However, it is also extremely rewarding to be the sole owner in charge of your building. You can make all of your own decisions and shape how you want your business to operate. This strategy is only recommended for individuals who are prepared for the financial and mental demands it requires. Partner Up: Apartment investing with a partner can be an excellent place to start for many novice investors.
Of course, this also means that you will not be your own boss all of the time. You will have to make many important decisions together, so choose your partner wisely. Syndication: Syndications collect capital from investors that want to take a passive role in real estate investing. In this case, the person running the syndication would be responsible for all of the important decisions related to the chosen apartment building.
All you have to do is add your money to the pile and share in any potential profit in the long run. Real Estate Fund: Real estate funds are similar to syndications, but on a larger scale. These funds typically as for higher minimum investments and invest in multiple properties at a time. Also, you may not know where exactly your money is being used, so do your research on any particular fund before deciding to invest with them.
When you invest with an REIT, you invest in the company itself, much like buying stock in any other company. Read our article on REITs for beginners to find out more about this investing strategy. Factors To Think About Before Buying An Apartment Complex Not all apartment buildings are the same, and like any other type of deal, investors should take care to work every angle and address any variables before making an offer.
Here are some factors to take into consideration when performing your market and property research that will help you think like a seasoned professional:. Apartment classifications: In the U. Older buildings with fewer amenities are usually more affordable, but investors should be mindful of hidden costs such as repairs and improvements. Return on investment: One of the trickiest factors associated with investing in apartment buildings is evaluating your return on investment.
Investing in small apartment buildings will be more affordable than properties with more units or those offering amenities. However, due to their size, they may produce less rental income. Old roofing, especially flat roofs, old plumbing, asbestos, and lead paint are all associated with expensive repairs.
Hire a professional to inspect any building under serious consideration to make sure hidden issues will not impact your budget. Preliminary numbers: Assessing preliminary numbers and financials allows investors to compare purchase deals. The rent roll, which is the total rent charged for all units multiplied by twelve, combined with occupancy rates, will provide an idea of the annual rental income.
Dividing the purchase price by the number of units will help compare apartment buildings with different amounts of units and amenities. In addition, investors can estimate their net operating income by netting out expenses from the rent roll, which is then used to calculate the capitalization rate. Property Management: Investors should also evaluate the opportunity cost of the time required to manage an apartment building. Because this type of investment will require a hands-on approach in terms of dealing with tenant turnover, paperwork, maintenance, and repairs, to name a few, owners will find that they will have less time to pursue other investing activities.
Although hiring a property management company requires an added cost, investors should seriously weigh this option. How much you can make by owning an apartment complex is a function of the property value and net operating income. Many investors will measure this profitability by calculating their capitalization rate.
However, investors should not underestimate the costs of owning an apartment building; the possibility of big-ticket repair and maintenance issues, as well as unexpected vacancies, can greatly affect the bottom line.
On the other hand, investors should consider the benefits brought about by economies of scale. As a single-family property investor, it could take you many years to build your way up to 10 properties in your investment portfolio. The initial outlay to acquire a unit apartment building is considerably high, but the economies of scale achieved can be worth it in the end. You get to collect the same number of rent checks from a single location. Thus, your overhead per unit will be much lower, making it easier to grow your business.
The best cities to invest in apartment buildings are a culmination of several socio-economic factors such as employment rates, industry growth, population growth, and occupancy rates, to name a few. The longer the period of vacancy, the smaller the annual return. Tenant markets that are active are frequently located in close proximity to service clusters, universities, and hospitals. Salt Lake City, UT. Learn how to get started in real estate investing by attending our FREE online real estate class.
There are several pros and cons associated with owning an apartment complex, and investors should make sure to familiarize themselves with each to appreciate the commitment they are about to make fully. Some may even describe being an apartment owner like having a career in itself, so investing in apartment buildings should be approached with vigilance. Some advantages to owning an income property include having access to recurring rental income from each of your units until you decide to sell.
In addition, owners can find creative sources of income by adding extra amenities and services, such as extra parking spaces. Managing a property with multiple units also ensures against the risk of absolute vacancy. In the case of a single-family property, the owner must absorb all costs without any income until the property is filled.
When it comes to an apartment complex, if one unit is vacated, the investor avoids losing percent of the rent for the building as long as other units are filled. When investors purchase an apartment building, they are adding multiple units to their investment portfolios through each deal. This offers an excellent opportunity for growth, as each unit adds to the total number of investments. While single-family homes are purchased one by one, an apartment building investment represents the acquisition of several assets with one transaction.
Unlike stock in Google or Coca-Cola, apartment buildings are not particularly liquid, and can be difficult to sell. In a market where prices have fallen significantly, it may often be more desirable to hold on the property for a few years until prices rise again. In contrast, buy and hold investors typically plan to keep the property for the long haul, say, years, while enjoying the annual income that it provides.
After that, they may sell the property, or, in some cases, pass it on to their heirs. In contrast, long-term buy and hold investors could generally care less about prepayment penalties, and, when possible, will seek longer-term fixed-rate loans. In many cases, first time apartment investors will want to seek out a property that needs significant improvement, whether in the form of physical upgrades or superior management. Other value-add opportunities include finding new supplemental sources of income for your property, such as vending machines, storage sheds, or new parking spaces.
