Understanding Common Multifamily Assets
Examine the more common multifamily assets to finance, as well as a breakdown of the class structure for conventional properties.
What Are The Most Common Types of Multifamily Assets?
Conventional multifamily simply refers to multifamily properties that offer leases to members of the public. Unlike affordable properties, which are specifically intended to offer units at rents affordable to lower-income residents, or student housing, which is intended for (or specifically marketed to) college students, conventional multifamily does not generally focus on one tenant demographic. It’s a safe bet to say that most apartment buildings in the U.S. would be considered conventional properties. Much like office properties, conventional multifamily properties are ranked by quality as Class A, B, or C (with some also using Class D as a ranking). Below, we’ve listed some of the major characteristics of each of these property classes.
Class A (+/-) Multifamily Properties
Usually 10 years old or less, may be older (but if so, will have been significantly renovated or located in a very desirable area)
Well-designed landscaping, well-finished rental office
Top-quality amenities, potentially including pools, gyms, saunas, or cafes
Top-quality construction, best materials
Class B (+/-) Multifamily Properties
Usually 20 years old or less
Good construction quality, average to above-average construction materials
Slightly dated appearance, amenities no longer top-of-class
Class C (+/-) Multifamily Properties
Usually 30 years old or less
Dated appearance, dated amenities
Medium-quality construction, little (if any) significant rehabilitation work completed
Appliances may not have been updated since original construction
Class D (+/-)/Distressed Multifamily Properties
Usually more than 30 years old
Often located in less desirable areas
Medium-to-poor quality construction and materials
Little to no amenities
Property may be significantly worn due to high turnover
Affordable property can refer to a wide range of things, but in the context of multifamily financing, it generally refers to the percentage of the AMI (area median income, a statistic created by HUD) that a unit is being offered for rent at. AMI is also used to calculate acceptable rents for the LIHTC and HUD Section 8 HAP programs. However, we’ll delve more into affordable housing towards the end of this chapter.
Mixed-use properties combine the best of both multifamily and commercial real estate. For instance, a mixed-use apartment property may have shops and restaurants on the first floor, and apartment units on the remaining floors. While mixed-use developments can be incredibly successful, they’re not right for every market. In general, mixed-use projects thrive in urban areas, where commercial traffic may drive outside visitors to first or second-floor businesses. Alternatively, mixed-use projects may do well if the overall amount of project units is very large (i.e. 100+), providing the in-building businesses with a built-in customer base. Fortunately, many types of multifamily financing, including Fannie Mae and Freddie Mac multifamily loans, as well as HUD/FHA multifamily loans, permit borrowers to set aside a small amount of their building’s square footage (often around 15%) for commercial properties.
Unfortunately, mixed-use properties that don’t ensure there’s a ready customer base for their commercial units often see them staying vacant, even if the surrounding apartments are fully occupied. One exception to this rule may be in-building convenience stores or grocery stores, which have generally been found to correlate not only to increased asking rents for a property, but increased asking rents for nearby multifamily properties. So, if you see the chance for a convenience store or grocery store to open up within a mixed-use development, it could be a great way to both ensure your commercial space stays rented and increase the desirability (and asking rent) of the overall project.