I would be interested in hearing you guys opinions on which type of residential commercial property to purchase right now.
Apartment complexes, from what I understand, don’t vary too much in value over the years. I am assuming that during this economic slump, they also did not drop in price too much either. Please correct me if I am wrong.
Multifamily houses have dropped considerably along with the single families.
Considering this, would it be more wise to purchase multifamily houses at this point in time and take advantage of the low prices, then sell them when the market has turned around for a premium and buy that apartment complex that never really changed much in value during an upswing in the economy?
I’m not sure I understand your difference between an apartment complex and a multi-family house. Are you talking about multi-family residential (4 units or less such a duplex or 4-plex) and multi-family commercial (5 or more units)?
Rents are dropping across the board, increasing vacancies and therefore, risk. This in turn has driven commercial multi-family cap rates up across the country by about 1%, with a corresponding 20% drop in values. If you don’t consider this much, then do the math with typical 5 to 1 leverage (i.e. you’re wiped out). Much of this is being driven by the number of single family homes that are now for rent.
Traditionally, SFH’s have accounted for between 40% to 50% of the US rental market. They are now approaching 60% and putting pressure on apartments of all sizes. (For a little more money, would you rather rent a house or an apartment?) Plus, there are an increasing number of areas in the country where it is now cheaper to buy a home than it is to rent (including Southern California). It’s not clear to me that things are going to get better anytime soon.
In spite of the rosy picture drawn by our politicians, there is still a big bow wave of foreclosures on the horizon. This can only mean added pressure to the entire multi-family rental market. While multi-families enjoy economies of scale, if you had an efficient way to manage them, I’d be inclined to buy a portfolio of single family houses and rent them. In general, there is currently more demand and less vacancy pressure on SFH’s than multi-families. They are also valued buy comps, not cash flow, and tend to sell for more per unit as prices recover.
Alternately, some people swear by 4-plexes. These are not commercial so they are also valued by comps and usually sell for a premium per unit. Some people like them because even though you might pay a premium, the total dollar amount is relatively small and the building sizes are easily managed. I’ll note that I am well aware of many areas in the country, especially the Midwest, where you can buy 4-plexes at an incredibly low cost per unit – often cheaper than in much larger buildings. These might make sense.
The only commercial apartment buildings I’d buy now are those that are distressed. Here you buy at a low enough cost per unit to absorb the vacancy pressure and can drive equity buy solving whatever problem is causing the distress. In my opinion, anyone who pays full price now, or buys a smoothly running building at market price (of any size) is taking a huge risk.