An alternative real estate investment which is more affordable is efficiency apartments. Many investors keep this property type in mind for this reason and more. If you want to succeed with investing in efficiency apartments, read on.
What Is an Efficiency Apartment?
You might not even know what we’re talking about when we say efficiency apartment. When investing in real estate, it’s important to understand the lingo. You may have heard real estate professionals using it interchangeably with the term “studio apartments.” While these two are quite similar, there are some main distinctions you should know before choosing to invest in efficiency apartments.
- Efficiency Apartments: Dwelling units, typically smaller in size, with no separate sleeping quarters and an incomplete bathroom and kitchen. According to Barron’s “Dictionary of Real Estate Terms,” this means in order for a rental unit to be considered an efficiency unit, its bathroom can only have a shower (no tub) and its kitchen can only have a convection microwave (no oven) and no full-sized refrigerator.
- Studio Apartments: Don’t necessarily need to be small, but it is an open area with a combined room for shared living and sleeping space. Studios may feature separate rooms for a bathroom and kitchen which come with full-sized appliances.
Related: Should You Invest in Studio Apartments for Sale?
More Features of Efficiency Apartments
- Always a small space meant to be occupied by one person
- The kitchen area is typically attached to the living room, featuring one wall of minimal counter space and mini appliances
- Not set up for extra storage
- Furniture often takes on multiple roles (for example, a pullout couch in the living room is also the bed)
- Designed to be a basic and inexpensive alternative for people who want to live in upscale areas
Getting the terminology right when trying to differentiate between studio apartments for rent and efficiency apartments could be a pain. Because real estate professionals often consider them the same thing, an exclusive search for one form and not the other could be near impossible. Also, we’ve made some distinctions between efficiency apartments and studios, but because of the uncertainty regarding these property types in the industry, the definition you get depends on who you ask. Some people may tell you an efficiency apartment always has a separate kitchen, and studios are always small spaces so they’re the same thing. The point is if you want to find efficiency apartments near you, ask around and clear up exactly what those are in your local real estate market.
Are They a Smart Real Estate Investment?
So how do these types of apartments perform in the rental market? Do they make for a smart property investment? Efficiency apartments and studios aren’t everyone’s first choice, so for supply to meet rental demand, their market share remains relatively low. For that reason, they only make up about 4 percent of inventory in the US housing market. If you want to buy and rent out efficiency apartments, the real estate market you choose could make all the difference to your return on investment.
Efficiency apartments could be very lucrative investments, but they aren’t the most sustainable in just any market. You want to provide something that people want. So you should only invest in efficiency apartments in markets with a good supply of them and a high demand for them.
Choose the Right Location
Look for high-density and high-cost cities. These typically have a larger renter pool of people searching for more affordable living options. In cities like San Diego, where the cost of living is very high, an efficiency apartment could save them thousands in yearly rent. For example, according to Mashvisor’s data, the average monthly rent for a traditional San Diego rental is $2,760. According to Apartment List data, the average rent for a San Diego studio is $1,413. Clearly, there is a big difference in rent prices from one property type to the next. This is a common trend in all real estate markets; properties with more bedrooms and space are more expensive.
Related: The Most Affordable Neighborhoods to Buy Property in the Most Expensive Cities
The market performance of efficiency apartments isn’t as progressive as it is when we’re talking about normal units. Studios and efficiencies aren’t seeing a boost in rental prices or demand. Things typically stay pretty stable, and that isn’t a bad thing. Every rental property business performs based on the market conditions surrounding it.
There Is a Specific Renter Pool
The target tenant for efficiency apartments is someone looking for a more affordable option to sustain living in a high-cost city. Because this person is typically in a transitional stage of their life and is only renting out the efficiency apartment until he or she can afford to live more comfortably, leasing periods aren’t that long. Although they don’t have the same level of long-term demand and growth as larger spaces, efficiency apartments still have a steady flow of interested renters.
Tips for Succeeding with an Efficiency Apartment Investment
Whether you’re a beginner real estate investor, or you’re just looking to diversify your portfolio, efficiency apartments can be some of the best real estate investments. We’ve got a couple of tips to ensure you make the most out your investment.
First, investing in a strategically placed efficiency apartment will guarantee you high occupancy rates. The type of tenant occupying a studio or efficiency apartment is mainly concerned about having an affordable place to sleep. But while they are searching for cheap efficiency apartments for rent, it’s also important that it’s in close proximity to where they need to be in the daytime. They’ll want to spend the rest of their time out, so being in a walkable neighborhood full of amenities will draw more people to your rental property. Providing fully-furnished apartments which make it easier for tenants to move in, could also motivate them to stay longer.
If you want to really analyze the profitability of a real estate investment in efficiency apartments, use Mashvisor’s tools. Our Property Finder gives you the option to filter searches in any city based on property type and the number of bedrooms. Once you find a promising listing, click on it, and you’ll get a full real estate investment analysis. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Related: Investment Property Analysis: Real Estate Investing