Single Family Homes vs. Apartment Buildings
Warren Buffett, the third richest man on the planet, has a simple investment philosophy – ‘Invest in What You Know’. Don’t try to invest in businesses or other vehicles that have an overly complex business model. Keep everything simple. That way you can evaluate it easily and know right away if it is a winning investment. Apparently, this philosophy has been working for him pretty well.
For simplicity’s sake, it makes a lot of sense to stick with single family homes – especially for newer investors. Almost everyone has lived in a single-family home at one time or another. Most real estate investors own their homes. They know what makes a home valuable:
- Good vs. bad floor plans
- Good neighborhoods
- Typical problems with homes
- Good construction vs. bad
If you have ever bought a house, you also know about the financing. Regular mortgage loans, even for rental properties, are some of the easiest, lowest-interest rate loans out there. It is also easy to obtain seller financing if the seller is willing to participate.
There can definitely be problems with the homes – including problems too large to fix, such as structural issues, or problems with the land. These problems can happen with any real estate investment, however, and are just part of the due diligence process.
When purchasing homes from motivated sellers, you are also generally not dealing with the most sophisticated negotiators in the world. Please don’t misunderstand – we are not trying to take advantage of anyone. However, homeowners who become motivated sellers are willing to pay a high price to fix their problem. That price comes in the form of a lower purchase price to you, the investor.
Larger real estate investments such as apartment buildings and other commercial properties are much more complex. While it may be true that many investors have lived in apartment buildings, they do not have a good idea of what makes one a good deal. In addition, the seller of a commercial property is almost exclusively another investor or investment company. That means even if they have run the building poorly, chances are they will be more skilled negotiators than the residential homeowner.
Commercial real estate financing can be much more complicated than residential mortgage lending. Although the commercial financing may be much more tied to the building’s equity than your personal property, lenders will often still require you to sign a personal guaranty which puts all your assets at risk. You will also typically have to send in tax returns and financial statements to a commercial lender periodically to show the business is doing well.
There are also many fewer apartment buildings out there compared to single-family homes. When a decent deal does come on the market, there will be a lot of competition from other sophisticated investors. Single-family homes are much more abundant. Many deals can slip under the radar of other investors, especially when you find these deals through marketing methods such as direct mail.
When a single-family home comes on the market that needs extensive rehab, many retail buyers will pass on the home because it is too much work. Apartments that need work just have the repairs priced into the purchase offer with your competition.
If you follow the philosophy of staying with what you know and what is simple, then you are probably the right investor for single-family homes. Let us help you find deals on them through our marketing services.