Apartment Building Investors Versus Apartment Building Speculators
September 23rd, 2008 by Ted Karsch | 7 Comments | Filed in Commentary, Commercial Real Estate
Investing, in my opinion, should be treated like a business.
It requires a product which produces an income or cash flow larger then the expenditures necessary to sell the product. Therefore, it should produce a profit for the manager or business owner.
Unfortunately, many investors are actually not investors at all in the business sense of the word. They are in fact speculators. Most people who own stocks are in fact speculators and not investors, according to my definition. These stockholders are speculators because their holdings don’t produce an income that exceeds their expenditures. Expenditures for stock holders include the erosive effects of inflation on the true value of securities and the cost of holding the stocks or commissions and management fees. These stockholders are speculating that the price of the stocks in their portfolios will rise over time and they will cash out their winnings. Meanwhile, the stock price could down or the company could go out of business and they could lose all of their invested capital. It has always been interesting to me that most people who buy stocks actually consider themselves investors when they are really speculating.
Analysis. What Analysis?
Many of the people who have an interest in apartment building investments are somewhat fearful of actually buying one because they don’t know how to evaluate them properly. On the other hand there are other investors, who also lack the necessary knowledge to truly evaluate the investment potential of an apartment building but they have no fear at all. This second group jumps right in and begins to make offers on properties just based on the recommendations of a realtor or even a friend who is equally inexperienced. Warren Buffet once said that “risk comes from not knowing what you’re doing.” In my opinion this sums up the true risks inherent with an apartment building investment. For this reason, all new apartment building investors should carefully study how to evaluate whether an apartment building will really be a profitable investment.
How to Learn Apartment Building Investing
The way to get the proper education is simply to read as many books as possible about the subject and learn how to analyze the rent rolls, the income and expense reports and the commercial appraisals when available. The new investor can also contact experts in the industry such as commercial mortgage brokers, commercial realtors and commercial appraisers. This is truly the “edge” that apartment building investors have over stock investors and even residential real estate investors. With apartment building investments you have access to the blue print for the business. It is just your job to properly understand what it is saying. The answers are in the details.
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Tags: apartment building investments, apartment investing, buying apartments

This is an unfortunate circumstance for many young families who may not be able to qualify for a mortgage to purchase their new home because of tighter bank underwriting guidelines.
As I stress time and time again to new apartment building investors, before making an offer on any apartment building real estate property be sure that the investment will be a profitable one. Banks and commercial mortgage lenders will only lend money on an apartment building that has a Debt Service Coverage Ratio of at 1.2. Once the investor has done his or her work and found a profitable apartment building to purchase then the next step is to structure a offer.
With the recent melt down of the sub prime mortgage market banks are tightening up their lending practices in the commercial sector of the finance industry as well as the residential. What this means for the apartment building investor is that he or she needs to make sure that he is working with a commercial mortgage broker who has experience preparing apartment building loan packages in tough times.
Most people who invest in apartments have some experience investing in other types of real estate, typically residential homes or duplexes and triplexes. The issue that new investors face is the fact that apartment buildings are valued by different methods than residential real estate. In fact, it is usually quite easy to find the fair value of residential estate using a comparative sales approach. The comparative sales approach simply uses the existing sales prices of similar residential properties in that particular area and determines value based on an average sales price of comparable properties. This should be very straight forward. 
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Ted Karsch.




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