1. Demand Is Raising All Multifamily Boats

Recently TruAmerica bet big on Class-B apartments in Seattle, closing on properties in Lynnwood, Kent and Silverdale. We asked TruAmerica CEO Bob Hart why Class-B has investment allure. For one thing, Class-A isn't the whole game in Seattle multifamily. “Job growth in Seattle and the Pacific Northwest has created robust demand for well-located, higher-quality Class-B multifamily units," Bob says. Class-B apartments are more affordable and appeal to the “renters by necessity,” which represents the largest renter cohort of the multifamily housing market.

2. Most New Supply Is High-End

Despite the demand, Bob says, there's a persistent lack of Class-B supply in most major submarkets as the majority of new inventory is being created for a minority of renters in the market. In Seattle, rents for Class-B typically range between $1.25/SF and $1.75/SF while Class-A rents can be as high as $4/SF in some areas. The majority of renters in metro Seattle simply cannot afford that higher level of rent. "We see these supply and cost imbalances as an opportunity to reap solid risk-adjusted returns for our investors, while at the same time providing quality rental housing for working families and young professionals."

3. There's a Lot of Value-Add Opportunity

In acquiring Class-B, Bob says TruAmerica's value-add strategy is to create improved cash flow immediately through renovation and capturing the loss to lease between existing rent levels and the higher post-renovation rent levels. "We also strive to maintain the income stream from a community at the highest level possible, without destabilizing the asset during a renovation," he notes. In the current low-interest rate environment, cash-on-cash returns at 65% leverage can typically yield 7% or more right out of the gate, versus 3% to 4% for Class-A.