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What type of multifamily property yields the best return on your investment?

What are the pros and cons of different asset classes?

Is it better to invest in a stable property or one with value-add opportunity?

In this week’s vlog, I explore the different categories of multifamily investments and share the advantages and disadvantages of each.

I walk you through the 4 asset classes, discussing which is most sensitive to market cycles and which carries the greatest risk.

I also offer insight on the difference between a stable property and a value-add opportunity and explain how an investment qualifies for agency debt.

In just 5 minutes, you’ll better understand what multifamily properties yield the best return on your investment and get familiar with the benefits—and the downside—of each property type!

Watch the video below or keep on reading.


Easy as A-B-C

Asset classes are labeled with the letters A through D, and as you may have guessed, class A buildings are of the highest quality. These luxury properties are either less than 10 years old OR they have been renovated in a big way in that 10-year window.

The advantages of class A include high rents, high-quality tenants, and few necessary repairs or renovations. The downside is that luxury properties are very sensitive to market cycles: While class A performs well when the market is thriving, tenants flee for class B when the market declines.

To B or Not to B

Located in desirable neighborhoods, class B properties are less than 30 years old, and they tend to attract young professionals as renters. We like this asset class because no major deferred maintenance is required, which means the heating, cooling, plumbing and electrical systems are usually in pretty good shape.

In addition, class B buildings perform well in any market. When the economy is strong, they attract class C tenants who want to upgrade. In a down market, class A tenants who can no longer afford their luxury apartments move into class B. Really, the only downside of this particular asset class is a possible need to upgrade the units.

Oh Say Can You See

Class C apartments are typically more than 30 years old. They have dated exteriors and few, if any, amenities. The upside to this asset class is that they afford the highest possible cashflow. 

Unfortunately, they also require a lot of deferred maintenance as major improvements to things like the electrical system or the roof may be necessary; when we invest in Class C properties, we will include the necessary capital expenditures into our business plan to maximize cashflow

Class D properties are located in run-down neighborhoods and struggle with issues like drugs, crime and prostitution. That’s why we focus on class B and C assets that are less sensitive to market cycles than class A but carry much less risk than class D.

Stable vs. Value-Add

Now that you have a handle on the pros and cons of the different asset classes, let’s take a look at another way we categorize multifamily properties. The first classification is stable, meaning that a building has an occupancy of at least 90% and the rents are at or near market value. A property like this already has cashflow, but there is little opportunity to increase your revenue in any significant way.

Like stable properties, stable value-add buildings have at least 90% occupancy, which means they qualify for agency debt in the form of government loans from Fannie Mae or Freddie Mac. This is an advantage in that these loans are the cheapest you can get with the longest amortization. Stable value-add properties differ from stable ones in that the rents are not at market value, either because they were simply never raised or because renovations are needed.

Damsel in Distress

A distressed value-add property’s occupancy has dipped below 90%, so it does not qualify for a Fannie or Freddie loan. In this case, you must employ a different product (i.e.: a bridge loan or local bank loan) to finance the deal. Many multifamily syndicators secure a bridge loan to get started and then refinance with a government loan once occupancy has been raised to the required 90%.

Last but not least, you might choose to reposition a property, meaning you transition the building to a new asset class. Perhaps you invest in a C property located in a B market with the intention of turning it into a class B building. Not only will this require extensive renovations, but you will also be tasked with completely changing your tenant base. These opportunities are highly profitable—and highly risky.

Our sweet spot here is in the stable value-add and distressed value-add range. We focus on these categories because they offer the highest potential return on investment without the risk.

Now that you’re well-versed in the asset classes of multifamily and understand stable vs. value-add opportunities, you can decide which types of properties are the best investment. For the greatest upside with the least risk, focus on class B or C properties with value-add opportunity. And if you want to invest in a deal like that with us, visit Nighthawk Equity for more information and consider joining the Nighthawk Investor Club.

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