With all this talk about flipping and what not, I was wondering if anyone has gotten out of residential and have gone to commercial? I'm interested in buying smaller apartment units (mainly because I can't afford bigger ones) and am wanting to hear people's experiences.
What's your goal in ownership? Make a lot of money or a steady stream of fixed income? If it's the former, I'd say stay away. Cap rates used to value pretty much all real estate assets right now are at all time lows (which means valuation is at all time highs). I think apartment complexes trade at some of the highest multiples of the bunch. Which means, you can't expect to make any return based on significant jumps in underlying value at a sale down the road. And with cap rates so low, you don't even have that good of an opportunity to juice your returns with leverage anymore. Essentially, though, the cap rate implies you should be able to make that % fixed income on the investment. That is to say, if you buy something at a 6% cap rate, it can be a 6% fixed income type investment for you. One way would be to find a quality asset that has been mismanaged, or hasn't been maintained as well as it should have been and can be bought at a lower valuation. In this case, if you know what you're doing, you can theoretically either increase your occupancy % or your average square foot rental percentage, or both. Moreover, assuming valuation doesn't just shift completely over the next 3-7 years, this type of strategy would allow you to sell at a higher multiple down the road. Strategy = (1) Buy cheap relative to cash flow produced, (2) Institute best practices across operations, (3) infuse capex to improve property, justify increase rents, (4) sell in 4-6 years with higher annual cash flows and at a higher multiple of those cash flows. However, this requires a lot of work and often a lot more money to spend on the place. Oh...and you have to know how to do it all I think it was mentioned in the other thread, but if you are wanting to get into real estate, the easiest way is probably through a publicly traded REIT. There are some that focus on apartments. Unfortunately, REIT's do end up sucking off a lot of charges. I think on average only like 80% of what you invest is actually used as capital to invest in an underlying asset. www.nareit.com - good place for info Personally, I'd stay away from real estate completely right now.
I have a pretty detailed spreadsheet I put together that gives me the breakdown on the properties I'm evaluating. I'm not even looking at anything unless it gives me a cash-on-cash return of 12-15%. This includes cashflow and tax depreciation, but not appreciation or equity buildup. Of course this all means nothing without due diligence to make sure the rent roll and other numbers they give me are correct. Cap rates are low but I'm finding even with 8-9% caps I can still make 15% on my money. That's better than I'm doing with CDs or the stock market. And yeah, I'm eventually hoping to buy mismanaged properties and either increase cashflow or decrease expenses, either way to increase NOI. But for my first property I want to get something that won't require 20 hours a week of my time and scare me out of this business totally. And, of course, still cash flow for me. Thanks for your advice.
Another option is duplexes which is less of an investment than an entire complex. If you buy a duplex inside the loop, the land is an asset as well as the potential rental income. So you'll have choices down the road.
I am in Idaho so your milage may vary. But here commercial is soft (except in front of the growth). I had a commercial building and lot sit for over a year before moving and it didn't even double in value over the 7 years that I held it. 4 plex and larger are good here. I flipped a 4 a while back for 50% profit 1 year + 1 day (for cap gains). Bare land is heating up. Last year I moved 40acres of timber for almost double after 2 years - but I sold too soon because right now it would go for double that. I would recommend that you grab any waterfront/riverfront property you can find no matter how far away - I can't find any deals within a 400 mile radius up here. Also what seems to be working here is investment groups put together by a broker - everyone puts in 100k, form a llc and buy/build large apartments. The payout is very good but you have to sit on the building for a few years to turn a profit since the market it so strong. .
