Many investment brokers state in their offering memorandum that the property has good “bones”. What does that mean and why does it matter for you as a multifamily investor? There are some things in a property that you cannot change or it is very cost prohibitive to change. If you want to move up from one class to another (C to B or B to A), these are items to consider before investing significant capital into the exteriors/interiors of a property. In this article, we are going to cover the key physical characteristics to have if you want to move up a class.
Summary:
If you are looking to purchase a Class C property and upgrade to a Class B, ideally you would have 9 ft. ceilings, pitched roofs, individual HVAC and water heaters, concrete slab, and washer/dryer connections. With these property characteristics you can spend money on the exterior/interiors and amenities to turn a C class property into a B. In the picture below, notice how the listing broker highlights ceiling height and washer and dryer connections on the offering memorandum. The property was being marketed as a Class B property.
If you are looking to purchase a Class B property and upgrade to a Class A, you must have 9 ft. ceilings, pitched roofs, individual HVAC and water heaters, concrete slab, and washer/dryer connections. Attached garages are not necessary but highly preferred. Example of class A unit amenities in a recent property in Plano, TX:
While the physical characteristics of a property might be a key factor in what class the property falls within, the sub-market and surrounding location is also a strong factor. A property can have all the physical characteristics of a Class A property, but be in the wrong neighborhood and the rents and value will be comparable to a Class B property in a better neighborhood.
If you have any questions on your next acquisition or refinance, please reach out to James Eng at jeng@oldcapitallending.com or 214-300-5035.