Why Medium Commercial Properties Are Better
Posted by Peter Vekselman Friday, 28 October 2011 04:03 No Comments
While almost every real estate professional with an opinion says that apartment complexes with over 150 units are the way to go, it’s not necessarily true. Multifamily complexes are indeed a great investment. However, what you really want to invest in is where you earn the most rent per unit. Often that is in complexes with less than 100 units.
When you are making a purchase bid for a large complex, you are often bidding against financial intuitions with deep pockets. This creates two distinct disadvantages for you as an individual investor.
First, most individual 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 and the weight your opinion counts within the large partnership.
Second, when your partnership is bidding with the last ten thousand it has to invest, the large institution can easily out bid you by several thousand more than you can raise. Going up against institutional investors can be overwhelming.
There are many other reasons to invest in complexes with less than 100 units:
- Cash on cash returns for medium complexes are frequently better than for large complexes offering a wide variety of amenities and services.
- 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.
- They require less equity to acquire. This means you can control the property as an individual or with one or two partners. You own a higher percentage of the property and thus a larger amount of the profits.
- You won’t be dealing with a big financial institution as the seller with a strict sale policy. The seller will likely be an individual or small partnership that can provide flexible sales terms if they choose.
- There is less upkeep and maintenance. You may be able to avoid the added expense of an onsite manager and full time maintenance crew.
- Often the less sophisticated seller has avoided raising rents because they’ve become chummy with the tenants or they are afraid the vacancy rate will go up. By studying the local rents and vacancy rates, you might find you can immediately increase cash flow through rent increases.
There are good arguments to owning small apartment complexes in the 4 to 12 unit range. This can be a good choice 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.
Some investors start with small complexes and once the income is stable buy another. After a few years, they have 3 or 4 small complexes located all over town. This becomes a problem because now you have the equivalent number 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 classic value for commercial investing. Now is the ideal time to make this investment move. Vacancies are down and rents are up. Income is very predictable.
Do the math and you’ll 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 six-unit complex, each unit represents 17% of the income stream. If you own a 70 unit complex, each unit represents 1.4% of the income stream. Still, a 70-unit complex is much easier to manage than a 150-unit complex.