Larger Residential Investment Properties

Once you've gotten your investment feet wet in single- or multifamily homes, you may ready to move up ladder to larger residential property investments. These opportunities come in a wide variety of sizes (from small apartment buildings to major complexes with hundreds of units) and price ranges. Equally diverse is the tenant population of such properties; in them you're likely to find singles, newlyweds (possibly with their first child), retirees, and empty nesters. The one thing that these people have in common is that, though for individually different reasons, they don't want the headaches and responsibilities of home ownership and prefer to rent for the lifestyle flexibility that it affords them. Of course, this also means that residential complexes will tend to have a high degree of turnover (depending on economic conditions and location; for example, an apartment complex near a university will probably see a regular turnover as students come and go). Usually, however, the demand outpaces the supply, providing a clear potential for investment growth.

Apartment properties are generally divided into several categories: garden apartment complexes, attached rows of townhouses, low- and high-rise apartment buildings, and boarding and rooming houses. The value of investing in one over the other is relative. For instance, if a garden apartment complex produces a higher rate of return on cash invested than a high-rise apartment building, you might decide to purchase the former. On the other hand, a more conservative, risk-averse investor may prefer the high-rise building. The more management and attention a property demands, the higher the rate of return that it should provide. For the purposes of this article, our discussion will be limited to garden apartment complexes and high-rise apartment buildings.

Garden apartment complexes usually consist of groups of two- to three-story walk-up structures with up to twelve apartments per building, or rows of apartments similar to townhouses. A garden apartment complex may, however, have as large a number of units as a high-rise structure, though they're typically spread between various buildings over several acres of land.

Because they're often (but certainly not always) small and more management intensive, garden apartment complexes usually sell for lower relative prices, giving a higher rate of return in comparison to other properties that are easier to manage. As such, you can frequently buy garden complexes with a lower down payment, thereby taking advantage of additional profits through the use of "other people's money" (or OPM).

However, maintenance and management attention tend to be larger factors with garden apartments. Because of the sprawling nature of this type of property you'll probably need to hire and manage staff to handle the landscaping and repairs. Additionally, insurance costs are likely to be somewhat higher because of the numerous buildings extending over larger areas of land. This raises the risk of fires and property damage, as well as overall liability. In some areas, garden apartments may also have higher security risks and hence require guard personnel.

A high-rise complex can be defined as an elevator building with many floors, and many apartments in each building (if there are multiple structures). Typically, high-rise buildings are constructed in strategic locations where land is very scarce and therefore expensive. Thus, the higher land costs are divided across many units, providing an economically feasible cost per unit. Of course, the rents and net income are nevertheless commensurate with the high land and construction costs.

High-rise apartments offer economy of scale; in other words, because everything is in one building (such as the electrical and plumbing systems), maintenance repairs and management functions are easier to accomplish and keep track of. Therefore, they're frequently easier and less expensive to operate on a per-unit basis than more sprawling complexes. Financing is often fairly easy to obtain, because lenders generally recognize that the owner will not be overly dependent on a limited number of tenants for income. And because of the difficulty of duplicating the property sites and ever increasing building costs, high-rise complexes usually offer the potential for substantial long-term appreciation.

Obviously, high-rise apartment buildings sell for correspondingly higher prices, due to the large number of apartments and their related income. As such, they're generally not recommended for inexperienced investors, whether individuals or groups.

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