Passive Investors should understand the concept of value-add, which is how sponsors create value for investors and residents. This happens from increasing the income potential of the apartment. Usually, these value-add opportunities are found in C-Class Apartments.
What is C-Class?
In general, apartment class is a subjective rating for the condition or desirability of the property, most often attributed to building age and location. Whereas Class A and B properties are newer, more luxurious and command higher rents from higher-income earners, C-Class properties are middle of the pack, usually occupied by working class with average level incomes. These properties are generally 20 years or older.
The Attractiveness of C-Class
Most importantly, the condition of C-Class properties is what makes them attractive for value-add. They are usually much older than newer Class A and B properties meaning that their construction could use improvements, features may be outdated and curb appeal could be improved. Newer properties are usually built with features that appeal to the latest preferences and command rents most in line with current market rents. On the other hand, C-Class properties may have been run by a small family for many years, could have some deferred maintenance and opportunities for improvement, and rents may be well-below market levels. Each of these spell great opportunities for investors who want to improve operations and create better living for residents.
Benefits to Residents
Speaking of residents, there is a growing trend in high-demand markets that makes investing in C-Class apartments great for the community. In these high-growth areas, developers are building new multifamilies – brand new apartments with luxurious features – to meet the growing demand in the areas. These apartments appeal to the growing number of high-income earners that see the benefits renting over owning, although they have the ability to buy a home. In other words, they rent by choice.
This is not the case for many residents of C-Class apartments. Rather than rent by choice, they rent out of necessity. When new developments are built in their submarket, rents in that area increase and shortages of suitable housing occur as working class residents may have a harder time finding an affordable, but attractive and safe place to live.
When investors improve existing apartments in high-demand areas, even with modest rent increases, residents appreciate improvements to their living, nicer facilities, updated features, exterior lighting, etc. without being forced to live in lower-quality housing because more expensive housing has priced them out.
The Perfect Formula
Investing in C-Class properties presents value-add potential for investors and improved housing for residents. By acquiring an existing multifamily asset in growing areas, investors protect against downside risk of low-demand, and have opportunities to make both operational and physical improvements that create wealth and improve the community at the same time!
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