Whether the economy is up or down people always need a place to live making apartments a virtual recession proof investment. Apartment investments range from smaller properties like Duplexes, Triplexes and Quads to moderate size buildings from 12 to 50 units and up. Larger apartment complexes range from 100-300 plus units.
Economies of Scale
The dynamics of economies of scale are an important part of deciding which category of apartments to invest in. Economies of scale measure the proportion of unit purchase price to debt service, the gross monthly rent ratio, and the distribution of operating costs across the total number of apartment units owned in a particular complex. As an example, duplexes, triplexes and quads are entry level investments for smaller, less experienced investors. While the investment amount will be smaller, the cost per unit, debt service per unit, maintenance and operating expenses will be higher. Rents will be market based and on par with larger properties. By contrast, larger complexes will have a proportionally lower purchase price per unit and the distribution of debt service and operating costs per unit are likely to be lower by comparison to much smaller, entry level properties.
Financing options will vary from Owner Finance to traditional lending. Small, entry level properties 2-4 units qualify for FHA residential financing at slightly higher rates than owner occupied homes. By contrast, medium to large apartment complexes can qualify for a variety of different loans from non-recourse commercial loans (which have no impact on personal credit and require no personal guarantee)to temp to perm construction financing,and from rehab loans to government low income housing loans. The larger the deals the more lending options that exist because the loans are made to corporations and partnerships based on the ability of the project to cash flow, NOT based as much on the strength of the borrowers.
An important decision to make before investing is who is going to manage your apartments. Managing apartments is a lot of work and many, less experienced owners make costly mistakes when they don’t understand the business. Most small properties 2-30 units+ are managed hands on by their owners. However, the majority of medium to large apartment complexes are managed by property management companies. Property managers charge a minimum 10% of gross monthly rents as a management fee for doing the leasing, rent collection, coordinating maintenance and managing books& records.
- Class “A” apartments are high end, more exclusive and more luxurious.Rents are typically very high and complexes are located in prime areas.
- Class “B” apartments are mid range with nice quality finishes but not as exclusive. Rents are not as expensive as class “A” and properties are in very good areas.
- Class “C” apartments are often older and even may need rehab. They offer the most basic living experience. Roofs, appliance and décor may need refurbishment. ”C” quality apartments routinely need more ongoing maintenance. Locations can vary from inner cities to suburbs depending on demographics. They can represent a buying opportunity for the purpose of improving and reselling.
- Class “D” apartments are generally lower income housing (possible section 8 Government housing) often found in poverty stricken inner cities and suburbs.These properties areoften older and may need rehab. They offer the most basic living experience.”D” quality apartments routinely need more ongoing maintenance than higher classes of apartments. Lower rent drives the “D” class apartment business because the tenants either make very little money or are being government subsidized.They can represent a buying opportunity for the purpose of improving and reselling
The Founder of Business Broker World has over 20 years experience owning and operating apartments. If your goal is to acquire apartments, we would be delighted to consult with you and assist you in making the right apartment investment decision.