Playbook #033: Apartment Complexes
🖼️ The Big Picture
If you’ve been interested in real estate for a while and are ready to go bigger than single family houses, apartments have probably caught your eye.
There are a lot of reasons to like them: there’s a huge shortage of affordable housing (meaning lots of demand,) there are plenty of professional property management companies (so you can be mostly hands off,) it’s a dead-simple model where tenants pay you rent (for monthly cash flow,) and almost any “expert” you can find on real estate seems to have a ton of units.
As we’ve mentioned in other real estate issues, there are creative options to get deals done without using your own cash or credit like buying with OPM (other people’s money), and Seller Financing.
And there are some simple, proven ways to acquire, optimize, stabilize, and either sell - or refinance to pull out profits tax free - that make this a very attractive investment.
For these reasons, apartments may also be the most competitive asset class in real estate. As inflation has increased and investors have piled into the market to participate in the upside, average cap rates have decreased from over 6% in 2015 to under 5% in Q3 of 2021, making them more expensive, and harder to find great deals. That may not sound like much, but it means paying an extra $333,000 on an apartment building that nets $100,000 per year (i.e. you pay $2 million instead of $1.667 million).
In today’s market, apartment investors have had to adapt by finding deals where they accept paying a premium, knowing they can get a great return within a year or 2 by raising rents, filling vacant space, or transferring utility expenses to the tenants.