When investors think of what it means to invest in real estate, there are two common things that come to mind. One is the holding of rental properties. The other is fixing up rundown properties and selling them for a profit.
Now, when it comes to working with apartments, which are my specialty, the idea of rehabbing gets really exciting. Nothing motivates an apartment owner to sell like having a bunch of rundown, outdated, or decrepit units that either can’t be rented or can only command either low rents or subpar tenants. It’s all too common, especially for apartment owners who have been in the business for a while, to see a large scale need to update and renovate as a sign from above that it is time to move on and sell the building.
This situation can be your goldmine and it has been mine too in the past. Apartments that are in disrepair should command a significant discount, credits at closing for repairs, or both. What you want to look for are deals that have the greatest upsides. By this, I mean a rundown apartment building in a low rent part of town may not command that much more rent when it is renovated so the upsides are weak.
Conversely, a rundown apartment building in a decent area of town may have depressed rents that are more attributable to the property condition than market rents in the area. These are some of the best deals to pursue because the upside here is tremendous. Imagine a 100-unit apartment building that is only 70 % occupied and whose rents are 20% below market because the property is in dire need of an overhaul.
If the value of this property is normally $5,000,000 ($50,000 per unit), then you might expect to be able to purchase it for $3 million in its current condition, equivalent to $30,000 per unit. By most models, rents of $300 per month should cover the note on such a value. Let’s say you invest an average of $10,000 per unit to update the property, bringing your total investment to $4,000,000, or $40,000 per unit. Upon updating, the market rents of $550 per unit are now competitive and reasonable, making this property both an equity source and an income producer. See how this works?
Unlike single family homes, whose retail values after a rehab are subject to the whims of market sales conditions, apartments are more valued based upon income. When you can increase both occupancy rates and the rents, as a result of a rehab effort on an apartment building, both income and property values will increase.
Can you see how rehabbing applies as much to apartments as it does to single value homes? Can you see how the worst looking apartment building in the neighborhood could be your best investment opportunity? Real estate empires are built by both seeing things differently and knowing the proper actions to take to get maximum results from every investment. Rehabbing single family houses will make you money. Rehabbing and either selling or holding apartments can make you a fortune! Which do you prefer?
