Here are some tips for investing in real estate for beginners who are thinking of 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, it is not necessarily true. Multifamily 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 happens in multi-family complexes with fewer than 100 units.
When you make a purchase offer 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 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 your ownership interest and the weight of your opinion when issues such as when to sell arise.
Second, when you and your investors are bidding the last few dollars you have to invest, the big institution can easily outbid 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 care and maintenance. You may be able to avoid the added expense of an on-site manager and full-time maintenance team.
B. There are more medium resorts available at any given time. That means less competition from other investors and more opportunities to find one with exceptional cash flow.
C. Cash back for midsize resorts is typically better than large resorts because 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 company 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 higher amount of profit.
F. Often the less knowledgeable seller has avoided raising rents because they have befriended 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 turn a profit when hiring a property management company.
Investing for beginners can start with small complexes and once the income stabilizes 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 in a medium-sized 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 to take care of maintenance and upkeep.
Mid-size apartment complexes have long been the favored type and classic value for commercial 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 midsize ones, but midsize complexes 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 your revenue 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.
