Investing in real estate for beginners: apartment complexes
Here are some real estate investing tips for beginners thinking about 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, this is not necessarily true. Multi-family units are indeed a sound investment. However, what you really want to invest in is where you can earn the most rent per unit. That often occurs in multi-family complexes with fewer than 100 units.
When you make an offer to buy a large complex, you are often bidding against deep-pocketed financial institutions. This creates two clear disadvantages for you as a beginning investor.
First of all, most beginning trading investors are forced to join a large consortium of other investors to participate in a multi-million dollar deal. This dilutes their ownership interest and the weight of their opinion when issues arise such as when to sell.
Second, when you and your investors are bidding with the last few dollars you have to invest, the large institution can easily outbid you by several thousand more than you can raise. Facing large institutional investors can be overwhelming.
There are many other reasons to invest in complexes with fewer than 125 units:
A. There is less care and maintenance. You may be able to avoid the additional expense of a full-time on-site administrator and maintenance team.
B. There are more midsize complexes available at any given time. That means less competition from other investors and more chances of finding one with exceptional cash flow.
C. Cash back for mid-sized complexes is often better than for large complexes, since you can offer a wide variety of amenities and services.
D. You will not be dealing with a financial institution as a seller with a cumbersome sales policy. The seller is more likely to be an individual or small partnership that can offer flexible terms of sale if desired.
E. They will generally require less capital to acquire. This means that you can control the property as an individual or with a couple of partners. Therefore, you own a higher percentage of the property and therefore a greater amount of profit.
F. Often the less informed seller has avoided raising rents because they have befriended the tenants or fear that the vacancy rate will increase. By studying local market rents and vacancy rates, you may 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 leave a profit when hiring a property management company.
Investing for beginners you can start with small complexes and once income stabilizes buy another. After a couple of years, you’ll have 3-4 small complexes located all over the city. This becomes a problem because you now have the number of units equivalent to 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 town for maintenance and upkeep.
Midsize apartment complexes have long been the favorite type and classic value for business investment. Now is the ideal time to make this investment move. Vacancies are down and rents are up. Income can be very predictable.
Do the math and you’ll see that very small apartment buildings are riskier than medium-sized ones, but mid-sized complexes do have advantages over large complexes that we’ve already discussed.
If you own a small complex of eight units, each unit represents 12.5% of the income stream. If you own an 80-unit complex, each unit represents 1.25% of your revenue stream. Still, an 80 unit complex is much easier to manage than a 175 unit complex.
Investing in real estate for beginners can be profitable, but you need to know what works best for you.