In fact, the demand for Class C housing increases in a downturn and Class C values remain unaffected while office, retail, and residential values are tumbling left and right.
Investors, lenders, and brokers have developed multifamily investment property classifications to make it easier to communicate amongst themselves about investment properties and areas. The general property classifications or property class used are A, B, C, and D.
Property Classes are really set by the conditions of the property and where it is located. They are not set by the appraisers. The classes are not something that is formally defined but more of something that is set in the vernacular.
Class A properties, naturally, are the the best within the group. These apartments are typically newer and receive higher rents in comparison with the apartment properties that are in either class B,C, or D.
Class A's are by and large constructed within the past 15 years and include plenty of modern amenities, low vacancy rates, tenants with higher than average income, and no deferred maintenance. The tenants tend to be white-collar employed professionals or business owners. It is not uncommon to have within a Class B location, a Class A property. They are still categorized as being Class A mainly due to the property being recently built. However, the rental income is not as much as other Class A area properties due to their location. Cash flow for Class A's is not as attractive to the other property classifications.
Class B buildings are made up of properties ranging in construction from 15 to 30 years in older yet stable areas featuring a few amenities; has some necessary repairs that have to be completed the property, and in contrast to A Class buildings the rents will likely be lower to a degree. These buildings are usually well-kept and located in the "middle class" part of town. As a result, they will have a blend of highly skilled blue collar tradesmen and people who work in professional offices. The benefit of owning a B Class property is the potential for appreciation, also known as equity growth, along with good cash flow upon purchasing. So, an owner would have the best of both worlds, cash flow and appreciation.
Class C properties are almost always properties built more than 30 years ago in areas od decline with significantly less tenant conveniences, a lower rate of occupancy, smaller rents versus B Class buildings and frequently have significantly more necessary repairs or rehab work that needs attention on the property. The typical tenant will be in the low-to-moderate income category, predominantly blue collar service laborers, and might include some subsidized tenants. The potential for appreciation is normally less than a Class A or B, but these properties have a higher cash flow rate. Individual investors and private investment groups are normally the owners in this category.
Class D properties are older, lack modern features and conveniences, have functional obsolescence, have substantial deferred maintenance, and the pool of tenants can be quite problematic and can require a lot of time oversight. Moreover, they tend to be in very bad neighborhoods which have high rates of crime.
The likelihood for appreciation for a Class D is next to nothing. For the majority of investors, particularly brand-new investors, D Class properties are not advised because they're the hardest. While it is true on paper, that it is a cash cow, the needed repairs and non-payment by tenants substantially reduces the cash flow.
Class D properties are not the type you will turn around without the help of gentrification. If you know that local city officals and planners will with 100% certainty improve the area then it may be a situation you'd look into for investing.