Investing in Real Estate for Beginners: Apartment Complexes
Here are some real estate investing tips for beginners considering investing in apartment complexes. Many commercial property consultants with an opinion say that apartment complexes with more than 150 units are the properties to buy, not necessarily true. Multi-family units are indeed a solid investment. However, what you really want to invest in is where you can earn the most rent per unit. Often that’s in multi-family complexes with fewer than 100 units.
When you bid to buy a large complex, you are often bidding against financial institutions with a lot of money. This creates two distinct disadvantages for you as a beginning investor.
First, most beginning business investors are forced to join a large consortium of other investors to close a multi-million dollar deal. This dilutes your stake in the property and the weight that your opinion counts when problems arise, such as when to sell.
Second, when you and your investors are bidding on the last dollars you have to invest, the large institution can easily outbid you by several thousand more than it can raise. Facing the big institutional investors can be daunting.
There are many other reasons to invest in complexes with less than 125 units:
A. There is less upkeep and maintenance. You may be able to avoid the added expense of an on-site administrator and full-time maintenance team.
B. There are more medium-sized complexes available at any given time. That means less competition from other investors and more opportunities to find one with exceptional cash flow.
C. Cash backs for midsize resorts are generally better than for large resorts as you can offer a wide variety of amenities and services.
D. You will not deal with a financial institution as a seller with a cumbersome sales policy. The seller is more likely to be an individual or a small company that can provide flexible terms of sale if desired.
E. Generally, they will require less share capital to acquire. This means that you can control the property individually or with a couple of partners. Therefore, you own a higher percentage of the property and therefore a higher amount of profit.
F. Often times, the less informed seller has avoided raising rents because he has befriended the tenants or because he is afraid that the vacancy rate will increase. By studying local market rents and vacancy rates, you might find that you can immediately increase cash flow through rent increases.
There are very good arguments for owning small apartment complexes in the 4-12 unit range. This can be a good start if you manage them yourself and do most of the maintenance. However, this size complex rarely generates enough revenue to make a profit when hiring a property management company.
Investing for beginners can start with small complexes and once the income stabilized, buy another. After a couple of years, you will have 3 or 4 small complexes located throughout the city. This becomes a problem because you now have the equivalent number of units as a mid-size complex, but you are still managing them yourself. You also have the added burden of having properties in multiple locations, which means you have to drive all over the city to take care of maintenance and upkeep.
Mid-size apartment complexes have long been the preferred type and classic value for commercial investment. Now is the ideal time to get this investment moving. Vacancies are down and rents are up. Income can be very predictable.
Do the math and you will see that very small apartment buildings are riskier than medium-size complexes, but medium-size complexes have advantages over the large complexes that we have already discussed.
If you own a small complex of eight units, each unit represents 12.5% of the revenue stream. If you own an 80-unit complex, each unit represents 1.25% of the revenue stream. Still, an 80-unit complex is much easier to manage than a 175-unit complex.
Investing in beginner real estate can be profitable, but you need to know what works best for you.