout the United States. This is due to a number of factors, including the rising cost of homes for sale.
In the midst of this trend, Class C properties are attracting a wide demographic of investors. However, is a Class C property a good real estate investment? There is a lot of information out there about investing in Class C properties, some of which are quite misleading. Before we find out the truth, let’s first have a good understanding of this property class.
What Is a Class C Property?
Class C properties are usually old buildings that are more than 30 years old with minimal amenities and outdated systems. In fact, they usually have most of their original appliances and systems. Many of these investment properties show visible deterioration and often have deferred maintenance issues. Due to their poor condition, they tend to have lower upfront costs compared to the other property classes. However, they will often require extensive renovations and hands-on maintenance. As a real estate investor, you have to invest some money in repairing the structure and mechanical systems. Some properties will require significant renovation work before they can be expected to provide steady cash flows. Despite its apparent wear, a Class C property itself can still be habitable.
A Class C property will often be located in a less desirable, low-income neighborhood. Class C locations usually have high crime rates and lack amenities such as good schools, restaurants, and good infrastructure. The tenants in these areas are more likely to be on government subsidies or work low-wage jobs. This may contribute to vacancies, high turnover, and evictions. The properties usually net lower rental rates compared to Class A or Class B properties. The rental rates will often be below the average for the area.
What Are the Benefits?
With all the negative characteristics of Class C properties, you may be wondering why an investor would want to invest in a Class C property. One aspect that makes a Class C property a good real estate investment is the low acquisition cost. They are cheaper than Class A and Class B properties and the rental rate is usually more than 1% of the acquisition cost. Therefore, the return on investment when investing in these properties is higher in terms of cash flow and cap rates. Out of all multi family asset classes, these properties offer the potential for the highest cash flow. Since areas with this type of rental property tend to have low-wage tenants, homeownership is usually a big challenge. Therefore, you will have a deep pool of renters if you decide to buy Class C properties for investment. If your real estate investment strategy focuses on cash flow, then Class C properties may be a good investment. With the right strategy, it can be very lucrative.
There are some real estate investors who seek out Class C properties because of the amazing potential in renovating and upgrading them. They allow real estate investors opportunities to enjoy a significant return on investment by making small improvements on the property. With proper upgrades, they can realize larger returns.
What Are the Drawbacks?
Even though a Class C property has an opportunity for strong cash flow if managed well, its potential for natural appreciation is usually very low or not to be expected due to the location. If you are looking for a capital gain, then investing in a Class C property may not be a good idea.
This type of real estate investment also carries higher risks since it will need more extensive improvements and ongoing management. One mistake many investors make when buying a Class C property is underestimating repairs and maintenance expenses. This can hugely affect their rate of return. With the type of tenants, property management will need to be more intensive. You will require greater oversight to deal with tenant problems, perform maintenance, and collect rent.
Financing can also be a problem when investing in this property class. Due to the poor condition of these properties, an investor often has fewer options for investment property financing. This can make pursuing a deal quite challenging compared to buying Class A or Class B properties. You may be forced to look for alternative sources of investment financing.
The Bottom Line
Is it worth investing in a Class C property? Well, that’s up to you and the investment strategy you have set. With the right strategy, Class C properties can be very lucrative real estate investments and offer unique opportunities to investors. However, it is important to understand the relationship between risk and return when buying multi family homes for investment. If you are looking for real estate investments with strong cash flow but real estate appreciation is less important to you, Class C properties would be the best fit. However, they carry the highest risk of any property class. Before you invest in a Class C property, you must factor in the costs of renovating and managing this type of real estate.
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