Apartment construction Classifications

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Lender Ratings of Residential speculation Properties

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

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 busy by white collar workers and have amenities such as garages, in-unit washer/dryers, pools, spas, exercise gyms, the most recent technology, etc. They are typically between 1-10 years old. Typically they are in the path of strengthen 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 busy by both white and blue collar workers. Class B properties are often owned by speculation groups, such as itsybitsy partnerships and itsybitsy 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 busy by blue collar workers and even some Section 8 tenants(please see my report on Section 8). The properties may be in declining areas but not necessarily dangerous 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 commonly 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 itsybitsy opportunity for appreciation.

Class D Apartments - These structure are older, in declining and even dangerous areas and as a ensue may have high vacancy rates, deferred maintenance, functional obsolescence and ask a high level of hands-on supervision from their private owners. As of this writing, they can typically be purchased for cap rates of 12% but may generate less income than other properties despite their higher cap rates because of higher maintenance and supervision 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 singular class of asset in the same area class. In other words, buy a Class B asset in a class B area. Alternatively, buy a lower class asset in a higher class area. In other words, buy a Class C asset in a class A area or one in the path of progress. The reasoning is so that you can perhaps change the Class B asset bought at higher cap rates (lower in price) into a Class A asset which can be sold for lower cap rates (higher prices). This "infill opportunity" is typically only potential if the area is best than the property. For a best comprehension of cap rates, please read my numerous other articles which give detailed information on the subject.

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