Some of the gurus make it sound easy to buy apartment complexes. They say you look for a poorly run apartment building with insides in need of paint and carpeting, the metal railings unpainted and rusting, perhaps the grounds poorly kept and probably a high vacancy rate.
Investing limit rationale
The gurus also say it is often less work than with single family houses. An example of this might be venture capitalists and other types of investment bankers. Each has upper and lower limits of deals they will do. If it is too large and takes too much money, they may not have the experience or the money to do that deal yet. On the other hand, they all have lower limits below which they will not invest. Why? They have deals coming to them all the time. Each deal takes a similar amount of time to evaluate and negotiate and structure. Therefore, why spend the time on a small deal when you could do a larger one in the same time and make considerably more money. Plus, if you do a small deal, you have to do more deals to make the same profit and that means spending time that you could have been doing other things.
The gurus who push investing in apartments make the same argument. Why not spend your time on larger deals and make more money? Of course, if something goes wrong, you could be in a lot more financial trouble. However, because of the size of the deal, you are in some ways more protected because the lender will be lending to an LLC or corporation and you are somewhat protected. Possibly more so than investing in a single family house.
No Personal Qualification
One of the key factors that is attractive besides the size and greater money is that you don’t need to qualify personally for a loan with the bank. On commercial loans of this sort, the cash flow of the property is the determining factor.
The idea is to find an apartment complex that is run poorly with a high vacancy rate or with rents that are below market. Part of the loan to purchase the property will be assigned for rehab. Once the units are fixed up and rented, the property will have more value. Or, once the leases roll over and the rents are raised to market value, the value of the property will increase. Why? Because commercial valuations are based on cash flows and raising the rents jumps cash flow and has a multiplier effect on the property value.
In residential real estate, the value is based on comparables. With commercial, you can increase the value of the property by increasing cash flow even if the real estate market if flat. Sweet deal!
You then have some choices. You can sit back and enjoy the cash flow or you can sell and have a fantastic payday. If you decide to sell though, you need to understand 1031 exchanges or you will be giving a lot of your money to the government.