Commercial Real Estate Cash Flow
One Of The Biggest Advantages Of Apartment Building Investing...
The ability to generate consistent, substantial, commercial real estate cash flow is definitely a huge advantage of investing in apartment complexes.
Of course they must be purchased properly and managed properly, among other things, in order to generate the amount of cash flows that we are after. And it is this monthly cash flow that attracts many novice investors as well as veteran investors. I know it attracted me when I was starting out.
It didn't take me long to realize that it was difficult to generate significant monthly cash flow while investing in single family homes. But don't get the wrong impression. Not just any apartment building that you buy will generate the kind of cash flow that you and I are after. You must know what to look for, which just takes some knowledge and some practice.
Oddly enough, while I was writing this page, I received a piece of mail from a local realtor who specializes in apartment buildings in my city. In the envelope was a two sided ad for a 10 unit building he had listed. It took me all of 5 seconds (maybe less) to "screen out" this building as a potential investment for me. (Actually, the fact that it is only 10 units immediately screened it out for me as I only look at much larger buildings at this point. However, it does make for a good example.)
The first thing I do when screening a property is do "the math". I look at asking price, cap rate, NOI, gross income etc. If the math doesn't make sense I don't bother going any further. Period.
In this case the asking price was $1,595,000 and the cap rate was 5% (actually it's worded "potential cap rate" which is even worse). These are the kind of cap rates we want to sell at, not buy! There is no way this apartment building is going to generate any positive commercial real estate cash flow unless you pay all cash or close to it. And based on the description, there is little if any room to increase the value of the property without waiting for it to appreciate. Another strike against it.
If you would like me to send you a copy of this actual flyer, along with my more detailed analysis of the property, feel free to fill in the short form at the bottom of the page and I will email you the information right away.
So is this building a "bad" investment? Not necessarily. If you were looking to add some commercial real estate cash flow to you "portfolio" of investments this may be a fit for you. In fact, if this building was ten times larger, it would be the type of building that a REIT (real estate investment trust) would snap up.
But rememeber, we want to sell to REITs, not buy what they would buy.
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