The Supply and Demand Of Multi Unit Real Estate
And How It Compares To Other Investment Property
Compared to some other types of commercial property, multi unit real estate is a fairly liquid investment. This, of course, is one of the main characteristics/advantages that make apartment properties an attractive investment, especially for newer real estate investors.
Raw land, big-box warehouses, industrial properties, etc. are, in general, more difficult to sell. For example, if you were to purchase an empty industrial property, fix it up, and then try and re-sell it, or even lease it up for that matter, you may have to wait quite a while before a purchaser or lessee (tenant) comes along. This time frame can easily stretch into 'years' for some properties.
On the other hand, if you were to purchase a multi family property, fix it up and increase the net operating income, it is likely that there would be a healthy number of investors that would be interested in purchasing that multi unit real estate from you. And likely at a price that would give you a healthy profit.
So why would anyone be interested in investing in other types of commercial property? Well, the main reason could be the potential overall return. Developing raw land or investing in vacant industrial property or office buildings, can, in the end, bring extraordinary returns on investment. But the risks involved in these types of investments are also much higher. Here is an example.
Right now I am looking at an office building investment located in a major Florida market. The building is currently empty. The owner is somewhat distressed, from what I can surmise, in that he needs some cash fast. His options are to either sell the property, or refinance it. Of course, refinancing an investment property when it is vacant is not always possible, and certainly not advisable, so his main option is to sell.
The 'raw numbers' look something like this.
Asking Price: $6.5 million
Market Value: $10.5 million (after it is renovated and re-leased)
Renovation Costs: $500,000 (very rough pre-due diligence estimate)
Building Square Footage: 87,000
Let's say we (I am working this deal with another investor who lives in the city where the office building is located), struck a deal at $5.5 million, and spent $500,000 to rehab the property. We would then have $6 million in the deal. Would we have made our $4.5 million yet? (Difference between market value and our costs) Not yet. We still have to lease up the office space, and this is a little more intensive in terms of time and money than renting up an apartment unit located in a multi unit real estate property.
What if it took us twelve months, or eighteen months to find the 'right' tenant? In this particular deal we would be taking over a $3 million mortgage complete with hefty monthly payments. On top of the monthly mortgage payments there are other expenses such as property taxes and utilities. In other words, there could potentially be substantial cash outlays before we see any income and any profits. But, when the building is leased up, the overall returns would be extraordinary. The investment is more risky, but the potential returns reflect this.
You will notice that one of the biggest variables in the above office property example is the ability to attract a quality tenant that can lease over 87,000 square feet. These type of tenants don't come along each day. Now compare that to multi unit real estate. The supply of tenants for apartment buildings far exceeds those for 87,000 sq. feet of office space. Of course, so does the demand, but this is where the quality of your marketing in your property management plan kicks in.
To summarize, it is the advantages provided by both the demand and the supply for multi unit real estate that make these types of properties attractive to investors. ie. demand from potential purchases when you are looking to sell your apartment building and the supply of tenants to rent your units.
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