Knowing what not to do is as important as knowing what to do!
Why High End is Out
Apartment properties are classified under 4 general categories, ranging from “A” to “D.”
A is the best – brand new or almost brand new, sparkling and expensive with all the extras. These are for those with higher incomes who want luxury apartment living.
So why is this a bad thing?
Why to avoid apartments that seem like they’d make a lot of money?
The reason is simple – these don’t appeal to 90% of apartment seekers.
Sure, there are those that want a $2,000 per month apartment… but people with this kind of money will probably also have good credit and good jobs.
So they’re short timers waiting to buy a house or waiting to sell one.
This is not to say these aren’t good properties… it’s just that when you’re new and when you really want to make some serious money with apartments, stick with the majority.
There is a higher renter pool of middle class blue and white collar workers with poor to average credit – and students.
Why Avoid the El Cheapos
Although some seasoned investors can make good arguments as to why you should choose from the bottom of the barrel – it’s generally a place best left to them.
With low-rent apartments in high crime and low-income areas, you run into some very common problems.
You’ll always have to deal with rent-dodgers, poor construction and consequently a lot of maintenance and probably some very sketchy tenants at that.
Also, while rehabbing a property can add tremendous value now and in the future, there’s a limit.
You want to fix up a property that needs some cosmetic work, paint, perhaps some new landscaping or even re-paving.
What you don’t want is something that looks like it belongs in downtown Beirut.
Don’t Become a Ghost Buster
It may seem that on the surface an empty or almost empty property is a gold mine.
After all, we know that income determines value, and if a 200 unit apartment complex only has 20 units rented – or none – then it’s gonna be cheap, right?
Why is it empty or near empty?
In this day and age, apartments in good areas near jobs and schools rarely go far below an 80% occupancy rate. 80% is pretty low, in fact.
So if one is nothing more than a home for tumble weeds – watch out. There’s one or more reasons why you may not want to tackle this problem now.
The truth is that you probably won’t find many 200 unit properties that are empty. This is more of a problem in small places with 5 to 20 units.
So What Should I Look For?
If you haven’t read the previous article, go back and do so.
It goes into this question in more detail. However, here are a couple of rules of thumb to go by:
- Properties near colleges and community colleges.
- Apartments near business and industrial districts – jobs in other words.
- Properties near major thoroughfares and highways.
- Places near the beach, parks and other sought-after locations.
One more thing – the best properties – the most profitable now and when improved, are going to be the class “B” and the class “C.”
Class B – 20 to 30 years old or so. Good condition with few significant deferred maintenance issues, good amenities and at or just below market rents.
Class C – Older properties from 35+ years or so. Good construction, nothing too fancy with some "fixable" issues and rents below market rents.
Focus on B and C and you’ll find solid properties that are probably priced right and have upside potential too. These are where most of your tenants will choose to live.
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