Specialty Services: Multi-Family Tips

Apartments are a basic necessity! Economics, or affordability of housing, forces many to rent. This creates the broadest and most competitive marketplace in the Commercial/Investment field. There are more apartment buildings than all office, retail, and industrial properties combined. In 1982 through 1985, 1.5 million new apartment units were built in the United States. Their market value -- approximately $45 billion -- exceeds the Gross National Product of many countries. The continued volume of building permits indicates that strong multifamily construction will continue. Present economics of housing indicate that demand for apartments will not only continue to be strong but will probably increase, and that the value of existing properties should increase markedly. 

Types of Apartment Buildings

• Garden Apartments: One- and two-story buildings; often a courtyard or single family-type setting; wide range of units.
• Walk-Up Apartments: Three- to five-story buildings, but no elevator; area may be mixed single and multifamily; usually only two or three different types of units.
• Mid-Rise Apartments: Six to ten stories serviced by elevators; usually inner city or dense suburbs; limited range of unit types.
• High-Rise Apartments: In excess of ten story buildings; underground parking and security; full service; standard plan with limited unit types. 

  Factors Affecting Apartment Investors

• Generally speaking, apartment buildings can be leveraged to a higher degree as compared to other commercial properties.
• The tax shelter benefits have been favored, and though investors usually do not purchase apartments solely for the inherent tax benefits, they do see the tax shelter benefits as a great plus.
• Real Estate has never been considered a liquid asset; and prior to the mid-1980s, apartments were usually more liquid than other real estate vehicles. In the late 1980s the apartment market slowed as a result of the loss of favored tax treatment. After a period of adjustment, they are regaining popularity. The resale market is generally good.
• Less sophistication is required to own and operate.
• Broad rental markets. A utilitarian demand exists because people need places to live.
• Variety of apartment sizes and prices allows various types of investors to enter the apartment ownership market. From "Ma's and Pa's" to major corporations and pension funds -- all own apartment buildings.
• Responsiveness to entrepreneurial efforts. Unlike other real estate vehicles, apartment building value determinants (occupancy, income, expenses, financing, etc.) can be impacted by the owner, and it is easier to do (as opposed to an office building where major tenants have long-term leases which cannot be re-negotiated until the end of the lease period).
• Professional management is usually available, but at a cost.
• Unit mix. This must be matched to the demographics of the area (i.e., studio apartments are less likely to succeed in a family area).
• Not having key or anchor tenants may be an advantage.
• Exposure to government regulations (primarily rent control).
• Institutional and seller financing availability.
• Elements that contribute to a good apartment location are: visibility and close proximity to major highways, labor, transportation, shopping, and residential housing tracts.
• Pricing apartment buildings involves the use of the gross-rent multiplier, price per square foot, price per unit (CPU), and capitalization rate as "rules of thumb" or value measurers.
• Property condition. Deferred maintenance can be extremely costly and detrimental to achieving investment objectives.
• Ratio of land to improvements affects the amount available for depreciation, and this affects the tax benefits associated with the property.
• Master metered. If the owner is required to pay utilities, it will substantially affect the expenses connected with the property.
• Vacancy. In general, this will reflect the physical appeal of the property, in addition to the number of units on the market, and whether or not rents are in line with competition.
• Parking. Both the condition and number of spaces available, as well as the type (covered, carports, open).
• Furnished vs. unfurnished affects the rental schedule and amount of depreciation available. 

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