Many real estate investors make a tangible return on investment (ROI) investing in apartment complexes. No one, however, was born with the knowledge and wisdom of purchasing apartment buildings that turn to increase their wealth portfolio. However, many people still consider apartment buildings a worthy investment.
Are you seeking knowledge on how to step into the apartment building niche and reap a fortune? This article is the apartment investing for beginners class 101, where we will detail the basic information on how to invest in apartments that will give you a healthy ROI. We also have an investing in apartment buildings guide that you can follow to kickstart your journey quickly.
Factors to Consider When Buying Apartment Complexes
Although apartment buildings are a lucrative part of real estate, certain variables and factors need consideration when buying a complex. Some important variables you need to think about when deciding to buy your first apartment building include:
Return on Investment (ROI)
The first trick you need to conquer is to get the potential return on investment (ROI) on the building you desire to buy. Knowing the ROI means considering certain indices, including facility maintenance and repairs.
Investments in apartment buildings compared to other property types with larger amenities tends to be more affordable for tenants, and such buildings rarely go vacant. However, the ROI might be lower.
As a newbie, what many experts won’t tell you is that your ROI may reduce further. Closing fees, general maintenance (repairs, renovation), and the facility manager’s wages are critical expenses to consider. A property management firm may be best suited to handle the affairs if you’re the busy type.
Classification of All Apartments
Depending on the status of an apartment complex; its quality, newness, amenities, and size, buildings are classified. This type of arrangement is found in the US, from A to D. The lesser the letter, the classier. For starters, you may go for the apartments classified under the lower letters (A-B) but consider the costs too.
Cost of Reconstruction
Getting apartment buildings ranked C or D may come with its set of problems. These problems are mainly redesigning all the apartments, changing the roofs, and even repainting. They’re expensive and could heavily disrupt your budget.
Tips for Buying an Apartment Building
Investing in apartment buildings is complex, but we’ve brought the basics of apartment investing for beginners to help newbies get started on this profitable venture.
Determine the Apartment Building Type Based on Your Budget
To start your journey to owning a property, you need to determine your finances and conclude on which class of apartment building is suitable for your budget. Take into consideration the choice of location and number of units. This will be helpful when you begin searching or enlisting the help of a real estate agent to find apartments for you.
This decision is necessary so that you can calculate the potential ROI after factoring in all the hidden costs required to make the building your own. It also helps you to choose if you want to manage the building personally or you have space in your budget to hire a facility management firm.
Hiring the firm will take the stress of dealing with regular matters associated with owning a multi-family complex.
Make Proper Findings
Before you approach the owner of the building to make an offer, conduct a thorough analysis of the entire building. Essential parts of the analysis should contain the condition of the building, inbuilt amenities, the location, the amount charged as rent in the area, and the number of units available for sale.
This analysis will be helpful during negotiations because location is essential for determining taxes and resale value. The rent will influence the amount you’ll charge your tenants, affecting your monthly cash inflow.
You can start negotiations yourself or enlist the help of a real estate agent. As with all the methods of buying real estate, you can finance it with cash, or mortgage. However, government institutions don’t finance mortgages of commercial properties containing 5 or more units.
If you’re considering a mortgage option, approach private lenders. While their interest rates may be high, they focus on the ROI of the property and not your personal income.
Pros and Cons of Apartment Complexes Investment
As with all types of real estate investment, there are advantages and disadvantages to buying apartment buildings.
- Down payment for the mortgage method for an apartment complex is usually low (between 25 to 30 percent). It could also be lower
- Better chance at increased ROI to build an account portfolio
- Good tax incentives such as reduction in mortgage interest tax
- Lenders will consider the potential ROI of the property rather than the intending owner’s personal finances
- Increased chance of resale value
- Diversification of source of income
- Regular safety compliant checks can be expensive
- The units may need to be renovated regularly because of poor handling by the tenants
- Some of the amenities in the building may become obsolete, posing as a liability to the owner
- Although the resale value may be high (depending on the location and other factors), it may take a while to resell the property, even with the help of a seasoned real estate agent
- It’s generally more expensive to purchase units of an apartment building as compared to a single-family home
While we’ve focused on apartment investing for beginners, there are lots of technicalities involved in owning your first apartment building. An apartment building is a huge investment with a reliable and viable investment that can pay off years later, rewarding you with a steady monthly income.
If you’re interested in buying an apartment building, you need to put in the work and watch out for openings for affordable apartment buildings that will attract tenants immediately. Getting started in real estate investing is hard at first, but the possibility of earning steady income over long periods should be enough motivation.