Why We Love Apartments

Inflation Protection

In a recessionary environment, apartment buildings are one of, if not the most, attractive asset classes to own, as they offer a hedge against anticipated and unanticipated inflation. Asset value is based on the Net Operating Income (NOI) generated by the property, primarily from rents, which keep track with inflation. In fact, apartment investors usually benefit from inflation, as rents increase along with rising prices and wages.

Economies Of Scale

It takes about the same amount of effort to close a purchase on one condo as it does on an entire apartment building. In many cases, it is also easier to get an accurate picture of an apartment building's quality as the owners typically manage these assets like a business and maintain a comprehensive set of records.

Purchasing

The purchase and management of apartment buildings has many benefits over smaller properties. Banks consider them to be among the lowest risk asset class (depending on asset quality) and therefore financing and the use of leverage is possible even in a tight debt market. When shopping for large apartment buildings as opposed to individual units, the closing costs are also much smaller per unit as is the energy required to find your targeted number of rental units.

Value Creation

Once the buildings have been secured, there are also economies of scale in renovation and improvement, as the Trades are asked to bid on many units. By focusing on larger buildings with more units in one location, it is easier to attract and justify the engagement of professional property management. These two activities, renovations and management, will be responsible for much of the post-purchase value creation in a project and will allow the buyer to focus on further acquisitions and development opportunities.

Market Volatility Protection

If we consider a multifamily building of 100 units, a single vacant unit translates into 1% of rental cash flow lost. Vacancies are easier to fill if the asset is professionally run and attractively maintained. Larger properties typically offer more amenities than a single family dwelling, including pools, guest suites, laundry, internet, and more, making the vacant units marketable and desirable. Now consider a small four unit building with a single vacancy which may be difficult to fill. This scenario results in a 25% reduction of cash flow with considerably more uncertainty. These examples indicate why we prefer the return profiles and stability associated with larger properties.

Stable, Predictable Customer Pool

The factors determining the demand for apartments are based on demographic and market data. It can be used to predict occupancy rates, rents, and to a large extent, asset values. On the buyer side, the markets in which we invest have a large number of people looking to own income properties, which translates into a liquid market for actively managed assets that generate consistent cash flow. Apartment buildings are popular as an asset class, so they maintain a relatively high degree of liquidity. On the rental side, the wave of Echo Boomers entering the rental market will also drive up demand for rental accommodations in the medium term. In the U.S., it is estimated that roughly 70 million Echo Boomers will make their way through college over the next decade. This group will dramatically increase the demand for rental accommodation as the tight debt environment puts home ownership out of reach for many.

Ease Of Asset Evaluation

Unlike stocks and bonds, multifamily assets are valued on the size and quality of their cash flows or NOI. Credit is available freely on the strength of the asset itself and its cash flow. By employing a professional property management team that is familiar with local markets, we are able to increase the NOI according to our conservative operating plan. Predictable asset valuation and a consistent investor ROI (Return On Investment) can be achieved by focusing on flawless execution according to our proven model.