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For most new investors, buying apartment complex can seem like a daunting task. Either because the property is too expensive or the buying process is too difficult or time consuming. A smart investor always seeks wise advice and does research on how to buy an apartment building before diving in.
Here are Some Things to Consider as you consider Buying an Apartment Complex:
Before you actively begin a property search, it is essential to understand the different types of apartment buildings on the market.
We’ve listed the main types here:
Class A: These apartment buildings are at least ten years old and offer an array of property amenities.
Class B: These buildings are between 10 and 20 years old; they’re in good structural shape and may offer fewer amenities than a Class A apartment building.
Class C: These apartment buildings are no more than 30 years old and have few or no property amenities. These buildings also often require renovations.
Class D: These buildings are 30+ years old and are often located in lower-income areas. They also usually require extensive repairs and rarely have any property amenities.
Before you actively begin your search for an apartment complex to buy, think about whether or not purchasing an apartment complex is your cup of tea. Ownership of this type of property has unique challenges that you may not experience when owning one or two single-family rental properties. Make every effort to weigh the pros and cons of buying an apartment complex before you embark on the journey.
Once you’ve decided on the type of apartment building you want to buy. You’ll then need to study the following financial concepts and terms, which you will likely hear during the buying process:
This is the final phase of apartment buying, so make sure you follow these steps to prepare the required documentation needed to secure a loan.
Before you reach out to the bank for a loan, you should get the property professionally appraised. Appraisers use different approaches when completing this process. It may include estimating the property’s value based on the potential income it could generate. This is known as the income approach.
Another approach is the comparative approach in which appraisers estimate the value of the property based on the sales of similar properties. A third approach is the cost approach in which appraisers estimate the building’s value based on what it would cost to rebuild it on the current lot.
This document will include the property’s current condition. It also provides what needs to be replaced or repaired.
Like the physical need assessment, the environmental assessment documents the environmental issues associated with the apartment building that could pose a threat to residents and the community.
This document provides the property’s boundaries and incorporates notes of any title issues that could affect how the property.
Buying an apartment building requires a considerable financial investment, so you’ll need to calculate the return on investment (ROI). ROI is a factor that considers how much money you have invested in purchasing the property and how much income you are earning from it. Apartment complexes are revenue generators, but they also require a larger upfront investment. Keeping all factors in mind, calculate how long it will take before you see a return on your investment.
You’ll also want to consider the following factors:
Location can make or break you as an investor. It’s in your best financial interest to keep units occupied if you’re thinking of buying an apartment complex because it will help you realize the return on your investment sooner. When evaluating location, consider factors like the potential for increased property values over the coming years, crime and safety data, and the area’s economic health and employment opportunities.
When tenants share utility costs, they are more likely to overuse them and increase the operating costs of the apartment building. One way to handle this problem is to adopt a ratio utility system in which you divide total monthly utility expenses by the number of units.
You have to make sure the apartment building is safe. So you’ll need to have the property inspected, preferably by a professional. You will have to address any identified issues, so if the identified issues are too extensive for you financially. You will have to decide whether it’s worth proceeding with the building purchase.
Older buildings are likely to cost more to insure. So, before you make an offer to the seller, you should always inquire about current insurance premiums. Get quotes from multiple insurance providers and use that information to calculate your ROI.
Facility issues like bad plumbing or a faulty roof can cause problems if not repaired immediately. So keep upfront costs in mind when deciding which type of apartment building to buy.
You can search for available properties on your own, but partnering with a real estate agent can provide you with access to a larger market of available buildings. Agents have access to the Multiple Listing Services (MLS) database and can help you find apartment buildings in the right location and at the right sales price. In addition, agents are familiar with the real estate market and can provide assistance during the buying process.
Once you’ve found a property to buy, you’ll need to secure a commercial loan to finance your purchase. You can apply for loans with private lenders, use seller financing if it’s available, or apply for a loan through government-sponsored lenders like Fannie Mae or Freddie Mac. You’ll likely be in a relationship with your lender for the next 25 years or until you’ve repaid the loan. So take your time to find the lender who offers the best rates.
Buying apartment complex is essentially a capital game and it is typically best suited for more experienced investors. If you feel buying an apartment building is right for you, prepare for an exciting journey. Take time to understand what it takes to buy an apartment complex before you actively begin searching for one to buy. The more hours you invest during the planning phase, the smoother the rest of the process with being.