For less intensive value-add deals that only require minor amounts of capital, investors may choose to self-fund repairs. However, for larger value-add deals that require significant property repairs or rehabilitation, an investor may want to get additional financing. Before deciding on a location, an investor should be familiar with area information, including:.
Economic health of local employers especially for smaller markets. For instance, an investor with a year horizon may be willing to pay more for an apartment building in an area where costs are currently rising. In contrast, an investor with a year horizon may seek a lower-priced property in an area that seems positioned for growth to begin over the next years.
Over time, that means lower risks-- and higher potential profits. Most people purchasing a single-family home will do so through a real estate agent; and, similarly, most investors buying an apartment building will want to work with a commercial real estate broker. A good commercial broker can help you identify quality apartment properties in your area, will have a good understanding of real estate investment fundamentals, and may even be able to help you negotiate on the sale price.
You may also want to directly contact the owners of apartment buildings in your area to determine if the owner is interested in selling. This can be a hit or miss process, but you may be able to find a hidden gem this way, especially if the seller wants to get rid of the property quickly due to outside circumstances.
A good advisor can leverage their experience and relationships to help you select the best financing option for your individual situation and goals. They can also help with the more onerous and confusing aspects of the commercial loan application process, such as documentation and third-party reports, as well as shopping around a deal to multiple lenders in order to achieve the best terms for a borrower.
Debt advisory firms generally charge between 0. However, to get a multifamily loan , you first need to get approved. In addition, the property itself will need to have a debt service coverage ratio or DSCR , of 1. During the application process, borrowers will also need a significant amount of documentation, including an appraisal and other required third-party reports.
Borrowers will typically need to pay for all of this themselves. Required documentation and reports generally include:. Appraisal: An appraisal attempts to gauge the current market value of a property. It typically must be conducted by a professional appraiser currently licensed in the area in which the property is located.
Appraisers will generally use a combination of the methods, including:. The income approach, which estimates the value of a property based on its income. The sales comparison approach, which estimates the value of a property based on recent sales of similar properties nearby. The cost approach, which estimates the value of a property based on the estimated cost to rebuild it, plus the value of the land, and minus any depreciation. This is used to calculate required replacement reserves, which are funds set aside each year for expected future repair costs.
Phase I ESAs may not always be required by lenders, but often are. This is not always required by lenders, especially if a report is available from the past several years, however, it is more commonly required when potential title issues are known to be present. Seismic Report: Typically only required in areas where earthquakes are common, such as Southern California.
Zoning Report: May sometimes be required when there are potential issues or confusion around the zoning status of a property. If a loan is recourse, a lender can repossess your personal assets in order to seek repayment for an unpaid debt. For example, in most states, home mortgages are fully recourse. In contrast, many commercial real estate loans are non-recourse, which means that the lender can only repossess the specific collateral for the loan i.
For borrowers with good credit and a sufficient net worth i. While it can be even harder to qualify for than an agency loan, the HUD f loan is the creme-de-la-creme of apartment purchase loans. In addition, HUD offers its d 4 program for apartment construction and substantial rehabilitation, but these types of projects may not be ideal for a first-time apartment investor, and can be significantly more risky.
CMBS, or commercial mortgage backed securities can also be a great source of debt for apartment investors. CMBS loans , or conduit loans as some call them typically provide low interest rates and some of the most lenient borrower requirements out there. Like many types of commercial loans, CMBS loans are pooled together and securitized, then sold to investors on the secondary market.
Options for more experienced multifamily borrowers include life companies, which offer long, fixed-rate terms at very low rates but generally want highly experienced investors , and hard money loans, which typically have very high interest rates, but can be the only form of financing accessible to borrowers with credit or legal issues. For additional leverage on larger deals, a borrower may be able to layer a CMBS or bank loan with an additional, second-position loan, known as a mezzanine loan , though this is also not generally ideal for first time investors.
Typically, before seriously considering purchasing a multifamily property, an investor should:. Have the property professionally inspected. However, it may not be necessary to have every unit inspected. In many cases, every second or third unit will be sufficient. You may want to reach out to friends or family members to see who they know, or attend events with a local real estate investing organization. Capitalization rate, or cap rate is one of the most important metrics in commercial and multifamily real estate investing.
Cap rate is defined by the formula:. Despite this, cap rates are generally lower for newer apartment properties located in better areas, as these properties will have lower maintenance costs and may also have higher potential rent growth.
Finally, when determining whether to purchase an apartment property, investors should be mindful of some of the following additional considerations:. Utility Billing: Many buildings, especially older ones, have shared utilities.
This can be an issue, especially as tenants may overuse utilities if they are not paying the bill themselves, greatly increasing your expenses. These issues typically will need to be remediated by a new owner, which can be very expensive. Ordering an inspection early on in the decision-making process can help you determine whether a building has these issues, and, if so, how serious they are. Plumbing Issues: Plumbing can be yet another issue faced by the owners of older apartment buildings.
Repairs can be expensive, and additional contamination issues may arise if the building has lead pipes.
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Apartment investments are a top investment strategy for people who want a slow, but steady appreciation in their portfolio value, as well as rental income, a. Apartment investing can be a great way to build wealth in real estate, and diversify your portfolio. Get started with tips from FortuneBuilders' guide. Buying a small apartment building is a great investment option, especially for new real estate investors. The rental income you can earn from.