Right now, there’s one particular asset class in commercial investment real estate that’s got everyone talking. Apartment’s. Whether it’s a small duplex or a 100 plus unit complex, these assets just seem to be the number one target of investor’s. Of course, there’s a few reasons for this. Financing is extremely favorable, almost more so than a primary residence. Add also the declining vacancy rate and surging rents, it’s no wonder apartments are so desirable. But are we creating a bubble? When everyone’s investing in the same thing – be in tech stocks back in 2000 or single family homes all through 2008 – doesn’t that cause everything to burst after becoming inflated? I’m going to give you a quick rundown as the positives and negatives of buying apartments, so you as an investor can make a more informed decision.
As I mentioned, probably the number one reason investors are purchasing apartments is due to financing. The rates are just ridiculously low. As of the time of this video, rates for a single family primary residence are just shy of 4%. If you want to buy a two or 4 unit investment property, you are likely to get around 4 in a half percent interest rate with a minimum of 25% down…. But if you’re looking into a larger 5 plus apartment complex, you can get a fixed, 5 year loan for as low as 3.5%, with possibly as little as 20% down…that’s right, you can get a rate CHEAPER than buying a HOUSE, for LESS of a down payment than buying a small fourplex right now…but wait, if you’re looking at a much larger $3M plus loan, rates right now are just above 3.3%, fixed for 5 years.
Compare this to any other type of asset class – be it retail, industrial or office, then the interest rate’s are going to be a minimum of 4 and a quarter percent with at least 25 to 30% down…still good, but not NEARLY as good as an apartment loan.
The second reason is the whole housing bubble crash. Most people still feel owning a home is one of the best investments they could make over time…however, in area’s like the San Francisco Bay Area, most people cant justify paying a 3 or $4,000 mortgage when they can rent for $1000 or $1500/month…ESPECIALLY considering home values are still fluctuating so much. People just cant justify buying a home that could easily lose value in the next few years AND pay a large mortgage, when they can just rent for a few years until prices stabilize. After all, homeownership rates are dropping at the *FASTEST* rate since World War 2. This means more people are renting. And if more people are competing for the same amount of apartments, landlords can charge more rent.
After all, apartments and homes are viewed as a basic necessity. People are always going to need a place to live. Whereas they might not always NEED a place to shop like with a retail property, or they might not NEED a hotel to live for the night.
But again, are we creating our own bubble…AGAIN??? No one can tell the future, but in my opinion we’re not. And there’s a few reasons behind this. Currently and likely for at least a few years, people aren’t buying homes in en mass…they’re renting. There’s also not a lot of apartment projects appearing in many established markets. And even if people are STARTING to build, it can take a good 18 months to 2 years for an apartment to be built from start to finish. Another concern is in regards to owners over leveraging their properties. Yes, the interest rates are ridiculously low, but due to the recent crisis in 2008, most banks and government entities have imposed higher debt service ratio’s and have stopped using fake pro-formas. In other words, you can borrow 75 or 80%, but you better make sure you have more income to cover the loan, and that income had better be current, NOT what you can likely raise it to.
So in this current state, do I feel the apartment market is just another bubble waiting to burst? Not really…so long as investors continue to use leverage intelligently and the market doesn’t become flooded with new apartment buildings, most apartment owners with proper management are set to make a nice return in what most view is a very stable type of asset class…now that’s good to know. 🙂
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