I was talking to a client about his financial goals and why he was drawn to apartment buildings as an investment vehicle. He talked about the appeal of tangible real estate, the benefits of multi-family vs. single family, the cost-savings that come from the economy of scale, and of course the appreciation of value… and on and on….
and I realized that he did not have a clue what multi-family investment was about, and he was investing for all the wrong reasons.
Multi-family is an investment in a business, it is not a real estate play.
A Coin Laundry is in the business of renting washing equipment, per job.
A public storage facility rents the use of an amount of secure storage space for a period of time.
A vending machine business sells convenience products.
An apartment building sells the right to use a living space for a period of time. This is a business activity- not just a real estate investment. It is very important – just like any other business operation- to purchase for Cash flow and based on the business’ net operating income, asset ratio, and so on. Like any business, the value is based on the Cap Rate.
This can be very confusing at times, since Multi-family investments are sold through realtors and real estate brokers. And yes, they are located on land and do carry some of the trappings of real estate ventures. But, the successful apartment owner realizes that the business of multi-family – marketing, customer service, maintenance, providing a desirable product – are all the core components of the investment and the value of the land/buildings, ie; the real estate, is secondary.
A multi-family investment approached from the perspective of a real estate transaction is far more likely to fail than a multi-family investment that is evaluated as as business and then successfully run as one.