Posts Tagged ‘vacancy rate’

Why Medium Commercial Properties Are Better

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.

Housing Prices Continue to Drop

With the homebuyer tax credit about to expire, more than 43% of home sellers reduced their listing price, according to ZipReality. Two percent more of the listed houses lowered the asking price in May than did in April.

The national median price dropped nearly $2,500 to $264,936.

For investors trying to sell this is not particularly good news but those preferring to be in the landlord business will do better. According to Rental.com, the average studio apartment is currently going for $1025, one-bedroom apartments for $862, two-bedrooms for $1,059, and three-bedrooms for $1,350. For expensive rental markets like California, rents have steadily been increasing over recent months. Even lower rent states like Arkansas are seeing rents remain mostly stable.

The Department of labor’s Consumer Price Index for May shows a stable national rental mark virtually unchanged from a year ago.

Hard hit foreclosure areas like Arizona are finding the rental market is becoming tight. This is somewhat surprising since Arizona has a large inventory of vacation rentals that are now being rented year round by displaced homeowners.