Commercial Real Estate - Small Apartment Buildings

Equity Build Up (1)

It’s a given, one way to watch your equity build up is to put your money in larger investments. For example, if multi-family units are appreciating at a five percent year over year clip, your equity in a $50 million dollar apartment will be significantly greater than a six-unit apartment home, right? But investing in apartments, just like investing in any other real estate, allows you to start small before you decide to get big.


2-4 Unit Homes

2-3 unit aparments rental investmentWhile not exactly an apartment building, homes with up to four separate living units can provide more competitive, long term financing compared to financing options reserved for multi-family projects. Both mortgage giants Fannie Mae and Freddie Mac have loan programs for four-unit homes with mortgage rates slightly above rates reserved for owner-occupied, single family properties and loan terms up to 30 years. To get your feet wet in the multi-family industry, this is the simplest, least expensive path.

More than 4

These properties are considered the proto-typical apartment building. Any property with more than four units falls out of the residential field and into the arena of commercial finance. Small apartments are considered to be anywhere from five to twenty units, but the definition of small will vary by locale.

5 unit real estate apartment investmentStarting small allows you to get the experience needed to manage the property and get your hands around how apartment investing works. Smaller apartments are also more marketable because the potential buyer’s pool is much deeper than multi-story high rise apartments owned and managed by global real estate investment firms. This means you can find a distressed property, rehabilitate it and flip it more quickly than you can a 100-unit building. What are some of the important considerations when evaluating a potential small-apartment investment?

Cash Flow. The primary focus is cash flow. Do the rents each month cover not only the financing costs but for maintenance and utilities as well? Distressed properties may have a high vacancy factor and don’t cash flow due to the current condition of the property. Can you buy such a property, bring it up to shape to make it more attractive to potential tenants?

Location. Smaller apartment buildings can be located in more places compared to big projects. But as with most real estate considerations, is the location of your potential acquisition ideal for renters? Is the neighborhood considered in decline or is the area sought-after by renters? Is the project near public transportation, near a campus or close to thoroughfares? And if you’re going to manage the 12-unit 9 unit apartment rental investmentapartment building yourself, do you live nearby or visit the property often?

Liquidity. Smaller projects allow you to cash in on your equity build up quicker because there are more buyers. This means it’s easier to take your profits and invest in other properties as they hit the market.

One final, important note regarding small apartment investing; do you have the time? Buying, rehabilitating, collecting rents is a full time effort. Some investors decide to make an apartment acquisition their new career by living in the apartment while managing the property. Others like to simply provide the funds or participate in an investment group to take advantage of apartment possibilities and leave the rehabilitation and the management to third 24 unit investment propertyparties. Whichever method you choose, it’s time to consider apartments. You can start small and stay small, start small and get big or start small and cash out. The choice is yours.

by, Sydny Cohen: EquityBuild News Editor

Definition equity build up (1)