Small Investor Plan

This report evaluates ownership of a small apartment building as an investment plan for the small investor. Apartment ownership is an investment which offers a number of important advantages to the smalltomoderate investor, but which also carries with it a number of disadvantages. The prospective investor can directly inspect an apartment building, as he or she generally cannot do with the underlying assets of financial investment instruments such stocks or bonds. The investor in a small apartment complex can directly manage the operation of the investment, if so desired, without the level of time commitment that would be required to own and operate a small business of comparable income potential; alternatively, the investor can entrust actual management of the complex to a professional property management firm. Through most of the 1970s and 1980s, real estate in general was an excellent investment. However, investment in a small apartment complex (or, indeed, any real estate) has its countervailing disadvantages. Even a quite small apartment building (for example, a fourplex) represents a major investment commitment for the typical small investor: the down payment will probably run tens of thousands of dollars, and the potential risk cannot be spread out in a portfolio, as the financial investor can do. Realestate investment involves ongoing expenses (interest, taxes, operating costs) whether or not the investment proves to be a profitable one. Insufficient cash

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de the investor's desires. On the one hand, the owner who manages his or her own building has more direct control over it and must depend less on the decisions of others than the owner who hires a property manager (much less the investor in financial instruments, whose control is usually nonexistent). On the other hand, the ownermanager faces responsibilities which range from keeping the books to answering midnight calls to fix broken toilets. In general, there is much to be said in favor of retaining a professional property manager (Wick, 1987, pp. 169-171). Professional managers have readier access to specialized skills such as plumbing, and can usually arrange such services at lower cost. They are used to dealing with tenant problems, including tenantlandlord relations issues, and are likely to be more objective, and less swayed (for example) by either sympathy for or frustration with individual tenants. In retaining a professional property manager, it is generally better to agree on a percentageofrent fee basis rather than a fixed fee; the latter gives the manager more incentive to keep units rented out. The owner who chooses not to operate through a professional property manager must have the necessary management

Category: Economics - S