Here is some advice for investing in real estate for beginners who are thinking about investing in apartment complexes. Many commercial property advisors with an opinion say that apartment complexes with over 150 units are the properties to buy, it’s not necessarily true. Multifamily 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 is in multifamily complexes with less than 100 units.
When you are making a purchase bid for a large complex, you are often bidding against financial institutions with deep pockets. This creates two distinct disadvantages for you as a beginning investor.
First, most beginner commercial investors are forced to join a large consortium of other investors to get in on a multi-million dollar deal. This dilutes your ownership interest and the weight your opinion counts when issues arise such as when to sell.
Second, when you and your investors are bidding with the last dollars that you have to invest, the large institution can easily out bid you by several thousand more than you can raise. Going up against large institutional investors can be overwhelming.
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 manager and full-time maintenance crew.
B. There are more medium-size complexes available at any given moment. That means less competition from other investors and more opportunity to find one with exceptional cash flow.
C. Cash on cash returns for medium complexes are frequently better than for large complexes as you are able to offer a wide variety of amenities and services.
D. You will not be dealing with a financial institution as the seller with a cumbersome sale policy. The seller will more likely be an individual or small partnership that can provide flexible sales terms if they choose.
E. They typically will require less equity to acquire. This means you can control the property as an individual or with a couple of partners. You thus own a higher percentage of the property and thus a bigger amount of the profits.
F. Often the less knowledgeable seller has avoided raising rents because they have become friendly with the tenants or they are afraid the vacancy rate will increase. By studying the local market rents and vacancy rates, you could find that you can immediately increase cash flow through rent increases.
There are some very good arguments to owning small apartment complexes in the 4 to 12 unit range. This can be a good start if you personally manage them and perform most of the maintenance. However, this size complex seldom generates enough income to leave a profit when a property management company is hired.
Investing for beginners can begin with small complexes and once the income is stabilized buy another. After a couple of years, you will have 3 or 4 small complexes located all over the city. This becomes a problem because now you have the equivalent number of units as a medium-sized complex but are still managing them yourself. You also have the added burden of having properties at multiple locations meaning you have to drive all over town to take care of maintenance and upkeep.
Medium-sized apartment complexes have long been the favored type of and classic value for commercial investing. 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 will see that very small apartment buildings are more risky than medium but medium size complexes have advantages over the large complexes that we’ve already discussed.
If you own a small eight-unit complex, each unit represents 12.5% of the income stream. If you own a 80 unit complex, each unit represents 1.25% of the income 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.