Often I ask investors why they choose apartments as their product type of choice in commercial real estate. The answers vary far and wide from “that’s what I understand” to “I inherited these apartments and never sold”. Few investors have actually compared multifamily units against other product types.

Those professional investors that made such side by side comparisons, provided solid reasons why they invest in apartment units. A recent speaking appearance at the UCSC Sunnyvale campus gave me reason to share a part of my presentation. First and foremost there are 4 primary reasons to invest in ANY real estate, in order of priority, they are:

ü Cash flow (measured by the consistency and durability of payments)

ü Principal Reduction (Loan Balance),

ü Tax Advantages (accelerated through Cost Segregation) and lastly…

ü Appreciation. Why is appreciation listed last? It is the component over which an owner has least control, it should be considered a bonus!

Excluding the discussion about job growth / local factors

Arguments to BUY OR HOLD Multifamily assets

• Lowest average vacancy factors, The #1 reason to be invested in apartments versus other product types.
• Shorter leases allow owners to capitalize on changing markets
• Financing is easier to obtain than other product types, because of reduced risk, see vacancy factors above…

Arguments to SELL Multifamily assets

• The 4 T’s; Tenants, Toilets, Teenagers and Turnover
• Litigation, legal compliance requirements and Management headaches
• Exhausted tax advantages
• Rents not keeping pace with Acquisition costs
• Appreciation has peaked
• Financing limited by debt coverage ratio rather than Loan to Value

Your feedback and comments are always appreciated. Please contact me at Pete@ConsultPete.com or 925-719-3569. Many thanks to my listeners and readers for providing feedback. To learn more about my background, visit Consult Pete. To learn more about my company strategy, visit Commercial MasterMinds.