Class B & C properties are perfect for the value-add strategy and are often considered recession proof.
Value Add Strategy
Class B & C properties have enough issues, whether it be deferred maintenance, functional obsolescence, or just mismanagement, to implement the value-add strategy.
While we do love the cash flow deals, there are often higher returns to be had using the value-add strategy. This strategy allows us to acquire the property, come in with a capital budget, and plan to bring the asset up to its highest and best use.
This may include exterior upgrades, interior upgrades, adding amenities, new signage, new management, and other changes.
In some cases we can even reposition the property into another class, even if only perceived. For example we may find a Class B property in or very close to a Class A neighborhood. If upgraded properly, we can turn that B property into a B+ or A- property that is appealing to those who want to live in a Class A neighborhood but may not be able or willing to pay for the Class A apartment. The same goes for Class C properties in Class B neighborhoods.
By using this strategy and bringing the property up to its highest and best use, we can increase the rents charged per unit – sometimes significantly. And as we learned previously increasing the rents, increases NOI, and increasing NOI, increases the value of the property.
Class B/C properties are also considered to be rescission proof, especially Class C. This is because as people start downsizing, some of those Class A tenants move into B properties, and some in B will move down to Class C. Not to mention the homeowners who sell their homes and move into apartments because they can’t afford their mortgage. This group would likely go for B/C properties over A in a recession.
This shift causes an increase in demand of the Class B/C properties which allows the rents to remain unchanged or even increase.
Why Not Class A or D?
Class A properties are expensive and the returns are too low to be appealing to individual investors. For this reason, Class A properties are often sought out by institutional investors that are willing to pay the higher price and accept less of a return in exchange for taking of less of a risk and not dealing with repairs and maintenance.
Class D properties often have major structural issues and are in need of major repairs. They are often boarded up and vacant and can be found in the worst areas of towns that are referred to war zones. These areas have a levels of violent crime, drug abuse, and related activities. Class D properties have the potential for high returns, but also carry high levels of risk that is often unacceptable for the typical investor.
The Bottom Line
Class B & C multifamily properties contain the best mix of risk and return of all the property classes.
Babylon Property Group, LLC can assist both accredited and non-accredited investors who are interested in private real estate investments. For a FREE consultation, please fill out our investor questionnaire, or contact us directly by phone at (631) 253-1609 or email at firstname.lastname@example.org.