Commercial real estate is everywhere and is a means of building an investment that increases in value every year and affords you an income every month. We continue from the post on Apartment Buildings For Sale – Cap Rate and we delve into apartment buildings and basic economics.
Location is always a key factor in determining the value of a apartment building, or any building for that matter. It is important because it will affect the demand for the apartments. There are a number of questions to be considered when location is the key.
- Is the building located in a favorable neighborhood with a sound economic base and is the area alluring?
- Is the building located in a area where there is reasonable access to municipal services such schools, buses and shopping centers?
- Is the building located next to a major highway with interstate access for people who are required to commute every day?
- Is the building located close to a technical college or university where there are students looking for accommodation?
Type of Apartment Buildings
Conventionally, apartment buildings are rated into one of three classes:
- garden or low-rise multifamily residential apartment buildings are no more than two to three stories high characterized by landscaped gardens and normally with a patio or balcony area. They are less of a drain on community services than the high-rise buildings and are usually located in suburban areas.
- Mid-rise multifamily residential apartment buildings reach four to six to eight stories although this number appears to differ depending on the location. These types of buildings usually have an elevator.
- high-rise apartment buildings and towers are generally higher than the six to eight stories. The cost of construction of each unit rising disproportionately with the height of the building.
The type and size of a apartment building ordinarily depends on the zoning laws associated with the location as well as the value of the underlying land. It follows that a apartment complex constructed close to the Central Business District (CBD) will be a high-rise apartment. This is required to justify or offset the typically high cost of the underlying land in that location.
Demand for Apartments
The demand for apartments seems to have increased over the long term. Even though the demand cycles do vary, the risk as opposed to the return from apartment buildings tend to make them a good long term investment option.
The growth in demand may be the result of:
- The aging of the baby boomers now considering retirement and looking to downsize.
- The growth of the population due to immigration.
- the life styles of young adults.
- the demands being made on young, professional individuals to keep on the move in a technologically mobile society.
Supply and Demand
There is always going to be some form of cyclical change in the supply of commercial buildings. When the demand for apartments exceed supply then the rents will naturally increase. This is the first principle of Economics 101. This is a profitable time for investors and a time when developers tend to release new apartment buildings onto the market. When supply exceeds demand, rentals will naturally fall. By how much, depends on the number released.
Potentially, the existence of such a cycle may present investors in apartment buildings with a profitable opportunities. Buying when the supply exceeds demand and the rents are down and all other factors in the area are stable, is a good thing. Selling when rents are high and there is a shortage of apartments should also prove profitable for investors.
Vacancy rate is an easily obtainable index signalling excess demand or excess supply in the market that the apartment building serves. If the vacancy rate is under 5% then expect the rents to rise and above 20%, expect the rents to fall. Once again, the location of the building is a determining factor as to whether the overall city wide vacancy rate is applicable to a particular building.
Converting Abandoned Commercial Buildings
In recent years, investors have been involved in converting buildings designed for other purposes than apartment buildings. Recently in Osage Beach, a counselor approved the conversion of a abandoned commercial building into 4 unit residential apartment building.
This is definitely not the first time this has happened as school and office buildings in commercial zoning locations have been transformed into apartments for a serious profit. Naturally, when these buildings are no longer used for the purpose originally intended, smart investors can obtain them for a devalued amount. Obviously the location would have to be suitable for apartment dwellers and forward thinking aldermen to approve the conversion.
No matter what sort of investment you are undertaking, there are always several factors to consider. The main reason for it is so you can make money from this deal. In order to respond positively to this, it is important to be able to accurately determine the value of an apartment building.