Class A, B, and C Properties: What They Are and Why It Matters to You as a Minneapolis Investor

While it isn’t as common in the vocabulary of 2-4 unit buildings, on occasion when it comes to larger apartment buildings the terms “Class A”, “Class B” or “Class C” in a converasation.

Basically, those terms are shorthand for the age, condition, location, and type of tenants a building attracts. With some modifications, those terms can also be applied to duplexes, triplexes and fourplexes.

So what are they?

Class A – the newest, nicest buildings in the best locations. When it comes to small multi-family, there are very few that fit this description. Most are infill properties, where someone purchased a city lot that may have had a house or duplex on it, tore it down and put up a new one. Or, it could be a recently renovated property near a lake that loooks like belongs on HGTV.

• Pros – These properties tend to attract tenants with stronger incomes and credit, lower maintenance headaches (at least for the first several years), and they command top-dollar rents.
• Cons –  You pay a premium. The purchase price is higher, which means the return on your investment is often lower than what you’d get on a Class B or C property. In a market like Minneapolis, where we’ve had periods of many new construction apartment buildings, increased supply can also cause it to be the first segment to see rent softening when vacancy rises. These properties can also be tough to make cash flow.

Class B:  If I had to pick one class that describes the majority of the Minneapolis duplex stock, it’s Class B. These are properties that are a little older, solidly built, maybe with some updates but not a full renovation, in good but not necessarily trophy neighborhoods. The tenants tend to be working-class and middle-income folks who take care of the place and pay their rent.

• Pros – Purchase prices are more reasonable, which means the math often works better for cash flow. The tenant pool is large and stable. And because these buildings have some age on them, most of the deferred maintenance has already been dealt with — or is priced into the purchase.
• Cons –  You will have maintenance. The furnace isn’t brand new. The roof has some years on it. You need to budget for capital expenses, and you need to have reserves. Class B also requires a landlord who pays attention — it’s not fully passive, especially if you self-manage.

Class C – Typically are the older, rougher buildings, often with deferred maintenance, in neighborhoods that aren’t the first choice on anyone’s map. In some cases they’re distressed. In others, they’re simply tired.

• Pros – The entry price is low, and if you know what you’re doing, the returns can be high. For investors willing to put in sweat equity — or who have a reliable contractor and a stomach for risk — Class C can be genuinely transformative.
• Cons –  This is the class where inexperienced investors get hurt. The tenant pool in true Class C properties can be more transient, which means higher vacancy, more evictions and more turnover costs. Maintenance needs are ongoing and sometimes unpredictable. Financing can be harder — some lenders won’t touch a property in poor condition without a rehab loan, and those have their own complications. And if you underestimate the rehab budget the numbers can unravel fast.

Is there a class that’s the best? That depends entirely on where you are in your investing life, what your goals are, and how much time and money you have to work with.

If you’re a first-time buyer who wants to house-hack — live in one unit and rent the other — a Class B property in a good Minneapolis neighborhood is a good bet. You get a livable space, reasonable maintenance, and a tenant who helps cover your mortgage.

If you’re an experienced investor with capital and a contractor you trust, a Class C property with upside can deliver real returns. Just go in with eyes open and a thorough inspection.

If you want the newest and nicest and you’re prioritizing ease over yield, Class A is your world. Just make sure the math works at today’s rates before you fall in love with the finishes.

The honest truth? Most of the best duplex investments I’ve seen in the Twin Cities have been Class B properties that someone bought at the right price, maintained well, and held for ten-plus years. Not glamorous. Not a seminar story. Just solid, patient investing in properties that people actually want to live in.

If you want to talk through where a specific property you’re looking at falls — and whether the numbers make sense — give me a call.