Investment in an apartment building has the potential to deliver amazing returns but it only works for those who are able to recognize a good deal and understand what it takes to benefit from that opportunity. If every real estate investor was as diligent as one needs to be, the industry should have been full of successful investors, but history has shown that, a significant majority of real estate investors lose money as they do not pay attention to the fundamentals. So, here is a list of some of the important things you should know before you invest your hard-earned money in an apartment building.
Location of the Property
If you want to make money by renting apartments in your apartment building, the most important factor you need to consider is the location. Ideally, the building should be located at a central location. You are likely to get excellent occupancy and rents in case the apartment building is located near centers of employment and provides quick access to public transportation.
Searching for a Property
When it comes to searching for an apartment building, you have the option of searching for a property on your own or joining a Real Estate Investors Association in your location or hiring the services of a typical real estate agent or a real estate agent specializing in commercial buildings. Another option available to you is business brokers that specialize in selling businesses, but they also offer mixed-use buildings, apartment buildings as well as entire apartment complexes.
The advantage of hiring a commercial real estate agent is that they typically have access to properties that are not part of the usual MLS. Though their commission is a bit on the higher side, but they do offer more sophisticated services as compared to an agent specializing in residential properties. Also, they can offer creative purchase options that your typical residential agent may not offer.
Type of Building
Buildings are available in a wide variety of forms ranging from old houses with multiple units to an apartment with two stories to small buildings with apartments specifically built for renters or a single building containing a dozen or more units and a variety of other options. These apartment buildings are typically classified in the following categories depending on their caliber:
The class A buildings are either substantially renovated or less than 10 years old, and these typically include various amenities such as clubhouses, tennis court or swimming pools. Class B buildings are typically up to 20 years old but are well made and well maintained. These complexes may not have many amenities, but the available amenities are usually dated as compared to the amenities in class A apartments. The class C buildings typically do not have any kind of amenities and may be up to 3 decades old, and it’s apparent that these buildings require renovation and repair. There are also class D buildings that are more than three decades old and are usually located in lower social economic areas. Usually, these buildings do not have any kind of amenities and are in need of urgent renovation and repair.
More successful real estate investors buy properties in the class B and class C category as these cost a lot lower than class A properties but do not require too much in terms of repairs and renovation.
Number of Units
As far as the number of units is concerned, an apartment building is classified as any building that contains more than two units. The choice of number of units will depend on your willingness to take on the risks associated with this business. If you only want a sideline income or want to add to your retirement, it’s recommended to invest in buildings that contain up to 6 units but if you are willing to take on higher risks, you may even invest in buildings with up to 20 units.
Size of Units
When it comes to size of units you need to consider the square footage, number of baths, number of bedrooms and other such things. You will find it difficult to rent efficiency or studio units outside of high population density areas and college campuses. Similarly, units with two bedrooms or higher are easier to rent as compared to one-bedroom units which in turn are easier to rent than studios. For instance, a couple with a child will always want to rent a unit with at least two bedrooms. So, take into account the size of the unit depending on the potential of the market when selecting an apartment building.
Construction Details
Pay attention to the plumbing. If the plumbing of the building is more than three decades old or has never been replaced, you need to be prepared to continuously deal with plumbing repairs. If the building you are buying is all frame, you will have to spend a lot more money on maintenance issues and the fire insurance will also be more expensive.
Apartment buildings with flat roofs tend to have a whole lot of problems related to leaks. Some of the older buildings come with shared utilities such as common water or electricity. It is recommended to avoid such apartment buildings as these tend to be problematic.
Number Calculations
You should never ever invest in an apartment building without crunching the necessary numbers. You will first need to figure out the average rent you can get from the building along with the occupancy rate. The occupancy rate will determine the amount of rent you can expect to collect realistically from the building. You also need to take into account the other expenses such as the expense on insurance, maintenance, advertising, taxes, management expenses, other fees as well as professional services.
Once you have figured out the expected income and expected expenses, you can come up with a table determining the expected net operating income. This table will help you get a realistic account of whether your investment with generate positive cash flow or you need to have some significant cash reserves in order to make a profit on your investment.
Get the Inspection Done
Once you have finalized a few apartment buildings, it is recommended to hire the services of a building inspector to get a proper evaluation of the property. Apartment buildings are complex and each unit may have potential issues that the owner or tenant might not have reported. Therefore, it is important that you get a detailed inspection report outlining the repairs required and other such things. It will also help you with the negotiation.
Conclusion
Overall, these are some of the important parameters you need to take into account in order to buy the right building at the right price. Make sure you choose the building carefully and are aware of the reasons for which the current owner is selling the building in order to get it at the best price. Do not forget that smart investors are able to get an excellent return on their investment in an apartment complex by doing their due diligence and they are always ready to walk away from deals that may seem too enticing. So, be prepared to walk away and never invest in an apartment building without crunching the numbers and doing proper research with the help of Live love at home – Remax.