Tuesday, April 04, 2006

Apartment Buildings: Big Boy Investing!

RE for the Big Boys
For anyone interested in making real money, you must consider buying apartment buildings in great cities. All day everyday, if you are reading this blog, you have probably heard all the scary news of how the housing market will burst. Bust or boom the greatest investment in real estate has to be commercial real estate. Commercial apartment buildings (5+ units) to be exact. These investments are ones I consider to be bubble proof but not fool proof. Remember the two most important rules of buying real estate.

Investment Rules
1. You make money when you purchase, not when you sell!
2. The greater the barrier to entry(inventory, location, price), the greater opportunity for making money. That's why Los Angeles, San Diego, New York and Boston are so expensive. Anyone can buy in Texas, but that means that anyone can also develop there too. More competition means less scarcity. Less land means greater demand. Simple econ 101!

Personal Case Study
I found a great little 5 unit apartment building in Los Angeles. The cost is $865,000 for 5 one bedroom units that all come with a loft. When purchasing an apartment building the barrier to entry is gigantic for the average person. Think of it, in order to purchase you need at least 20% down payment. There has to be a reason why getting admission to this party is so difficult. The answer has to be, because of just how very lucrative it is. I recommend these high barrier to entry markets only because home prices may or may not go down, but one thing nearly every investor can agree on is that rents are very, very low! Nearly 2.5 to 1 when compared to mortgages of like kind properties.

The Math
This apartment building is great because it presents a condo conversion opportunity. The market will stand selling these units for $300K when you can purchase each unit for $173K. You add about $30K to each unit for upgrades and conversion costs and you can do the math. A nearly $500K payday. I am searching for a lender that is willing to give better finance terms on the LTV, but I'll end this posting by saying the big boys own commercial real estate in tough to get into areas.

Tips (use
  • Commercial Real Estate is difficult to get into, but also lucrative. Consider partnering up. It is better to make 25% of $100, then 100% of $10.
  • In high barrier markets, remember to negotiate. Make money on the buy not the sell, this will sustain a price correction.
  • Consider your exit strategy before you enter. Income, condo conversion, flip.
Work the math on a deal I know very well. Address: 7120 S. La Cienega, Inglewood CA 90302. Use, (does not work), price paid was $535K about 9 months ago. Use $54K for fix up and holding cost, while rents more than cover the new note. See current listing price on here. Not bad huh?

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