Apartment Building Investors Versus Apartment Building Speculators

by | BiggerPockets.com

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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  1. >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.

    I guess these would be the people who bid cap rates down to 3 and 4% in the recent past. How did they even get these bad deals financed?

  2. Nice try people.

    One has to understand the mentality of the seller. I have appraised real estate for 30 years in Cleveland, Ohio.

    Many sellers are older or retied and who most likely made two payments a month to pay off their mortgage.

    To sell is to part with that income stream. It is easier to pull the sellers teeth with an old pair of pliers. Also the old timer has to give the govt. 28% in cap. gains. Ouch

    To cool the situation offer a purchase money morgage for a five or ten year period that maintains 3 points over prime.

    Make sure to lay out the payments on paper and also put in your down stroke. These folks want to study this stuff overnight or give it two a CPA. If that does not work, walk away.
    Rick Linhart

  3. Rick Wrote:
    >”Nice try people”

    It sounds like you are disagreeing, but it is unclear who you are disagreeing with.

    >One has to understand the mentality of the seller.

    Agreed all negotiation starts with understanding your opponent and his or her needs.

    >If that does not work, walk away.

    Hmmm,that sounds like a contradiction. If that doesn’t work maybe you just haven’t found what the sellers true needs are.

  4. My closest friend cut BBQ in a kitchen before investing in apartments because 5 years ago there were books, available on Amazon predicting Wall Streets recent meltdown.
    6 years later he controls 41 complexes worth $1Billion. He’s no smarter than you or myself. 16,000 people get up, go to work all for one thing – to pay him rent. .05% makes him $200k a month.
    Now tell me buying any apartment complex is risky.
    Far easier than buying a home. It’s easier to borrow $3million that cash flows on it’s own than a $300k house dependent on you keeping your job.

  5. @Rick makes sense that an older aparment owner would be more interested in a continuing income stream than in a lump payment. Thanks for pointing that out.

    My question for the group is that, if you are planning on buying an apartment and making some changes, like shaking up the renter mix and fixing up the units to get greater rent (hopefully), how do you both keep it conservative to factor in the unknowns as well as reflect the benefits from the changes you plan to make?
    .-= Eric´s last blog ..3 Secrets to Reading Housing data for the Real Estate Investor, Part 1: Understanding Seasonally-Adjusted Data =-.

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