Apartments Offer Best Returns

by Howard Bell

In general, rental property is better positioned for this downturn than most other properties.

Why Do It?

According to the National Multi Family Council, U.S. apartments have provided the highest risk-adjusted long-term returns of all real estate asset classes and with less volatility.

1. Because investment income property is a cash flow business it has benchmarks and some standardized methods for determining value. Cash flow provides the investor with an objective evaluation tool.

2. Leases are generally one year, rental income makes relatively quicker adjustments than long term AAA leases or larger shopping malls etc. Apartment buildings have 12-14 month development cycles and can react in a timely fashion to the needs of the market place.

3. Apartments have a lower cost of capital and availability of debt capital thanks to Fannie Mae and Freddie Mac. Its a matter of policy.

4. Demographic trends are favorable. As a result, demand for rental housing in the U.S. is expanding at the strongest pace since the mid-1980s. Three million new renter households were created as a result of new household formation, declining rate of home ownership, foreclosures bringing new renters to market and the echo-boomers coming of age

5. The cost of gas and the time it takes to live in suburban/ex-urban areas is taxing and many people are moving back to city hubs for the convenience.

Todays Market

Things are tough in commercial real estate. Vacancy rates are up and rent rates are declining. Because income property is evaluated using cash flow, values are declining and are likely to continue to do so for awhile. Its not likely we will see the free fall that home prices have experienced, in part because investors are not emotionally driven buyers. So development didn’t get out of whack and there wasn’t as much of a bubble.

Reis Inc., a third-party commercial real estate data provider, notes apartments will continue to be the beneficiaries of housing’s ills until “expectations of price appreciation” re-emerge with stabilization of the housing market. Vacancy rates may rise and rent rates may drop, but the crashing collapse we‘ve seen in the housing market is not likely. Cap rates have already adjusted to lower cash flow and are now at 2004 levels. Attractive evaluations are beginning to create demand. The banks are not helpful, but Fannie and Freddie have stepped up and mortgage financing liquidity is available.

The apartment market is viable, even in times like these. The National Multi Housing Council points out that “relative to other investment classes such as industrial, office or retail, apartments translate 83% of NOI into cash flow while other property types range between 64% and 74%

See Howard Bell’s feature, Get Your Property Rented Faster.

Howard Bell PFP CCRM is the founder/editor of Your Property, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.

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