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. We have talked about some steps in our previous article and rest of those are mentioned here:
Locating for Your Apartment Complex to Buy
You can search for an apartment complex to but in many ways such as:
- Search on your own (that can be time consuming).
- Using a Local Real Estate Investment Association (REIA) to find for you.
- By engaging a Real Estate Agent
- You can consider using a business broker.
Evaluating the Potential Apartment Complex and Neighborhood
When you buy an apartment complex and evaluate the potential purchases then you must take care of things like:
- Assessing the location
- Considering the number and size of units
- Making a note of apartment complex’s amenities
- Paying attention to the construction details (flat roof, all frame or bricks, old plumbing, shared utilities, asbestos and lead paint etc.)
- Examining the basic numbers before buying (rent roll, occupancy rate, cost per unit etc.)
- Evaluating the full financial before buying (gross operative income, expenses, Net Operating Income (NOI), profit / loss statement
- Evaluating capitalization rate (the formula is- Cap rate= Net Operating Income / Purchasing Price) etc.
Making an Offer on the Apartment Complex
If you make a good offer on a property then it will involve appraising the value of the building and you will know how rents affect the value of an apartment investment. Apartment buildings needs different appraisals than residential properties. In this case three methods are : (1) the market value, (2) replacement cost approach and (3) income approach. Again another thing which is important to understand that if you can increase the rents then you can raise the value of your building.
Financing the Purchase of an Apartment Complex
The areas you need to consider while you finance the purchase of an apartment complex includes:
- Types of financing for apartments (commercial as opposed residential lending, conventional loans, private loans and seller financing)
- Recourse or non-recourse loans
- Lender required reserves (interest reserves or cash reserves)
Some important things which is considered by the lenders during the loan approval process are: looking favorably on properties having good market potential, high possession rates and long-term tenants also. It is important to buy good grade properties in good areas as the income affects the value.
Closing on the Purchase of the Apartment Complex
Here, you can consider three things:
“Select a Title Company Experienced with Apartments”- according to the rule of your state you need to select an escrow agent or title company or attorney to help you close the transaction. Make sure to find out the company is experienced in this case and always get title insurance to maintain and protect your ownership.
Closing on the apartment complex on a financially advantageous day of the month and ensuring that apartment complex’s security deposits are properly transferred to you.
Featured Image Source: Mass Housing Competition