As I have already noticed in my previous posts among the main tendencies at the real-estate market we observe market’s cooling, rise of mortgage interest rates, growth of inventory, slowing of price appreciation, and increase of apartment rent. In accordance with some economists, among whom I’d like to mention Sam Chandan, an economist at Reis Inc., a real-estate research firm, apartment vacancies are expected to tighten to 5.3% nationally this year, while rent growth reaches 5.5%, the strongest since a prior peak in 2000. Apartment investors have experienced total returns of about 20% a year from income and unusually high price appreciation in the past two years, as compared with the 12% annual average return for the previous 10 years. Thus Sam Chandan states out that “expectations for income growth are strong, so this is a good time to hold on to assets that you already own.”
Most of the private real-estate investors who can afford investments which require such a big sum of money as apartments are at the age of 50 and elder, according to Harvey Green, chief executive officer of the Encino, Calif., real-estate investment brokerage firm.
Whereas some economists (like Sam Chandan) and real-estate investors (like Kenneth Heebner mentioned in my previous posts) consider investments into apartments as attractive and profitable due to the rising apartment rent, many other real-estate investors are starting to sell these investments. And the reasons for acting in such a way I regard as quite forcible and that’s why try to partly describe them in this post.
But firstly I want to cite some instances illustrating the moving of investors’ equity into other forms of investments.
Marcus & Millichap maid an analysis of 700 apartment transactions ranging from $1 million to $10 million in the 12 months ended May 31 and found out that its apartment-investor clients who have recently sold their assets plan to move 59% of that equity to other properties, investments and cash.
One apartment and condominium developer from West Bend, Wis., James Shafer sold a 164-unit apartment complex in Menomonee Falls, Wis., that he built in 1990. He substantiates his decision by pestered plumbing repairs, poor managers and constant turnover. He also closed on two Eckerd drugstores — in Wilson, N.C., and Cambridge, Md., arguing that thus he has released himself from maintenance duties, repair work and taxes but lost just a relatively nice income.
Another example is Bob Morgan from San Diego who sold four San Diego apartment units in 2004 for about $816,000 (versus about $70,000 that he paid to build them in 1974) and purchased a preschool learning center in Kalamazoo, Mich., this year, paying approximately $1.55 million for it. He pays $3,000 a year in insurance, but regularly receives $10,000 a month. He considers his newest investment as also rather risky, but less-capital intensive than apartments.
As it is evident from the given examples apartments are considered by the vast majority of real-estate investors as rather capital intensive and that is the main reason why they are getting rid of such kind of investments and looking for less-intensive ones. Frequent apartment turnover requires repeated and expensive painting, cleaning and carpeting.
Besides of this, apartment investors are tied from myriad tenants’ service complaints connected with plumbing, sanitary engineering, sewerage, electric light, poor managers and many others.
Another reason why investors are refusing from investing into apartments is their wish to receive
stable, long-term cash flow that is not featured to apartments due to the frequent turnover.
And one more reason is requirement of good management and big responsibility.
Thus a great deal of investors give their predilections to other areas of commercial sector that are also attractive but featured with less hassle, such as office and industrial properties. Many apartment investors are redeploying their equity into single-tenant, net-lease properties, such as office buildings, warehouses or retail properties. They rent such property just to one tenant who is responsible for expenses, including taxes, insurance, maintenance and almost everything else. Such redeployment releases investors from management responsibility and allows getting stable, long-term cash flow.
So I’d like to mark out the chief reasons which impel many real-estate investors to refuse from the investing into apartments in favor of other kinds of investments (like office, industrial properties, etc.):
1) Capital-intensiveness of apartments, requirement of frequent maintenance, repainting, recovering.
2) Constant turnover.
3) Absence of stable, long-term cash flow.
4) High management responsibility.
Thus, the question is which realty to choose for investing your money. As for me, I think that the best way to save and multiply money is to invest them in property in any way connected with land especially located in ecologically clean picturesque areas or enriched with minerals. You can make any choice you like. But whatever decision you make remember one thing: dealing with real-estate require careful deliberation and, what is better, applying to a good specialist for assistance.
