Friday, 29 May 2020

Your Ultimate Guide to Buying an Apartment Building

Written by Posted On Monday, 04 November 2019 04:51

Want to buy the block? With our helpful real estate guide, now you can. Here's your ultimate guide to buying an apartment building!

Almost 40 million Americans live in apartment buildings. Since many young adults are buying homes at a younger age, apartment complexes are becoming more popular than ever. In fact, there will be a shortage if current trends continue.

Now's a great time for investors to get into the market before it's too late. But buying an apartment building can be a daunting task, and it's more complicated than renting out single-family homes. Luckily, there's a secret to getting your hands on this type of real estate.

All you need is the right advice. Read our guide and learn how to buy your first apartment building.

1. Evaluate Different Types of Investment Properties

Before you get carried away with an apartment building search, you should know what you're getting into. An apartment complex is wholly different than other residential properties.

Consider, for example, renting out a collection of single-family homes. Tenants who seek out this type of property are usually in for the long-haul, ready to pay more for the privacy and features of an entire home. They also tend to take better care of the properties they inhabit.

So why should you consider buying an apartment building? Well, they have their own benefits. A high number of apartment units will offset any vacancies you may experience, which isn't true for single-family homes.

Best of all, a large apartment complex has other services, giving you more opportunities to earn. Don't disregard the passive income of a laundromat, ATM, or parking garage. These perks simply aren't an option for other types of residential dwellings.

Do your homework and see which types of investment properties are best for your budget and desires. Buying an apartment building isn't for everyone.

2. Decide on the Key Features

Although apartments have many similarities, they differ more than you might think. Some apartment complexes may be only one-story and spread out across a handful of units. Others may consist of several floors with nearly 100 units.

These features will impact your ownership experience. More units could lead to more income, but there are also higher expenses and a larger loan.

In addition to considering the layout and number of units, you'll want to know the classification of each apartment building. There's a classification system that grades these complexes and gives investors more information.

In short, there are four different classifications: Class A, B, C, and D. Let's look at these in more detail.

  • Class A properties are newer and riddled with modern amenities. They may be about 10 to 15 years old. If the complex is already in operation, the current tenants are likely well-off.
  • Class B properties are slightly older with tenants who pay a bit less. These units may be in need of some light maintenance.
  • Class C properties are several decades old and feature only the most basic features. These tenants are nearing the low-end of the income curve and the units need renovations.
  • Class D properties are even older and located in unpleasant areas. There will be a constant need to vet tenants and collect rent.

As you consider these different classifications, there's an important caveat to keep in mind. There's no standardized classification system, and it depends on the local real estate market. A Class C property could very well be Class B in a different city.

3. Hire a Real Estate Agent

Imagine buying an apartment building in NYC with no commercial real estate experience. The process is more complicated than buying a simple residential home. If you want to ensure you're getting what you pay for, it's in your best interest to work with a commercial real estate agent.

These agents will take a good chunk of the final sale, but remember that it's the seller who pays the final price. These agents are familiar not only with the legal process but can help you search the property for problems you may miss on your own.

Ultimately, the decision is up to you. But if it's your first time buying an apartment complex, the commission fee is well worth the price.

4. Assess the Premises

What should you look for when assessing an apartment building? Well, let's start with the exterior.

Most apartments have flat roofs, but this design will no doubt lead to water damage in the future if it hasn't already. However, flat roofs are a ubiquitous design. Prioritize other options if you have the chance.

Pay attention to the way units access the utilities. Some units may have their own electricity while others share from a central source. This can make it difficult to measure, so you'll have to adjust your prices accordingly.

And as always, pay attention to legal concerns regarding contaminants. A good inspector will ensure you aren't buying a complex filled with asbestos or lead paint.

5. Estimate the Cash Flow

An apartment building may seem like a good buy until you look at the expenses. That's why you'll want to estimate the cash flow for any complex that seems worthwhile.

The cash flow is the net operating income, or your final earnings once all the expenses are accounted for. You'll calculate this by asking the current owner for the rent roll and removing average operating costs.

More cash flow isn't always better. The rate of return is the most important variable. This depends on the market's capitalization rate, which will vary from place to place.

Financing and Buying an Apartment Building

Once you find the property with a comfortable amount of risk and a great rate of return, you're in business. Ask your lawyer and real estate agent for help with commercial loans. Buying an apartment building with no money down is possible with the right method, so it's important to get the right advice.

Take care to pursue smaller apartment complexes if you're just getting started. With a bit of experience, you'll be ready for bigger and better things.

Looking for guidance before you purchase your next property? Search our Buyers' Advice column for more.

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Stacy Stein

stacy is a real estate writer, and she would like to real estate, business-related topics, she would like to go out with her friends. she studied business management from California University and she presently lives in California.  



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