How to Choose the Right Apartment Investment

Published on: 1 July 2020

On our last post, I told you about some of the best reasons to start investing in multifamily apartments.

To recap, investing in multifamily properties is a fantastic option because:

  • Multifamily Investing typically beats the stock market;
  • It’s a comparatively stable investment during recessions and times of slow growth;
  • It’s not dependent on your income or credit rating; and
  • Apartment investments increase in value based on property income, not comparables in the market

But not all apartment investments are created equally. Today, I want to cover the different classes of MF Apartment Investments to determine the best option for you and your portfolio.

Class A Properties

Class A apartments are newer (<20 years old). They offer high-end finishes like granite countertops, stainless steel appliances, and hardwood floors. Maintenance is performed immediately. These are conveniently located in cities near mass transit or downtown. These apartments attract affluent renters with high price tags.

Bottom Line: Low cash flow compared to high initial investment. Cash flow is highly sensitive to recessions (when tenants will often move to Class B or Class C Apartments). Traditionally, only accessible to Institutional Buyers.

Class B Properties

Class B apartments are between 20-40 years old. They offer standard furnishings like laminate countertops and black/white appliances. There is some deferred maintenance.

Bottom Line: Cap Rates of 5%-6%. Higher cash flow than Class A. Open to Private Buyers as well as some Institutional Buyers.

Class C Properties

Class C Apartments are typically much older – at least 35 years old. Properties are in constant need of maintenance and located in less desirable locations.

Bottom Line: Cap rates between 6%-8%. Lots of value-add opportunity for investors. High cash flows due to low initial investment, but lower cash flow in the long run.

Note: We do not recommend Class D / Warzone Apartments, which are often risky and have very heavy management load.

Double-digit returns are quite common for multifamily investments, as long as you choose the right opportunity for your liquidity requirements, cash flow needs, and available investment capital. It is important to work with your financial advisors and investing team to make sure potential investments are a good match for you.

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