Why do people invest in apartment buildings?

Question

Just something I never really understood is why people are compelled to buy apartment complex's? I've never really found a complex where the cap rate was over 6% and that seems really low even if you invest in rehabbing the units. Does anyone own a complex that has made a really good ROI ?

A realtor offered me a 5% cap rate complex that was in a great area and needed no rehab and she praised it as a "great opportunity" but 5% seems like I'd be better off putting my money in a Mutual Fund because I can't make those numbers work.

I've had much more success getting 10%, 12%, 15% on single family homes and 1-4 unit multifamily.

Stephen David Smith Jr. · Answer

Good Morning @Rob Bianco,

There are many interesting and entertaining things to discuss in regards to commercial (4+units) apartment investments. However the one item I believe is most important without speaking on everything is the ability to force appreciate, in Residential your value ties to condition, location, and market. The big thing with the commercial apartments is it is valued on cash flow, if I can improve that I have IMMEDIATELY raised my value, what other investments give you that control? I have included a definition for Commercial forced appreciation below:

If you can get your Commercial properties to generate a little more income, that income is divided by a capitalization rate, and that's the value your property will appraise for. So you can force your value up by increasing your income stream. That's forced appreciation

An example I have done is when there is additional unused land put in a laundromat or storage that you rent back to the tenants, immediate property value increase.

Adriel Hsu · Answer

You need to remember a CAP rate is the return without any leverage. So a 5% CAP would be a 5% return if you purchased it outright with cash.  Now factor in debt service, your returns easily jump up to 8-12%.  Also, you are looking in a market that doesn't cash flow well (for the most part). I know plenty of people doing well with apartments in Orlando, Phoenix, Texas etc. Hitting well over 15% IRR on 2-3 year holds

Rob Bianco · Answer

Sorry for the confusion, but I don't own real estate in NY. I've been investing in the Midwest, which cash-flows well, but the appreciation is not that of NYC

Brian Garrett · Answer

In those low cap markets the key is to buy value-add deals and force appreciation.

Using your example of a 5% cap for every $1,000 increase in NOI that's $20,000 in added value.

Andre Jernigan · Answer

Everyone here has already stated some good thoughts and reasons as to why people invest in apartments. I also agree with @Stephen David Smith Jr. with respect to the idea of appreciation. When it comes to residential appreciation is based on factors completely outside of your control. Commercial properties can literally give you the ability to force that appreciation through rental increases are in decreasing expenses through more efficient management and operations among other things.

I would also agree that investing in the Midwest and other markets is a great idea especially if living in NY or the west coast as well. Obviously as you know, the prices here in the Midwest are cheaper than either coast which is why is why there has been an influx of capital from investors from coastal states such as CA and NYC.

Elbert D. · Answer

@Rob Bianco Your doing the right thing by investing in other regions. The midwest and some Southern areas have the best returns on average when it comes to buy and hold. Also you get more bang for your buck. Apartments are probably the best when it comes to rentals at the residential level. But the rehabs normally are higher on average. a MFH allows you to have double if not triple the amount of rent. Also vacany is less of a risk. Normally property taxes and insurance are the variables.

Agnes Greco · Answer

You're looking in the wrong places.  If you are in NY investing in the Midwest, you can easily research in other areas of the country.  I invested in an apt. complex 3 years ago.  Last year we refinanced and got 98% of our investment back.  We are still receiving distributions, just not as much but?  I have not done well in SF b/c of buying with more issues and contractors walking off.  So I get the expertise of people who are much more knowledgeable.  Just saying.....I think more knowledge is needed.  But I do agree with you, cap rate is important in apt complexes.

Simon W. · Answer

Looks like your from NYC, I am a fellow New Yorker. If you are getting 5% cap rate in NYC, that is a great deal.

I've been working for Property Management and other firms for the past 15 years and I always see cap rates in about 2-5%.

Yes, it is true that you can make better ROI if you invest in Stocks or other types of similar investment, but what you need to take account of is the appreciation level in NYC.

Why do people invest in apartment buildings?

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