Does it make sense to look at Industrial or Multi-Family Apartment property? Over the years you have built up equity in one property you own or cash on the side to now invest in real estate, or more real estate. You have been told real estate is a great investment, you’ve possibly experienced it, and the idea of building or adding to your portfolio has been attractive ever since you played Monopoly.
Now it is time to deploy that cash or equity you’ve built up. So, what do you look at for investments? As this decision draws near and the excitement builds, one thing continues to get your attention:
“What should I buy?” “Should I buy an apartment building or some other property type?” So where does that answer come from and is the apartment the best alternative?
While there are many reasons people look to apartments, such as (i) steady tenants and a lower financial impact of a vacancy, (ii) lower turnover cost to re-tenant a unit , (iii) reduced overall vacancy time, (iv) perceived prestige of owning apartments, or (v) public feeling and sentiment that ‘this is a good safe investment’ (which it certainly can be), there are still other factors to consider when comparing alternative real estate investments such as industrial property.
For an example of apartment owners now considering industrial, I am actively working with a family who owns apartments in southern California, and they are now looking for industrial investment property. I have another client who recently sold their apartments to further invest in industrial property in southern California.
While the concern over purchasing industrial property is that if your building goes vacant you have big hole in your operating rental income and turning over these vacancies (renovations, concession, tenant improvements and commission) can be expensive, there are still tremendous benefits and upsides to owning industrial property. To properly understand your risk, it is important in the due diligence period to have an understanding of (i) the property’s current or potential tenants, (ii) the local market dynamics, (iii) vacancy locally and (iv) the overall present condition of the property (for potential improvements). While dealing with vacancy is a consideration, investors know that a well-balanced portfolio and diversified tenant mix can minimize the impact. This can be accomplished by purchasing multiple properties or purchasing one Industrial property with multiple tenants. Our team recently represented a buyer of a three-building, 30+ tenant, 205,000 SqFt. Industrial Business Park where they now experience great tenant diversification. Risk is never eliminated, whether apartments or industrial, but it can be greatly mitigated or reduced through proper investigation.
Now, when you look at the math of your return on investment, apartment units generally do not stack up with the industrial property. Even in California where investors are buying industrial property for 4.5% to 5.0% capitalization CAP rates (the first year return on your investment if the property was purchased all-cash), an apartment in the same price range and area may offer a low 3% CAP rate, or lower. In this example, a $2,000,000 apartment will generate $120,000 net income over (2) years while the same $2M industrial property will generate $180,000 net income. Furthermore, when you add external factors such as potential rent controls on residential units and property management issues with apartments compared to industrial’s more hands-off management, you can further see why industrial property may prove a better alternative in the near and long term.
For full disclosure: I specialize in industrial property in the Southeast Los Angeles and North Orange County Market, helping owners and tenants, buy, sell, or lease industrial property.
In conclusion, contact us today to discuss your situation, and we can formulate a plan to help you accomplish your goals.
Christopher J. Destino, SIOR, a Principal at Lee & Associates, is an engaging, responsive professional who enjoys working closely with his clients and helping them succeed.