YOU BUY COMMERCIAL REAL ESTATE FOR APPRECIATION…

YOU BUY COMMERCIAL REAL ESTATE FOR APPRECIATION…

PART IV…

Appreciation happens as neighborhoods either change or mature. Neighborhoods will change over time, and I have explained that occurrence a number of times already. It still boggles my mind that Flushing, New York went from a Jewish neighborhood to a Chinese neighborhood. I’ve seen, we’ve all seen neighborhoods change from one ethnic class to another, but I just find that what happened in Flushing was something that I’ve NEVER seen before.

We also talked about how neighborhoods come to be either starting with nothing or starting with a base built years ago. Let’s assume for a moment that the neighborhood starts with some streets and stores and schools, and you want to do your due diligence to determine if you want to put an apartment building in this neighborhood. I have a very simple formula as to determining where to build, we can discuss purchasing an apartment in our next set of papers.

If I were going to build an apartment in a neighborhood that has been established for a while but has not yet MATURED, I would look for an area that gets some decent amount of foot traffic as I like to put retail on the ground floor of an apartment building instead of starting with a lobby on the ground floor. Retail space gets a higher rental amount per square foot then living space and having people come to the building to shop brings prospective tenants to the building when there is a vacancy or when you are just starting out to fill the building with tenants. Also, if the retail space attracts better stores and restaurants then it helps with the appreciation of the property as a whole.

Another consideration as to where to build is parking. I’ve seen apartment buildings with parking in lots all around the building in designated areas off of the streets and I’ve seen apartment, especially with stores on the ground floor, with parking on the first few levels of the apartment buildings. That may be a waste of rental income space but a necessity when you consider the parking situation around the building.

Rents in the United States are going up and up and up and, if you look at Southern California, the rents are just going crazy. And the size of the apartments is getting smaller and smaller. At the beginning of the pandemic the apartments generally got larger to accommodate home offices, but the size of the apartments went down last year by 54 square feet per RentCafe.

So, in Southern California it’s not unusual to have a smaller apartment, say a 2-bedroom 2-bath apartment that is around 900 square feet for, and get this folks, $5,000 to $7,000 a month. That’s ridiculous!!!

Another thing I like to do instead of putting stores on the ground floor is make separate entrances for each apartment instead of having elevators and hallways and make the apartments similar to townhomes. And, if I am going to build apartments instead purchasing existing units, I like trees in courtyards and washer and dryers in the units. A very reasonable investment in appliances can increase the rent substantially and that’s like an annuity.

The more the rent the greater the NOI the lower the Cap Rate the more valuable the property and, then we have appreciation.