For real estate investors who are ready to expand their portfolio beyond single-family residents, apartment buildings can be a lucrative asset. While the financial return can pay off, apartment properties involve a higher level of management. Purchasing an apartment property investment can be similar in some ways to other real estate transactions, but there are some differentiators that you need to consider before diving into apartment property investing.
Weigh the Pros and Cons
Apartment buildings are a great source of somewhat passive, recurring income and owners are often eligible for tax breaks. One or two vacancies in a multi-unit building is far less of a loss than should single-family tenants vacate. Over time, the property will build equity for you as an investor and appreciate in value. The disadvantages of owning these properties, however, include a higher purchase price, and higher volume and greater costs of maintenance.
Thoroughly Understand Classifications
Apartment (multifamily) complexes are classified as class A, B, C, or D. This resource offers a great breakdown of each class, which starts at newly constructed or renovated properties with many amenities falling under class A and older, more run-down properties being grouped into class D. It makes sense that the lower the class means lower purchase prices, but it also means higher maintenance costs. Furthermore: “Class A assets — and Class B assets located in major markets — typically command more interest from lenders…Class C and D assets tend to be financed by local banks with little to no interest from secondary market lenders.”
Make Sure It’s the Right Move
Seriously — even if you’re a seasoned real estate investor, you need to explore the question of whether owning an apartment property is the right option for you and your portfolio. The cost of owning this investment goes beyond the purchase price; you need to consider the cash flow necessary for property maintenance. Time is also a consideration. Tenant turnover is much greater in apartment complexes than it is in single-family rentals, and there’s a higher level of overall involvement.
Find the Right Fit
There’s a wide range of apartment complexes out there, from older homes divided into several residences to newer, highrise buildings located in city centers. Start narrowing your search with how much property you can feasibly afford, and from there you can zero in on the types of building that will offer the most return based on what you’re willing to spend. Don’t overlook the importance of calculating costs of repair and maintenance when you’re looking to balance your upfront financial investment with ROI.
Time to Go Hunting
Once you’re clear on which types of properties you’re looking for, the search can begin. There are plenty of commercial real estate agencies and services that will help with this; just remember that these third parties may often require you to pay a commission if they do find your perfect fit. If that’s not something that fits in your budget, you can look without outside assistance. Join local networking groups specifically for real estate investing and use these contacts to explore different properties in your target area.
Tackle Due Diligence Wisely
If you do come across what seems like the perfect apartment property for your portfolio, don’t be so quick to pull the trigger. Take plenty of time to dive deep into an analysis of the purchase, factoring in things like location, unit volume, amenities, and overall property condition. From there you can better understand how much rent you can charge and what your monthly operating and maintenance costs will be. Hire an inspector, obtain copies of important legal documents from the prior owner(s), and carefully comb through everything to look for issues that may not be initially evident.
Pick the Right Property Manager
If you decide that your schedule doesn’t allow for managing an apartment property on your own, it’s a smart idea to partner with an experienced property management group. They should have a history of working with apartment property investors, along with a proven track record of success. Ask for references and examples of communities that they’re currently managing to better understand their management style. Check their local and national licensing and certification, and examine the property management agreement with a fine-tooth comb before signing anything.
When you’re ready to invest in an apartment property, let us help. We’re a team of real estate and property management professionals that specialize in acquiring, renovating, and managing apartment communities that offer unmatched value in their respective markets. We don’t “farm-out” management to third parties — we manage properties ourselves. Give us a call today.