I am looking for passive cash flow, let's say the cap rate is about the same. For 500k investment, do you invest in apartment complex or single family houses in Dallas TX?
Reason for thinking invest in apartment complex is easier to manage and lower cost for expenditure.
Hello @Peter Sik
I agree to an apartment. The reason is economies of scale. This is the cost advantages that you/investor obtain due to size, output, or scale of operations. It also cost per unit decreasing with increasing scale as fixed costs are spread out over more units.
Depend on your goal... Now it is harder to find good deal in Dallas for both ...
- Easy to acquire
- Easy to manage (Long term tenant)
- Easy to sell
- Longer to acquire
- Need Management in place
- Longer to sell
Apartments have several advantages over SFR, but I will tell you two that standout in my mind. One, economies of scale (mentioned by Peter M above). In a 300 unit apt community, I can hire a FT handyman that can go purchase 300 toilet handles (should be able to negotiate cheaper price per handle than w/SFR where I have to pay retail), the handyman is not charging me a per visit call and will know exactly why these flushers fail while an outside person at your SFR may fumble around, troubleshoot and not fix it right since its the first time visit to your property.
But the other one is that commercial real estate is valued differently than SFRs and small MF (4 units and under) which are valued by comparables to other like properties. MF apartments for instance (commercial) are valued based on NOI and cap rate concepts. By far the most important thing here is that by buying value add types of apartments where the owner can renovate, add additional revenue generating amenities (maybe covered parking, or privacy fences off the first floor units, or retrofitting plumbing to reduce overall utility costs) have a direct impact to NOI. The concept is called forced appreciation. It's a mind blowing concept few understand or often overlook when they do this comparison.
Why is this important, if the market goes sideways and there is no SFR appreciation happening, whatever you do to your property w/a SFR is not likely to increase its value because its being compared to other like SFRs in the area. However, not so much w/your large MF. The operator has much more "control" if purchased correctly w/value add mentality to "create" value, so that a sideways market is not as relevant. The FMV of an apartment is simply the NOI / cap rate. If I can drive the NOI higher by appropriate renovations, better property management, etc then I'm much more in control and can move the NOI needle up. If cap rate stays the same for example, I've just created a higher FMV. For every $100K in additional NOI positive I create on a 6 cap for instance, I created 100K/.06 = + $1.67M in FMV on the property. Is that amazing or what?
SFHs rarely cash flow due to the added costs associated with having only one paying tenant per unit.
In theory it would be a personal preference when cap is the same but in the real world the apartment will always produce the greater cash flow when properly managed.
Thank you for the inputs
I have a few questions for apartment complex:
1. Up to how many units, a manager must be hired?
2. Around how much the salary for apartment manager?
3. Can I use a management company instead of on-site manager?
4. For 10 units, around what yearly amount for the property insurance?
I don't live in Texas, do you think it can be handle the apartment complex remotely? If necessary, I can move to there.
@Peter Sik , generally you hit the right economy of scales at around 70 units to be able to hire a full-time manager. At this size, even if you get a management company to manage, you would be large enough for them to put an onsite manager at your property. Smaller properties will also cost more for management, as a percentage of rent. Smaller properties you generally think 8-10% of rents, whereas large MFH you will be around 4-5% instead.
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