Apartment investing might appear to be a challenging undertaking, particularly for individuals who are relatively new to investment opportunities. While purchasing an apartment complex can be a demanding process, it offers some significant benefits that any investor would want to explore.
If you are thinking of venturing into apartment investing, here are the basics you should know.
Is Apartment Investing A Good Investment?
If you are reading this, it goes without saying that you are somehow interested in apartment investing or trying to decide if investing in an apartment complex is a great investment.
Like any other real estate investment, buying or investing in an apartment complex comes with a series of advantages and drawbacks. You should take these considerations very seriously as they will help you decide whether or not this investment opportunity suits your ideal investment goals.
Choosing to invest in an apartment building can provide many unique benefits compared to other investment properties. Getting recurring rental income every month from various units can help increase your income potential. It also means that any maintenance costs that may arise are split across the units.
Additionally, investors can spread the risk across various units. Here’s an example to help you get a clearer picture. The vacancy rate in a single-occupancy property becomes 100% when the tenant moves out. On the other hand, when a tenant moves out of a 20-unit apartment complex, the vacancy rate is only 5%.
But that’s not all. With apartment complexes, owners can increase the potential of generating more income by adding a few amenities to their property, which tenants will gladly pay for. For example, landlords can add vending machines or laundry services.
That said, choosing to invest in an apartment building isn’t without its potential downsides. For one, owning a property with various units will require intensive management, particularly when dealing with maintenance repairs, requests, and tenant turnover.
If you are interested in building an apartment investment portfolio, ask yourself if you are prepared to do what it takes to be a landlord of not just one but multiple tenants at the same time.
If you would prefer a more hands-off approach to apartment investing, enlist the services of a property management company or a property manager to take the burden off of you.
Some investors are not willing to invest in apartment complexes because of the seemingly prohibitively high purchase price. Nevertheless, it is important to remember that with apartment investing, banks and other financial lenders tend to focus on the financial potentials of the property rather than the investor’s personal financial capability.
For apartment complexes, the value of the building is a function of income potential and market value. Due to this, financing an apartment complex can be a lot more accessible than other real estate investment opportunities.
How Does Apartment Investing Differ From Commercial Real Estate?
In many cases, investors interested in apartment investing and its many benefits also eye commercial real estate because both options appear to require a significant upfront investment when it comes to acquisition. Some investors also believe a commercial building will bring in more profit than apartment complexes.
The two real estate investment options offer different benefits, which is why it is super important to carefully consider the pros and the cons of both real estate investment options before choosing one.
Most investors believe that it is easier to find and keep tenants in a commercial space. Yet, due to the constantly changing economic climate, many retailers are either folding under the pressure of internet retailers or big-box retailers.
While a business can potentially occupy the commercial space for a longer time, filling a vacancy can be more difficult to achieve, which is different from the trend in residential real estate, where the demand for units continues to increase every year.
This trend is especially true in concentrated real estate markets, where people feel it is more financially prudent to rent rather than buy. Also, it could be because the purchase prices of residential real estate are unattainable to many individuals.
Investors comparing commercial real estate and apartment complexes have to consider the level of turnover with both opportunities. For commercial real estate investment, managing turnover between tenants can be more expensive than the same process for residential investment opportunities.
When a business moves into a building, the space is typically configured to match its specifications. Unfortunately, reconfiguring the space tends to fall to the owner when the business eventually moves out.
Just as with any situation, it is important for potential investors to carefully consider the drawbacks associated with each real estate investment opportunity.
Apartment Investing Mistakes and How You Can Avoid Them
To give you a head start, here are some common apartment investing mistakes that many beginners make, and how you can avoid them.
Making the Wrong Management Decision
Every apartment needs a property manager. While this may seem like a no-brainer, you’ll be surprised at how many newbie investors assume they can be landlords and manage a property even when they have no experience doing so. Of course, the result is nothing short of creating their nightmare.
The key to being successful is hiring an experienced property manager. This allows you to channel your time and efforts into pursuing opportunities where your strengths lie.
Investing in a Property that has Poor Financial Health
Sometimes, an investor might be tempted to invest in a property with great potential, especially if it has undergone renovations, even though it does not provide cash flow from the beginning.
Choosing to go ahead with this type of property can be a huge mistake, especially when you are just getting into apartment investing.
Not only is having a decent cash flow crucial to covering insurance, mortgage, and expenses, but it can also cover any unexpected expenses. When you do not sufficiently plan for a decent buffer margin, the property is certainly going to eat into your profit margin.
Not Having Enough Cash at Hand
Smart investors usually expect the unexpected when investing in real estate, which is why they always have a healthy cash reserve.
Dismissing Due Diligence
When you eventually find a property that you are interested in buying, it is essential to always ask for financial documents and records from the property’s current owner.
This gives you the chance to see the details that will help you access the property’s financial health. Pay particular attention to current rent roll, income, and expense reports. The information you get from the records can guide your financial projections.
Conducting a Deal without Adequate Research
It is quite easy to become over-excited with a property that appears to meet your specifications whether that’s the price or location. However, as a competent real estate investor, it is important to not let your emotions get the better of you when it comes to closing deals.
Take the time to perform a preliminary financial check and follow it up with an in-depth analysis. When investors rush into closing deals without conducting their due diligence, they could end up running themselves financially in the long run.
Choosing the Wrong Neighborhood
Apartment investing experts all agree that choosing the right location for your investment opportunity is crucial to any real estate strategy. One of the worst things you can do is to buy or invest in a property in the wrong neighborhood.
In this case, the wrong neighborhood refers to any area with a declining real estate market. Putting your money in this type of location will mean that you will be forced to lower your rent price.
10 Step Guide to Apartment Investing
- First, it is super important to ensure that apartment investing suits you. This means it matches your investment goals and preferences.
- Discover what your ideal apartment complex class and size is.
- Use a financial test to filter through available apartment complexes.
- When you find a property that piques your interest, request an appointment for a walkthrough.
- Gather all the information required to perform an in-depth financial analysis.
- Ensure you conduct your due diligence on any potential property.
- Once you have appraised the property’s investment potential, you can make an offer to negotiate terms.
- Ensure you schedule and conduct a property inspection.
- Secure a financing source in time for closing.
- Sign the required paperwork to close the deal.
Keep in mind that although these steps are rudimentary, they can be quite challenging. The reality is that the entire process involved in purchasing apartment complexes and managing them is different from any other residential investment strategy.
Nevertheless, you can put yourself in an advantageous situation by conducting proper research, creating an apartment investing business plan, and of course, reaching out to people with more experience in the industry for advice.