Apartments are a basic necessity. Economics, or the affordability of housing, force many people to rent. This creates the broadest and most competitive marketplace in the commercial/investment field. There are more apartment buildings than office, retail, and industrial properties combined. The continued volume of building permits indicates that strong multi-family construction will continue. Present economics of housing indicate that demand for apartments should not only continue to be strong but will also probably increase, and that the value of existing properties should increase markedly.


Types of Apartment Buildings
  • Garden Apartments: One- and two-story buildings; often a courtyard or single-family-type setting; wide range of units.
  • Walk-Up Apartments: Three- to five-story buildings, no elevator; area may be mixed single and multi-family; usually only two or three different types of units.
  • Mid-Rise Apartments: Six to ten stories serviced by elevators; usually inner city or dense suburbs; limited range of unit types.
  • High-Rise Apartments: Buildings with more than ten stories; underground parking and security; full service; standard plan with limited unit types.

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Factors Affecting Apartment Investors
  • Apartment buildings can be leveraged to a higher degree than other commercial properties.
  • The tax shelter benefits have been favored, although investors usually do not purchase apartments solely for the inherent tax benefits.
  • Real estate has never been considered a liquid asset, and prior to the mid-1980s, apartments were usually more liquid than other real estate vehicles. In the late 1980s, the apartment market slowed as a result of the loss of favored tax treatment. After a period of adjustment, they are regaining popularity. The resale market is generally good.
  • Less sophistication is required to own and operate apartment buildings.
  • A utilitarian demand exists because people need a place to live.
  • Variety of apartment sizes and prices allows various types of investors to enter the apartment ownership market. From individuals to major corporations and pension funds-all own apartment buildings.
  • Entrepreneurial efforts can increase value. Unlike other real estate vehicles, apartment building value determinants (occupancy, income, expenses, financing, etc.) can be affected by the owner. It is also easier to do than with other real estate. For example, in an office building, major tenants have long-term leases that cannot be renegotiated until the end of the lease period.
  • Professional management is usually available, but at a cost.
  • Unit mix must be matched to the demographics of the area (e.g., studio apartments are less likely to succeed in a family area).
  • Not having key or anchor tenants may be an advantage.
  • Exposure to government regulations (primarily rent control).
  • Institutional and seller financing availability.
  • Apartment visibility and close proximity to major highways, labor, transportation, shopping, and residential housing tracts are good elements.
  • Pricing apartment buildings involves the use of the gross-rent multiplier, price per square foot, price per unit, and capitalization rate as "rules of thumb," or value measurers.
  • Deferred maintenance can be extremely costly and detrimental to achieving investment objectives.
  • Ratio of land to improvements affects the amount available for depreciation, and this affects the tax benefits associated with the property.
  • If the owner is required to pay utilities, it will substantially affect the expenses connected with the property.
  • Vacancies affect the appeal of the property, as do the number of units on the market, and whether or not rents are in line with competition.
  • Parking conditions and the number of spaces available, as well as the type (covered, carports, open).
  • Furnished vs. unfurnished affects the rental schedule and amount of depreciation available.

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