Many people dream of owning real estate investments, but few know where to start when it comes to investing in an apartment complex.
Tackling commercial real estate investments is quite a challenge, but the potential return on investment (ROI) typically higher than with single-family investments.
If you’ve ever dreamed of owning your own apartment building, this guide will walk you through everything you need to know to get started.
The Pros and Cons of Owning an Apartment Complex
Purchasing an apartment building is trickier than single-family residences. While there is much more risk and capital required, there are clear benefits to owning your own apartment complex.
Pro: Steady, Recurring Income
Income is the main reason most investors opt for apartment buildings over single-family residences.
Having multiple tenants provides various sources of income, that can help you maximize your ROI.
If one or two units remains vacant for a few months, you should still be making enough money to cover all of your expenses.
Con: Risk of Tenant Turnover
Of course, with great reward comes great risk. As an apartment owner, you can handle a few vacancies, but what happens if tenant turnover becomes a common theme?
Apartments are considered transitional homes, so tenants are always coming and going. Finding good tenants can prove difficult and could have you renovating units as often as once a year, which can be expensive to maintain.
Pro: Small Rent Increases Improve Your Property Value
In general, the value of an apartment complex building is determined by the value of the units’ rents. Therefore, the higher the rent, the higher the value of your apartment.
While increasing your rent by $100 might be too drastic for the profile of tenants you’re marketing to, small increases like $15 or $25 per unit can slowly, but surely improve your building’s overall value.
Con: Professional Management is a Must
When owning an apartment complex, you can serve as the building’s property manager, but you should be aware that this is a huge time commitment.
You’ll need a way for tenants to easily pay their rent, a process for maintenance requests, and schedule for lawncare and other tasks.
Most apartment building owners hire a property manager and sometimes an assistant or two to help manage this workload. While it takes the pressure off of you, it also means you’ll need to pay salary.
4 Tips for Purchasing an Apartment Building
Once you’ve decided to purchase an apartment building, there are a few key considerations to keep in mind throughout the process. The purchasing process is different from traditional single-family financing, and can be more expense up front.
1. Partner with an Experienced Agent
Working with a real estate agent who focuses on investment properties is a great first step to finding an apartment building with a strong, predictable ROI.
An experienced, local agent will understand the local market and can help you make smart financial decisions when it comes to choosing an apartment complex and procuring financing for your property.
2. Choose Your Property Type
You should decide early on if you want to purchase an already functioning or state-of-the-art apartment building, or if you’d rather invest in a property you can renovate.
There are pros and cons to each approach, so ultimately, the decision comes down to your finances and how much time and effort you’re willing to pour into your investment.
A functioning apartment complex will cost more, but allow you to start making money immediately, though your ROI could be minimal.
Renovating an old complex or commercial building is certainly riskier, but could provide stronger ROI in the long run.
3. Research the Building Before Committing
Not only is it smart to understand the average rent rates in an area before purchasing, but it’s also important to understand why the current property owner is selling the building.
While the owner may have made significant ROI and is ready to sell, there could be other factors in play.
You’ll want to make sure the units do not require major repairs that the seller might be trying to hide.
Additionally, requesting copies of current leases will allow you to familiarize yourself with the current tenants, to better understand risks of potential property damage from children and pets.
4. Understand the Financial Process
Unlike buying a single-family residence, there are expenses you’ll need to take into consideration when purchasing an apartment building.
This could include insurance, interest, taxes, maintenance fees, management costs, and advertising spend.
When it comes to financing, you’ll likely need to put down a 20% downpayment to be approved for an investment loan.
If you don’t have the money right away, you can look into crowdfunding options to help raise the downpayment through a network of investors.
For more information about the process of buying an apartment building, connect with an experienced agent near you.