This guide contains everything you need to know to buy an apartment building, and decide if it’s a good investment for you.
Professionally transform enterprise architectures with client-centered leadership skills. Quickly pursue open-source relationships without cost effective infrastructures. Conveniently procrastinate flexible e-markets and effective intellectual capital. Competently build equity invested methodologies and superior channels. Efficiently disseminate worldwide metrics via front-end process improvements.
Is Buying An Apartment Building A Good Investment?
The important thing to consider when making any investment is the risk-adjusted return — the amount of money you can hope to make in the face of the risk you take on. Overall, apartment buildings have a great risk-adjusted return, but this varies for each individual property, usually based on the purchase price that you’re able to buy the apartment for.
In short: apartment buildings in general are good investments, but not every individual apartment building is a good investment. Would-be investors must exercise caution when evaluating a property and take into account many factors including the condition of the property, price relative to other similar properties, local real estate trends, rental vs. ownership demand in the area. The easiest way to do this is with a rental property calculatorthat lets you forecast the returns you can expect from purchasing a particular apartment complex
However, people always need a place to live, and renting an apartment is often the most affordable housing option. There is currently a shortage of affordable housing in most american cities, which bodes well for owners of apartment complexes that offer affordable to mid level housing. On the other hand, there is currently a large amount of new luxury apartments being built, and those will be the first to reduce rent or go vacant if the economy dips.
How Much Does Buying an Apartment Building Typically Cost?
The average cost of buying an apartment building really depends on what you define as an apartment building. If you consider buying a duplex, triplex, or fourplex and apartment building, than the average cost goes down drastically.
How Much Money Can You Make Owning an Apartment Complex?
There are 4 primary ways to make money owning an apartment complex:
- Rental Income- After you cover all of your expenses – what you have left over is cash flow that you can spend as you please
- Property Appreciation – This is often where the majority of the money is made, as apartment buildings have been growing in value rapidly in the last 10 years. Some investors are even willing to buy a building that just breaks even on cashflow with rent, because they are confident they will make a great return on their investment with appreciation.
- Tax Benefits – Real estate is one of the most tax advantaged investments, as you’re able to depreciate your investments, and write off the interest you pay in your mortgage.
Pros of Investing in an Apartment Building
- High earning potential: You can grow your portfolio faster by buying one large apartment than you can with single family rentals.
- Dependable cash flow: Apartment buildings provide a reliable income stream. If some of your units are vacant or tenants aren’t paying, you still have other units that are paying that cover your expenses.
- Appreciating asset: Like all real estate, apartment buildings are an appreciating asset. If you no longer want to run your complex, you can sell it for a profit after a few years.
12 Steps To Buy An Apartment building
If you’re looking to buy an apartment complex – you can follow this 12 step guide:
- Set Your Goals – If you don’t know where you’re going, you will never get there. Ask yourself what you want to achieve from owning an apartment complex, and then work backwards to figure out how much income you need to generate.
- Set Your Budget – Establish an amount that you’re willing to spend buying an apartment complex. Make sure you leave enough cash on hand for repairs, and keep your portfolio diverse. It’s not a great idea to put over 50% of your investment portfolio in one property.
- Learn how to forecast cash flow – This is where the renal property calculator we mentioned above comes in handy. You should be able to model prospective deals so you know where to focus your time and energy.
- Choose a market – I recommend that you start by looking in your local market and modeling a few deals to see if it’s feasible, before you start looking out of state. Its much easier to manage something you can drive to, and you can be more confident that you understand the dynamics of the neighborhood.
- Get Pre Approved For Financing – Talk to 3+ different lenders and compare their different products and rates. It’s a good idea to get pre approved with at least 2, so you can get detailed quotes to compare once you find your property.
- Start looking for properties – You can look on the buyrentbd.com and other commercial real estate websites, as well as networking with brokers that have off market properties. You can learn 5 tips to find great deals here.
- Start making Offers – Remember not to get emotional! These are investments, and you should only offer a number that makes sense for you, even if it’s drastically lower than the list price.
- Inspections– Make sure your apartment complex is in the same condition it was advertised in. Be sure to check the roof, HVAC, plumbing, and electrical systems, as those can be the most expensive if they need repairs.
- Choose a property management company – The management company you choose will make or break your investment, so be sure to interview at least 3 companies, and hear real reviews from some of the current owners they manage property for.
- Locking in your financing – Go back to the same lenders that got you pre approved, and bring the actual deal you found so you can compare rates. Pick a lender, and they will take your personal financial statement, and get you fully approved.
- Closing day – Congratulations! Get ready to sign a ton of paperwork, then take a moment to celebrate your accomplishments.
- Growing your portfolio – Once you’ve stabilized your investment and are generating cash flow, it’s time to repeat this process, and start looking for your next investment!