Real estate investment is ideal in many situations. Investing in apartment buildings can be a gold mine. It’s not as volatile as the stock market, and it’s ideal for those investors who want to take a more active role. More than that, though, strategies abound in this market, which can make it intriguing for many investors. While some property enthusiasts follow the thoughts of Donald Bren and Zhang Xin by developing residential and commercial properties, others follow the lead of names like Sam Zell who created his fortune through rental properties. Some investors even choose to engage in house flipping and renovation.
The simple reality is that it doesn’t really matter what your strategy is when it comes to investing in apartment buildings. Multi-family real estate is a great way to diversify your portfolio and build a steady income, and one of the many opportunities you’re likely to find is investing in apartment complexes. These are called multi-family properties, and they can quickly increase your income with only a bit of added cost. Multi-family properties significantly boost your net operating income because of the sheer number of rental units you can bring to the market at once. If you manage the property well, it will grow in value, so should you ever decide to sell, your gains will quickly outstrip those you might see in the single-family home market. Additionally, the costs involved, outside of the debt service, tend to be fairly low. They’re all completely tax-deductible, too, as is a portion of the building’s value thanks to the Modified Accelerated Cost Recovery System (or MACRS, for short).
Investing in apartment buildings is fairly easy to finance, too. While these properties tend to be more expensive, securing a loan for the right property is much faster than getting a loan on a single-family home. Multi-family properties generate a continuous cash flow each month, even if there are a few vacancies or a tenant is late with his or her rent. As a result, the likelihood of foreclosure is significantly less, so it’s not considered a risky investment for lenders. If you already have a fairly strong investment portfolio, securing a loan for a multi-family property isn’t likely to be an issue. Conventional mortgages are possible with smaller properties, but larger apartment buildings may require a different kind of loan, so make sure you chat with a lender about the best loan options before you make an offer.
Many consider this type of real estate investment because it’s easy to find a property management company to handle the day-to-day operations. Property managers aren’t always willing to take a single-family home, but most are ready to handle an apartment building. They usually make a percentage of the income the property generates, so it makes financial sense for them. If you’d prefer not to be hands-on with the management of your property, utilizing this kind of service makes financial sense for you as well.
Finding the Right Building
If you believe investing in apartment buildings might be the best way to expand your portfolio, then begin searching for the right opportunities. Try to start with properties that are located in areas that offer attractive features to potential tenants like neighborhoods with good school districts or areas with access to hot amenities. These are less risky. You will also want to focus on profitability. The 1% rule will help you better determine whether a property will provide the right level of profitability. This rule states that the monthly rent for each until should be equal to at least 1% of the property’s purchase price. For example, if the total rent collected is $1,000 per month, but the property itself goes for $400,000, you may not be making enough to cover the debt service on the property, making it a poor investment. There are additional costs involved with buying an apartment building like maintenance, property management fees, and landlord insurance, so you want to target only those properties that meet the 1% rule.
As you begin the process of investing in apartment buildings, due diligence is a must. You’ll want a financial audit report on any options you’re considering, as well as a thorough property condition assessment. A market report can help you better determine a property’s estimated occupancy, and a lease audit will uncover any lease issues you may have to deal with like late payments. Additionally, you’ll want the appraisal and a title report.
You don’t have to become an expert on investing in apartment buildings on your own. You can certainly form a Real Estate Limited Partnership, or RELP, to add an option like this to your portfolio or work through a syndication agreement. You may also choose to invest through a REIT.
Shifting Your Focus
An apartment building is an excellent way to change the focus of your investment portfolio, and it means the potential for added cash flow quite quickly. To learn how we can help, contact us today.
