Apartment complexes…top of the market?

Question

I have always invested in single family homes and have done pretty well so far. Recently I have been looking into apartment buildings (8-20 unit) in the Cleveland, Oh area. I am trying to get familiar with the market and learn more about it. I am going to work for a property manager in a few weeks to learn more about it but I wanted to see what the BP community was thinking on a more macro level.

I see a lot of opinions that these investments are at the top of the market and some people are predicting a bubble in the market because people have been blindly buying up these properties. Some still say a great investment.

Thoughts?

I see a lot of opinions that these investments are at the top of the market and some people are predicting a bubble in the market because people have been blindly buying up these properties. Some still say a great investment.

Thoughts?

Nicholas Varner · Answer

Account Closed I think apartment complexes will continue to grow in value here. It's a great way for investors to play defense. The returns aren't going to cash flow as high as duplexes, however, there are a few reasons I believe they will hold their value nicely and even go up in value.

• A lot of folks out there on disability, unemployment, low paying jobs, living at home with their parents, and so on, they all need to live somewhere and it's not going to be a Single Family House. 
• Real Estate Investing is maturing in ways we have not seen before in the past. Buyers are more willing to invest in areas not remotely close to where they live. In fact, I have clients who have specifically ask me, "I want to invest in Cleveland, I just don't want to ever have to go there." 
• Service Providers have increased. Twenty years ago there were not as many service providers or the sophistication associated with being able to scale property management, development, and sales. Tools have evolved and the business is reaching a more mature place in its development.

Buying apartment buildings is a great way to play defense and are great long-term plays. As far as, population decreases and vacancy rates here in Cleveland. When you live here, it sure does not feel like everyone is leaving. It actually feels like folks are moving here. I've noticed folks moving to Cleveland from Puerto Rico, New York, and Chicago. A nice combination of lower property prices and job creation here is driving the influx. For white collar workers, Cleveland Clinic brings in medical students, doctors, and administrators.

As far as vacancy rate is concerned, there are two factors to consider. Functional vs. non-functional housing. If you take a building without heat and electric and you count that as part of the vacancy rate, thats technically true. However, if you have a building that is functional and it's still not renting that is far more disconcerting. We don't see that here. If the building is livable, we can rent it.

Steven Gesis · Answer

Thank you! These are very important words to live by, you must always separate the emotion and the business, its about building wealth through value.

I think we are seeing the polar opposite today in Cleveland, we have a crazy surge in new construction apartments along with massive conversion of commercial to residential, with a 99% occupancy rate. Downtown is booming in many spaces along with several boutique neighborhoods that are surging in demand.

As we sit today, we have a great response for tenancy not only for SFR but for our Multi-Family and Apartment buildings situated along the entire east side of Cleveland Metropolitan area.

It boils down to the product, if you have a good product that people can attest to, they will want you units regardless, if you have sub-par units you will have a tough time renting.

Renting has been around forever and will continue to strive in good and bad times, tis about the product and the numbers.

Account Closed · Answer

@Nicholas Varner

I appreciate the input! I totally agree that  "When you live here, it sure does not feel like everyone is leaving."

I live on the west side and my personal opinion is that Cleveland is buzzing and has a lot of things going on right now. I am biased because I love Cleveland and I see the potential of the city (whether or not the community  and government maximizes the potential is another story) and I am trying to look more objectively at the numbers.

Functional vs Non Functional housing is a great point! Definitely something that will be in the back of my mind from now on.

Thanks!

Account Closed · Answer

@Steven Gesis

I appreciate the input! I really like your comment "buy value, not blindly".

@Federico Gutierrez

Congrats on the deal that is awesome! I actually saw that earlier today, I have been following your company and saw James post a picture about it.

I know the occupancy rates in Cleveland are high, does the decreasing population concern either of you?

Federico Gutierrez · Answer

Apartment buildings are awesome! Just closed on one today :)Creatively you can get many revenue streams, advertising on the exterior, coin operated laundry, vending machines. If you get lucky could get a carrier on top of your roof, endless possibilities to make additional cash

Nicholas Varner · Answer

Thanks Account Closed

Federico Gutierrez · Answer

Account Closed

Working at Holton-Wise and seeing how many tenant leads we get daily, in an excess of 50+, even if the Cleveland population is "decreasing" people are constantly looking for new apartments/doubles/houses to move into.

Steven Gesis · Answer

Hi Rob, great questions and congratulators on your new job, great way to learn.  Considering the Cleveland market has been rebounding at a considerable pace, much of the country is also trending upward, in some cases and in certain areas of the country on the west coast as well as the east coast we are seeing pricing exceed market crash levels. As it pertains to MF, specifically in Cleveland, its tough to buy, these types of assets have excellent value and if they require a little work, its just about buying right. I think its safe to say that RE investors, experienced ones, buy value, not blindly, at least I want to believe this is true. Good times or bad, if the numbers are right its a good investment!

Much Luck in your future endeavors.

Jeff Greenberg · Answer

We look for properties with some value add component that will provide us with a greater equity buffer if there is a dip in the market.  MF properties in a good market hold up fairly well in down economies.

Apartment complexes…top of the market?

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