Three Frequently Asked Questions About Investing in Apartment Buildings

In working with passive and aspiring active apartment investors, we tend to hear similar questions over time, making us realize that many others may also be looking to get the same questions answered. Below we will answer three of our most frequently asked questions.

Three Common Questions About Investing in Apartment Buildings:
1. What market(s) should I invest in?

This is a very common question. It is highly dependent upon what your objectives are for your real estate, and more specifically, your apartment building investments. Prior to working with any capital partner or coaching student, we spend some time helping them determine what they need real estate to do for them financially. Remember, real estate is typically a means to an end. Once you have clarified what your end goal is—whether that be wealth creation, short-term cash flow or both— you can then determine which market(s) is best positioned to deliver on your objectives.

Our own investment philosophy has been weighted towards wealth-building through equity appreciation. This means that we are trading-off high cash flow for longer-term value growth.  

We typically target markets with populations of more than 100,000 with strong economic fundamentals like population growth, job availability and growth, GDP growth, strong demand for rental housing, a good transit system, and a diversity of industry. Investing in markets that are characterized by these features provide our investments with added levels of protection during periods of economic slow-downs and growth during economic prosperity. 

Keep in mind that there is no right or wrong answer to this question, there is only what is best for you and your own goals.

2. How does cash flow vs equity growth markets influence tenant profile?

Firstly, let’s define what is meant by cash flow vs. equity market. Cash flow markets are ones where cap-rates are relatively higher, where properties tend to produce cash flow. Conversely, markets that are deemed to provide more equity appreciation in the long-term tend to have lower cap-rates. The tenant profiles in each of these markets may vary due to the following market features.

Lower cap markets where transit systems are abundant, population is growing, and more job opportunities exist attract a wider variety of tenants. In markets where fewer jobs are available and public transit systems are lacking, you may find a narrower profile of tenants. In higher cap-rate markets (where cash flow is more likely), population growth is typically slower and population size is relatively smaller – leading to a narrower base of tenant profiles to market to.

3. What are the main benefits of investing in commercial residential properties compared to single-family homes?

The following are some of the main benefits of investing in commercial residential properties (5+ residential units):

1. Mortgage qualification is highly dependent on the property’s financial performance than the relying on the guarantor(s)’ personal financial situation. This financing factor is extremely beneficial as investors try to scale their portfolio given that the traditional limitations of residential mortgages do not apply.

2. Economies of scale. Having multiple residential units under one roof lends itself to a number of efficiencies that are not realized with single families. For example, one roof, one heating system, one physical location to manage with regards to property maintenance. You get the benefit of multiple rental units in one physical location.

3. More control over the valuation. Commercial real estate is primarily valued using the income-based approach. The higher the income, the higher the relative value of the property. Residential real estate is typically valued using the comparable approach, meaning that the value of residential real estate is highly dependent upon the values of similar neighbouring properties. This is beneficial when markets are hot, but not so much when markets are in decline as your property’s value will follow suit. While commercial residential properties do follow some market dynamics, the income generated is the primary vehicle by which it is valued.   

Stay tuned for future blog posts that will address other frequently asked questions!
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About the Author:

Mark Baltazar, Co-Founder of Peak Multifamily Investments

With 18 years of experience in business strategy and corporate consulting on the global stage, Mark brings a wealth of business management and operational expertise to real estate investing. Winner of the Real Estate Investment Network’s Top Player Award in 2017, Mark continues to build strong momentum in growing his real estate portfolio.

His strong analytical background enables him to bring a strategic rigour to portfolio expansion and the assessment of investment opportunities.

With five years of real estate investing experience across various strategies, Mark oversees Peak’s capital raising, client acquisition, partner relations, educational content development while ensuring the company delivers on its promise of helping others build generational wealth through apartment building investing.