Here are some tips for investing in real estate for beginners who are considering investing in apartment complexes. Many commercial property advisers with an opinion say that apartment complexes over 150 units are the properties to buy, this is 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. It is often in multi-family complexes of less than 100 units.
When you make an offer to purchase a large complex, you often bid against financial institutions with deep pockets. This creates two distinct disadvantages for you as a newbie investor.
First, most newbie business investors are forced to join a large consortium of other investors to close a multi-million dollar deal. This dilutes your participation and the weight of your opinion matters when issues arise, such as when to sell.
Second, when you and your investors bid with the last dollars you have to invest, the large institution can easily outbid several thousand dollars more than you can raise. Running up against large institutional investors can be overwhelming.
There are many other reasons to invest in complexes of less than 125 units:
A. There is less upkeep and maintenance. You may be able to avoid the additional cost of an on-site manager and a full-time maintenance crew.
B. There are more mid-size resorts available at all times. This means less competition from other investors and more opportunities to find one with exceptional cash flow.
C. Cash returns for mid-sized resorts are often better than large resorts, as you are able to offer a wide variety of amenities and services.
D. You will not be dealing with a financial institution as a seller with a heavy selling policy. The seller is more likely to be an individual or a small partnership who can offer flexible terms of sale if they wish.
E. They will generally need less equity to acquire. This means that you can control the property as an individual or with a couple of partners. You thus own a higher percentage of the property and therefore a greater amount of profit.
F. Often the less knowledgeable seller has avoided raising rents because they have befriended tenants or fear the vacancy rate will rise. 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 in favor of owning small apartment complexes with 4 to 12 units. This can be a good start if you manage them personally and do most of the maintenance. However, this sizable resort rarely generates enough revenue to leave a profit when hiring a property management company.
Investing for beginners can start with small complexes and once the income has stabilized, buy another one. After a few years, you will have 3 or 4 small complexes spread throughout the city. This becomes a problem because you now have the number of units equivalent to a mid-sized resort, but you still manage them yourself. You also have the added burden of having properties in multiple locations, which means you have to drive around town to take care of upkeep and upkeep.
Mid-size apartment complexes have long been the preferred type and classic value for business investment. Now is the perfect time to get that investment moving. Holidays are going down and rents are going up. Income can be very predictable.
Do the math and you will see that very small apartment buildings are riskier than mid-sized but medium-sized 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 income stream. If you own an 80 unit complex, each unit represents 1.25% of the revenue stream. Yet an 80-unit complex is much easier to manage than a 175-unit complex.
Investing in real estate for beginners can pay off, but you need to know what works best for you.