It is known throughout the investment community that you make money in real estate when you purchase the property. The biggest challenge for apartment building investors over the past few years is the decreasing cap rates. Cap Rate simply cannot be ignored when purchasing property in an inflated market and where money is widely available. There have been plenty of buildings being sold to novice investors over the past few years. Investors dreaming of big profits as they pluck down 20% or more to lock in an apartment building. In San Francisco and around the Bay, Cap Rates are very low. Meaning that people are purchasing these properties at higher then normal valuations and ultimately squeezing the profit right out of the deal from the start. Many investors that I've met have put down enormous amounts of cash into the deal to break even on cash flow. They also are overpaying to get into the market and believe the sky high days inflated values will continue.
So the question is where can you make your money on owning apartment buildings. The answer is simple, add value to the build and increase the gross rents. So, find an apartment building that has lower rents that can be increased, increase the occupancy and reduce the vacancy factor, and make capital improvement on the building. Typically these can be harder to find in the Bay Area vs. in other markets because in counties around the Bay we have tough rent control ordinances that hurts property owners. Also, rent controlled tenants kill opportunity to increase the value of property by simply increasing the rents and creating turnover in the building.
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