This article is part of our passive investors guide on real estate syndications, available here.
In multifamily apartment investing, ensuring you acquire the right property with the most optimal type of unit mix could drastically change the trajectory of the property’s long-term success.
Suppose the property has an undesirable unit mix, or simply a large majority of a singular type of unit that tenants aren’t looking for in that particular area. In that case, you’ll have a problem leasing those units. As a result, this could push you to make more than necessary unit concessions to encourage prospective tenants to become residents.
In this article, we’ll go over the best unit mix for apartments, the least desirable unit mix, and some attributes about the renter profile of each unit type.
What is a Unit Mix in Apartment Investing?
The unit mix in an apartment complex is simply the breakdown of the various unit types that make up the mix of units. Every apartment community has its own unit mix, depending on the size of the property, what area or market it’s located in, and the demographics of those who reside in the area.
An apartment community might have efficiency units, studio units, 1-bedroom units, 2-bedroom units, 3-bedroom units, 4-bedroom units, and sometimes larger bedroom units, but more rarely.
Next, let’s look at an example of a unit mix at an apartment complex.
Unit Mix Example
Below is an example of a unit mix of an apartment complex that has most unit types available for lease.
What's the Best Unit Mix for Apartments?
The best unit mix for an apartment community does vary market to market. But as a general rule, having more 2-bedroom units than 1-bedroom and studio units will lend to a better-diversified unit mix for most apartment communities.
2-bedroom units are the best unit type as there in higher demand, and they attract a longer staying tenant as typically these units are occupied by families. Also, as demographic and rental pricing shift U.S.-wide, some tenants need more space, so they move up into a 2-bedroom unit.
Sometimes this is due to starting or growing a family or some wanting to have a bedroom dedicated to a home office. For those more driven by rental pricing, some 3-bedroom unit tenants who don’t need the third bedroom might move down into a 2-bedroom to save on rent.
You’ll see efficiency units generally in more densely populated MSAs across the U.S. to cater to the trend of micro-living, where people will pay the least they can to be accessible to the things they want, like major entertainment, subways, and work in those major cities.
Studio units also have more of a demand in densely populated cities and are generally less desirable in more secondary or tertiary markets. These units have higher turnover than each unit type that succeeds it.
The 1-bedrooms are a popular unit type U.S. wide and usually come equipped with 1-bathroom. Generally, the smaller the apartment community, the less of a problem it is to maintain high occupancy when you have a large majority of smaller unit types like a 1-bedroom or studio apartment unit.
These are the easiest units to rent out in most markets. These units tend to have lower turnover, which makes occupancy of these units more profitable for a landlord.
These units have a strong demand, second to 2-bedroom units. They also attract families that typically stay long term as the tenant demographic that fills these units is raising a family.
4 Plus Bedroom Units
These units have less demand and usually make up the smallest percentage of the unit mix. These units are harder to lease, and developers have been building fewer of these unit types in recent years.
What's are the Least Desirable Units in an Apartment Complex?
An apartment complex’s least desirable units would be efficiency and studio units. The two unit types are the least desirable for a real estate sponsor/operator as most apartments outside of highly densely populated MSAs have less tenant demand for these types of apartments. Also, even in highly densely populated MSAs, the tenant profile you tend to attract has a higher turnover rate.
This is due to this demographic of people who start out at in the smallest possible unit they can afford. They graduate to different unit types as they excel professionally or have kids and need more space. In apartment investing, the turnover cost is one of the most cumbersome expenses that eats your profit; the longer a tenant stays in a unit; generally, the more profits are made as the unit doesn’t need more renovations dollars and doesn’t have to sit vacant before a new tenant makes it there home.
Good Read: Single Family vs Multi Family Investing
What are Efficiency Apartments?
Efficiency apartments have the sleeping, living, and kitchen areas all in one room. One person generally occupies these units as their very small.
What's the Difference Between an Efficiency Apartment and a Studio Apartment?
Studio apartments and efficiency apartments have pretty much the same unit layout; the only difference between the two is that the studio has a bit more square footage of living space.
Best Unit Mix for Apartments - Conclusion
Considering the unit mix before acquiring an apartment community plays a significant role in the short-term and long-term success of the deal. Although it is generally best to have more 2-bedrooms than 1-bedrooms or studio units, and the 2-bedroom type has some of the highest demand, playing close attention to local market demographics and trends will give you all the answers you need to know about what the best unix mix is for your local market.
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