Economy of scale wears several hats in apartment and multifamily real estate investment:

· Apartment buying discounts – go to the Home Depot or Lowe’s and tell them you want one refrigerator. You’ll get a good price. But, tell them you want a dozen, and you get a cup of coffee and a special quote.

· Multifamily structure maintenance – If you own a dozen rental homes, you have a dozen roofs with different ages and in different stages of condition. With a single building multifamily property, it’s just one.

· Landscaping and outdoor maintenance – Those dozen yards require trips to each for landscaping, or at least careful watching if you’re leaving it to the tenants to do. The apartment property is in one location, and landscaping and yard services do it all in one trip.

· Cash flows ramp up with more units – The savings already mentioned combine with multiple rental units all in one place to produce much higher cash flows than taking them apart and spreading those twelve units all around town.

· Buying more units is no more of a task – Whether you’re doing a negotiation and transaction for four units or twenty, the effort is the same. The due diligence is concentrated, rather than spread out.

Those all relate to a larger number of units in one place. But, there are benefits in commercial apartment & multifamily investment that are derived from the higher dollar value of the properties as well.

If appreciation of real estate in the area is expected to be 15% over your holding period, would you rather be holding $200,000 worth of property, or $2 million worth? The difference is more than a quarter million dollars in your pocket.

One more benefit that began to show huge promise during the collapse of the housing and mortgage markets beginning in 2007 is the increase in rental demand that comes from homeowners displaced by foreclosure.

Any commercial real estate investment portfolio will be greatly enhanced with the addition of apartment and multifamily properties investment.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

The Cap Rate Calculation

Simply stated, the cap rate of an apartment property is the net operating income divided by the price, either asking or sold price.  It represents the rate at which the investment is recaptured by income.  The higher the cap rate applied to the same income, the lower the price.  The lower the cap rate applied to income, the higher the selling price.  In other words, a high price paid for income has a slower recapture, or lower percentage rate to get the investor’s investment back.  An example:

Net Operating Income / Price  =  Cap Rate

$105,000 / $1,500,000  =  .07, or a Cap Rate of 7%

In this calculation, the price could be either an asking price, or a recently sold price, depending on the buyer or seller’s goals.  If a buyer is considering buying the property in this calculation, the “price” in the calc is the asking price.  The buyer would get the cap rates of comparable properties sold recently in the area to see if this cap rate compares favorably.  If other properties have been selling at 9% cap rates, the price would need to come down to get that cap rate:

$105,000 / .09  =  $1,167,000

As other properties are selling at a 9% cap rate, to be competitive this property would need to be priced at $1,167,000 rather than the higher price it’s listed at with the 7% cap rate.

Looking from a seller’s side, there is a property owned that has a net operating income of $125,000, and the seller would like to determine a probable asking price for the listing.  Going out and getting the comps, prevailing cap rates average 8% for previous sales.  What would a probable listing price be, all other factors being similar to previous comparable sales?

$125,000 / .08  =  $1,562,500

If this seller wants to move the property quickly, using a 9% cap rate would yield a selling price of approximately $1,389,000.  Buyers and lenders will see more value in this apartment property if others are listed at the lower cap rate.

Karen Hanover, CCIM Candidate
Apartment Education Institute, President