In the previous article, we defined what an investing rule of thumb was and how they were useful in real estate investing. A rule of thumb is a guideline that provides simplified advice regarding a particular subject, in this case investing in real estate. The first three rules of thumb that were introduced were,
- Cash on Cash return
- Debt Service Coverage Ratio
- Cap Rate.
It is vital for investors to master these three ratios to become successful in real estate, and to follow these rules of thumb in any market cycle.
In this article, we are going to tackle unit mixes. This ratio deals with what is the optimal unit mix in an apartment complex. As we mentioned previously, we are going to discuss guidelines pertaining to this ratio, and how to have this rule of thumb help you sniff out a good deal.
Unit mix is simply the different number of bedroom apartments in a property. Apartments range in sizes from efficiency to 5 bedrooms. An efficiency apartment is usually occupied by a single person and combines the sleeping, living, and kitchen areas.
Studio apartments are larger versions of the same footprint, but tend to have a larger kitchen. We tend to shy away from these types of apartments because the tenant base tends to be transient, which means that the tenants move in and out and create a high tenant turnover.
One of the largest expenses that a landlord incurs is tenant turnover because the unit has to be prepared for the next person to move in and, in the meantime, the unit remains unoccupied.
The next size is a one-bedroom unit, which can also have a higher turnover rate, but not as high as the aforementioned smaller styles. Typically, municipalities allow two tenants to occupy an apartment for each bedroom, and in turn, it shrinks the tenant pool.
However, it all depends where the units are located. One-bedroom units are favorable for college students, senior citizens, and couples. We own a 36-unit property that contains all one-bedroom units, and we have no problem maintaining the occupancy at 95%.
Our favorite unit size to work with is the two-bedroom units.
They’re ideal for most demographics yet larger families can’t occupy them. Larger families tend to cause more deferred maintenance on a unit, another costly expense for landlords. Two-bedroom units are usually the most cost effective for tenants and are the easiest to rent out.
The three-, four-, and five-bedroom units conclude the sizes for apartments, but it’s pretty rare for apartment buildings to contain four- and five-bedroom units. These sizes are found more often in single-family homes. When it comes to apartments, the more bedrooms, the higher the rent, so investors should try to acquire properties that have more bedrooms.
The key to unit mix is to acquire an asset that has a favorable number of two-bedroom units in relation to one-bedroom units. The ideal ratio is 2 two-bedroom units to 1 one-bedroom unit.
For example, on a 100-unit property, we like to see 66 two-bedrooms and 34 one-bedrooms.
This type of unit mix makes the asset more valuable, and will make it easier for the landlord to rent out the units as well as choose from a larger tenant base. Tenants also have the option of moving up or down a size without having to leave the property, which also benefits the landlord in that it reduces vacancies. We wouldn’t discount a property solely on the tenant mix. It’s only one piece of the puzzle, but a rather important one.
Let us know what you think is the best unit mix and leave us a comment down below. We love 2 bedroom units, but this size may not be beneficial in your market. Certain markets have a high percentage of millennial renters who favor one-bedroom apartments, so it is vital you are familiar with the demographics of your market.