Apartment Building Classes: What They All Really Mean

Investing in an apartment community can get a little complicated. Mostly because there are several types of building classes, each with its own set of characteristics and potential for return on investment. So, deciding which one is best for you takes some consideration.

Whether they include a handful of units or hundreds of them, apartment communities are multi-family commercial real estate, and they're categorized into different building classes to help investors and lenders better understand the quality of each, the level of risk of the investment and the potential returns.

The properties are given a letter grade — A, B, C or D. These building classes, which are also known as asset classes, factor in a number of elements like a property's age, location, income level of tenants, appreciation, amenities and how much rental income property owners can earn. Here's a closer look at these different apartment building classes.

What is a Class A property?

High-rise, luxury building

A Class A apartment are among the highest quality properties in an area. They're usually newer, built in the last 15 years or so. But any renovated historic or older property can be Class A, too. These apartment communities also usually feature amenities, like new appliances and an on-site fitness center. They're in great locations, near top employers, in top-rated school districts and close to activities.

A Class A apartment offers a desirable place to live. Property owners likely won't have any trouble renting them out and vacancies will be minimal. Rentals in these building classes typically attract higher-income tenants, and you can rent them out for top-of-the-market prices. The properties also have fewer maintenance issues, meaning expenses won't cost much.

Because of these factors, a Class A property is the least risky investment compared to other property types. They may cost more to buy, but they'll be easy to rent, bring in a steady income and have fewer expenses.

What is a Class B property?

Generic apartment building

Class B properties are a step down from Class A rentals. They might be a little older but are usually well-maintained and in good shape. From an investor's perspective, they might be less expensive to buy and could move to a higher class after renovations. If you don't opt for a complete renovation, these homes might come with a few extra maintenance costs.

Class B rentals are usually not in an area's most desirable neighborhoods and they may have fewer amenities. Still, you're likely to attract good-quality, stable tenants. You probably can't charge as much rent as for a Class A, so you won't earn as much income. And, you will have more vacancies to deal with.

Since Class B properties typically come with more expenses and won't always bring in as much rental income, they're considered a little riskier than investing in Class A apartment building classes. It might take some time to see a decent return on investment with a Class B building.

What is a Class C property?

Apartment building that needs some work

The next step down in building classes is a Class C property. These rentals are usually older (more than 20 years old) and feature few amenities. They often need extensive plumbing, wiring and structural repairs. Class C homes are usually in lower-income neighborhoods where rent prices are less expensive. In many cases, the rentals also lack easy access to grocery stores, restaurants, parks and other amenities.

Class C properties are risky investments. Tenants might be less financially stable, so vacancies could be common. Still, properties in Class C building classes are worthwhile investments. They're usually inexpensive to buy but may require a substantial investment to meet local rental laws. Even though rent prices are low, you'll likely have a stream of tenants since many areas lack affordable housing. Over time, you can recoup your investment and start to see gains.

What is a Class D property?

Run-down apartment building

Class D properties are the least-desirable type of multi-family commercial real estate. The buildings are usually old and need significant repairs or even full-on renovations. Some aren't up to code and don't meet local landlord-tenant law requirements for adequate living spaces.

These rentals are often located in declining neighborhoods that have high crime rates and lack access to grocery stores or pharmacies. Properties in this building class attract low-income tenants who may have evictions or even criminal histories. Some aren't able to pay rent consistently or on time.

Class D rentals are usually affordable for investors, but they come with high costs. You're also not necessarily guaranteed a steady monthly income. Because of these factors, Class D apartment buildings are the riskiest investment.

Why does property class matter?

Investing in any of the building classes has its pros and cons and comes with its own set of risks and rewards. When deciding which type of multi-family real estate to invest in, consider how much the property costs to purchase, how much you'll spend to get it ready to rent out, how much rent you can charge and how likely you are to keep it rented.

Many investors recommend investing in Class B and C properties. They're affordable to buy and less risky during market changes. In a downturn, when people lose their jobs, many can't afford to live in the top-of-the-market Class A rentals and move into Class B and C homes. There is usually a higher demand for B and C building classes no matter the market conditions.

What apartment building classes really mean

If you're planning to invest in an apartment community, understanding the different building classes will help you make the best choice so you see a return on investment. Once you've settled on a property and are ready to rent it out, listing it on Rent.com will streamline the process of taking applications, screening tenants and collecting rent.

This article fits under the following categories:

Erica SweeneyErica Sweeney covers real estate, business, health, wellness and many other topics. Her work has appeared in The New York Times, The Guardian, Good Housekeeping, HuffPost, Parade, Money, Business Insider, Realtor.com and lots more.

Recent Articles

There's no shortage of great neighborhoods in D.C.

Finding a low-income apartment is possible through Section 8 and public housing programs.