MacFarlane Real Estate, Inc.

In college at UC Davis, I began to get interested in investing and making money.  I read books about the stock market and specifically became fascinated with Warren Buffet and Berkshire Hathaway.  I admired Buffet’s basic approach to investing.  He looked at the underlying numbers of a company, not the glamour of the hottest new tech stock.  Buffet never cared what the next guy would pay for a company.  Buffet looked to make money on the cash flow.  Well…   Apply that principle to real estate.

If an investor looks purely at the numbers (Rental Income Verses Expenses) of an investment property, apartment buildings in low-income areas are shining jewels!  That’s right!  The money is in the hood!  Haven’t you heard of “slumlords” making tons of money?  Well, I don’t suggest being a slumlord.  But, I do suggest looking at the numbers of a low income apartment building in comparison to other investments. 

Let’s look at three scenarios; a single family home, a Class A 4-Plex, and a 14 Unit Apartment Complex in a low income area.  All three properties are worth $1,000,000.  A single family home worth $1,000,000 is likely to rent for about $3,500.  4 Units in a nice area of Pasadena are likely to rent for about $1,600 each, for a total of $6,400 of income.  A unit in a low-income area is likely to rent for about $900 per unit, with 14 units… there is a total income of $12,600.  

It is definitely more work to manage a 14 unit low-income apartment building than a 4 unit class A apartment.  Turn that work over to a professional management company for 6% of gross rents!  As an investor, you probably don’t want to manage any apartment building, class A or low-income.

What would Warren Buffet do with $1,000,000?  I think he would prefer low-income apartments! 

Let me preempt some of the normal resistance to low-income apartments. 

“Low Income tenants are harder on apartment units.”  Thats true!  However, less expensive maintenance and repairs are acceptable in low income apartment buildings.  The expense is only slightly higher in a low income apartment building. 

“I will have more evictions and turn-over.”  Go Section 8.  Have the government pay the rent and the tenants will practically never leave.  Little evictions and little turn-over.  In fact, the class A  apartment has turn-over because people end up buying houses, students graduate, etc… 

“I invest in commercial properties with business as tenants because they are professional and take care of my property.”  Businesses are failing.  The vacancy factor is sky high.  Businesses are not paying their rent on their office/retail space.  However, the owners are doing everything they can to pay for their home!  

Apartment deals start at about $500,000, making the investment accessible to many!  MacFarlane Real Estate, Inc. is finding investment properties that are great deals.  If you would like a complimentary property search, just call!  We are attorney-brokers that provide legal review and brokerage for the same brokerage commission.  Buy an apartment through us and you get the first year management for free!

Apartment buildings are commonly described as “income properties.”  Unlike single family homes, apartment buildings (a sub-set of the multi-family property category) are almost exclusively valued based on the amount of income generated on a per-month basis.  Appreciation is a factor, but it is not as important when compared to rent collection and the related considerations (i.e. rent control issues, market rents in geographical area, vacancies).

There are two major valuation approaches used when considering the purchase of an apartment building income property: 1) Gross Rent Multiplier (GRM) and 2) Capitalization.

Gross Rent Multiplier (GRM): This approach establishes a number which, multiplied by the gross income of a property, produces an estimate value of the property.

Annual Gross Income MULTIPLIED BY Gross Rent Multiplier = Value

In many cases, an apartment building is listed for a price and the seller discloses the annual gross income and the gross rent multiplier.  Most potential buyers have a GRM in mind when shopping for deals.  With that GRM figure in mind, they will make offers on apartment buildings of interest.

Capitalization: This approach determines value by considering net income and percentage of reasonable return on the investment (known as “capitalization rate” or “cap rate”).  The value of the property is determined by dividing annual net income by the capitalization rate.

Annual Net Income DIVIDED BY Capitalization Rate = Value