After working with hundreds of investors over the years, we have seen a clear trend.
Tim was a young man when he started investing, and he hustled and fixed and managed his units, which were all older properties in less desirable areas.
Over time though, Tim realized that he could get a better return by focusing on higher quality assets in better locations. These properties always cost more at the beginning, making it harder to swallow on a price per unit basis.
However, because the ‘Class A’ units held their value more, and demanded less of his time, Tim found that he liked this Class of units better.
Like Tim, many investors like to start with a small cash-flowing asset, and over time, sell those older B and C class units in order to ‘upgrade’ into something newer.
This is born from experience- they often learn that B and C is a lot more work, and holds less appreciation than A. But if you are looking to grow with a ‘Value Add’ investment, is Class A out of the question?
Why Class A Value-Add Apartments Are Attractive
When most investors think of “value-add,” the natural tendency is to picture B or C class properties—older apartments with dated finishes, deferred maintenance, and clear opportunities for cosmetic upgrades. For decades, the value-add playbook was built around buying at a discount, investing in renovations, and raising rents to market levels. While that strategy still works, many investors are missing a growing opportunity: Class A value-add apartments.
Class A assets are typically newer buildings with premium amenities, prime locations, and higher-quality tenants. At first glance, it might not seem like these properties present much room for improvement. But in reality, there is often significant untapped potential, and the appreciation upside can exceed what’s achievable in B or C properties.
1. Stronger Tenant Demographics
Class A apartments attract tenants who are generally higher income earners with more stable financial profiles. Economic vacancy (Tenants who don’t pay rent) are much less common in Class A, because the tenants have more financial resources. Evictions and court costs are much less frequent in class A.
2. Institutional Demand and Exit Liquidity
Perhaps the most compelling reason to pursue Class A value-add is institutional appetite. Pension funds, REITs, and private equity firms prefer Class A assets, especially in gateway and growth markets. That demand creates higher exit multiples and lower cap rates, magnifying appreciation. Even modest rent increases in a Class A property can lead to significant valuation gains because the exit pricing is sharper than in B or C properties.
3. Location Advantage
Class A assets are almost always located in high-demand submarkets—close to major employment centers, retail, and transportation. These areas benefit from long-term growth trends and supply constraints, giving investors a tailwind of natural appreciation in addition to forced appreciation from value-add improvements.
4. Cost of Capital and Lending Flexibility
Lenders favor Class A real estate. Financing is typically more available, at better terms, and with lower interest rates. That translates into greater leverage and higher projected returns. Compare that to C class properties, which often face stricter underwriting and higher borrowing costs—chipping away at overall returns.
5. Easier to raise rents
Class A tenants are less price-sensitive and more responsive to upgrades in amenities, technology, and lifestyle enhancements. While a $150 rent bump in a C class property might be the ceiling, tenants in Class A are often willing to pay $300–$500 more for premium improvements—resulting in stronger revenue growth per unit.
Improvements that are less intensive than Class B or C units can still bring as much or higher rent increases, making it easier to boost the NOI. For example, installation of EV Chargers, utility billback programs, installation of washers and dryers are improvements that Class A tenants can afford to pay more for.
Why Class A Outpaces B and C in Appreciation
Many investors assume that the lower entry price of B and C class properties automatically means better value-add returns. But appreciation is a function not just of cash flow but of multiples. For example:
- Class C scenario: An investor renovates units and raises rents by $100. At a 6.5% cap rate, that increase adds roughly $18,000 in value per unit.
- Class A scenario: An investor renovates and adds smart home features, package lockers, or high-end finishes, raising rents by $300. At a 5% cap rate, that translates to $72,000 in added value per unit.
The combination of larger rent premiums and lower cap rates means the appreciation potential in Class A can be multiple times greater, even if the percentage rent growth is similar.
Risks to Consider
Class A value-add is not without challenges. Renovations must be carefully tailored—over-improving a property can reduce ROI. Construction costs are higher, and the competition in A-class submarkets is stiff. However, for investors who execute with precision, the reward profile is far stronger.
Tip:
Remember that a long term capital gain (Appreciation) is taxed at lower rates, making the tax decision for long term growth under a appreciation vs cash flow model a smart tax choice as well.
Conclusion: The Modern Value-Add Play
The conventional wisdom that “value-add is only for B and C class apartments” is outdated. With rising demand for high-quality living experiences and institutional capital chasing top-tier assets, Class A value-add has emerged as one of the most lucrative opportunities in multifamily investing.
The game has shifted, and the smart money is increasingly betting on A.
We help many real estate investors make smart long-term choices, so that they can build wealth for years to come. Contact us for your next step in your investing strategy.
