What is a Multifamily Real Estate Asset?
Multifamily Real Estate assets are amongst the least risky real estate investments, which offer a steady return and passive income. In Texas, most multifamily properties are considered residential spaces, but others are commercial properties depending on the number of units.
This type of real estate investment offers high tax benefits to the investors in addition to an almost guaranteed cash flow via rental income. Real estate investments also appreciate over time and on most occasions offer much more than profit through interest. According to listwithclever.com, in the last calendar year, we saw a 7.9% appreciation in the median value of apartments in Texas. This is expected to rise another 4.2% in 2021. Thus by all accounts, multifamily real estate is amongst the best alternative investment options for passive income in Texas.
Multifamily real estate properties are classified into four classes based on their location, amenities, year of build, rental income potential and value addition. These complexes are classified into four classes namely Class A, Class B, Class C and Class D. Of these the first three namely A, B and C class properties are most likely to attract investors.
Class A Properties
Class A properties are the newly constructed, top-class apartment complexes with all the necessary amenities. They normally contain dispensaries, well-laid parks, swimming pools, shopping zones, gyms, pet caretaking facilities, sufficient parking space, clubhouses and all top class amenities a potential tenant can ask for. Class A apartment complexes are located in the most desired localities with external amenities like schools, hospitals and major retail zones within the vicinity. Class A properties within cities or high-class suburbs can see an expanding job market.
At times Class A multifamily real estate properties do not offer much ‘in house’ amenities. These properties are likely to give the highest rental incomes and you can see good appreciation in the long run. Class A properties are also maintained properly with almost no wear and tear; usually less than 10 years old.
From an investor’s point of view, Class A properties are usually not affordable to the working class. These are luxury properties that are costly and also yield high rental revenue. The asset appreciation occurs at a higher rate in this category of multifamily properties.
Because the rent is generally on a higher note and this property class will be the most hit by a market crash or a recession. During times like the COVID-19 pandemic, rental revenues from Class A properties decreased the most compared to Class B or C. This shift was due to the lowered demand of high-class properties –making it harder to monetize this type of property.
Sahara Equity’s University Heights in Fort Worth, Texas is a classic example of a Class A property. This 117 unit complex comes with all amenities, including shopping, dining, fitness, and social activities.
Class B Properties
Class B multifamily real estate assets are classified under two different criteria. They are
1) the year of build
2) the location
Class B multifamily real estate complexes are typically a little over 10 years old. These are well-maintained structures that require very little input costs for upgrading to Class A. The interiors in these properties are slightly outdated but not as vintage like Class C structures. They still have attractive flooring, kitchen and interiors. The external amenities in these complexes typically include basic things like grocery shops, parks and parking facilities.
Class B properties are most likely within a developing suburb, with families as potential tenants. These suburbs also appreciate the value of the Class B property if there is a strong community with amenities such as hospitals, universities and businesses. Investors normally invest in these properties for asset appreciation ahead of cash flow.
Class C Properties
Class C multifamily real estate complex is normally an older structure that might be around 30 years old. The infrastructure including electrical lines, HVAC and telecommunications are outdated. They come with some vintage interiors.
These properties typically have weaker structures and require a lot of initial capital investments for repair and remodeling. Yet this asset class is a real estate syndicator’s favorite because the value of such assets can easily be enhanced with some value addition and resold for a much better price. Class C multifamily real estate buildings provide the best cash flow for capitalists.
The Best Class of Property to Invest in Texas
The real estate market in Texas is re-emerging from the COVID-19 pandemic setback. Market experts are projecting a spike in prices in the coming years.
In an emerging market, it is advisable for investors who are looking at long term gains to opt for Class A properties that are likely to deliver short term rental revenue and a steady long term appreciation. However, investing in these properties require high initial input capital.
For investors who are short on budget but love to have a fairly long term investment shall have good returns over a fairly long period by opting for the right Class B property.
Those planning to capitalize on the immediate rise in Texas real estate market post-pandemic should opt for Class C assets that will appreciate the enhancement in the market and will also be in high demand when people are just beginning to recover their financial conditions post-pandemic recess.
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Tax Benefits from Investing in Multifamily
