To buy an apartment complex is more involving than investing in single family properties. This involves a deeper understanding of the management and financial perspectives. In general, you can learn the process to buy an apartment complex in some steps and these steps are:
Is Buying an Apartment Complex Right for You?
It is important to make sure that it is the right investment strategy for you before you start investing in the apartment buildings. An apartment building requires more research and more time than purchasing single-family homes and small multi-family properties. It is important to survey the pros and cons before you buy apartment complexes.
The Pros of Buying Apartment Complexes
Recurring Income: You can get a positive cash flow of an ongoing income from a good apartment building. If the finances are sound and the deal is right then it will throw off recurring monthly income.
Diversifying the Income Across Many: Apartment buildings alleviate the effects of a high vacancy rate. If you face vacancy problem with one unit, but you still have other units to generate rent and can still produce positive cash flow.
Lower per-unit maintenance costs: The building owners bears a lower-maintenance cost for each unit. For example, if the power need to repaint, he/she can use the same paint for several units and not have wasted materials which results from only one unit’s need.
The Possibility of Extra Sources of Income The larger the building, the more one likely to have additional sources of income. The sources may include vending machine, ATMs, coin-operated laundry, facilities, renting parking areas, charging additional monthly rent for air conditioning units, upgraded bathroom and kitchen appliances etc.
The Building Value is Often a Function of Rents: In the case of buying apartment buildings, the value of the investment is determined by the financial performance of the building. So increasing rents can increase the value of your occupying.
The Cons of Buying Apartment Complexes
In some cases, buying an apartment complex is much harder than attaining a single- family home or small multi -unit property. According to Todd Stoddard, a blogger and investor, it can be costly to sell an apartment building and time-consuming. It can often involve scheduling conflicts and working with real estate agents which may put an investor in a difficult situation if he/she needs cash quickly.
Requirement of Intensive Management: As the buildings are larger than four units and the nature of tenants are different so the management will be a bit more intensive process. It may become an issue and you need to figure out some form of outside management. Well, you can hire a professional management company or an onsite manager and both of these comes with extra costs.
Tenant Turnover is Prevalent: Tenants in apartments are much more transient. They can stay in a single-family home for years. But in an apartment, you’re lucky if a renter stays more than one year. So, you have to keep marketing for new tenants as you will expect new occupants.
Less Care of Leaseholder for an Apartment: Every renter tends to treat the property like their own home. But in the case of an apartment, the scenario may be different. The tenants often do not treat apartments with the same care do in a single-family dwelling. So, the owner have to bear the damage and maintenance needs over and over again.
High Maintenance Costs: The overall cost of maintenance will be higher than an apartment building as the tenants may not treat it like their own house. For example, preparing the roof of a unit or replacing the plumbing system for one bathroom is much cheaper than repairing the roof top and replacing the plumbing of a five storeyed building.
Choosing the Type of Apartment Complex You Want to Buy
Now that you have decided to buy an apartment complex then the next step is to find out the type of apartment building you want to acquire. Some items to consider while choosing the type of apartment are:
Figure out Your personal and financial criteria before You Invest in an apartment complex
Firstly in this case, “consider the number of units in the apartment”. If you’re looking only for a sideline income or to supplement your retirement income, then you may like to stay with buildings having four to five units. But if you want to get larger incomes then you may consider buildings like which have 10 or even 15+ units.
Secondly, “know the types and classes of apartments”. There are a lot of variety in the forms of apartment buildings. In U.S. there’s a rating scale which divides the apartment building into four types:
“Class A apartment buildings”, which might be 10 years old or less having mid-rise or high-rise buildings and have conveniences like pools, clubhouses and tennis courts.
“Class B apartment buildings”, which might be up to 20 years old but are well maintained. These may not have facilities like ‘Class A’ , but if they do then they will be more dated then those of “Class A’.
“Class C apartment buildings”, these might be up to three decades old and there is very rare chances of getting any amenities.
“Class D apartment buildings”, these buildings are generally over 30 years old, located in lower socio-economic areas, having no amenities and a dire need for the buildings to get a renovation.
Most investors prefer to purchase ‘Class B’ or ‘Class C’ properties because of their lower cost than ‘Class A’. Less people would like to demand the repairs and intensive management which ‘Class D’ properties require.
Consider Your Return on Investment
In this case, you have to be very calculative about how much you have invested in the property and how much a building returns. Larger buildings with more units may produce more income but this will need a larger investment. Again you’ll need to consider the complexities of its management.
A smaller building with less units may not produce more income like a larger one but it won’t need that much cash to purchase and will require less intensive management.
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