How To Buy Apartment Buildings
Why buy apartment buildings? Well, you should get more cash flow than with rental houses. Of course, big projects do take more time and research and cash, but then they pay you for year after year.
It is easier to start investing in single family homes than apartment buildings. If you have done so, however, you have noticed how difficult it is getting to get positive cash flow from houses. Even if you do squeeze a little out of each, it can take a lot of them to have a decent income.
Like in a Monopoly game, at some point you may want to trade in your little green houses for a big red apartment building. One apartment building may provide as much cash flow as twenty little houses. And once you have management in place it may be a lot less work.
How To Buy An Apartment Building
Rule number one? Buy properties that will have positive cash flow from the start, based on the current income and all of your projected expenses including management. If the current owner doesn’t have management, that is his problem. You are an investor, not a manager, and a good income property should pay for management and still produce positive cash flow.
Do your due diligence? Here’s a simple definition of the term: “Investigation and verification of the details of a particular investment.” You can start this process before you make an offer, but you should also have clauses in the offer that allow you to have inspections done, and reviews of the books and certain documents.
Look at the files, to verify income. There should be rental agreements signed by tenants, and rental histories showing if there are any problem tenants or late payments. Look for rental deposit documents also, to see amounts and where the deposits are kept.
Ask to see service contracts and agreements. Do they transfer, or are you free to seek better deals? These can include property management agreements, landscaping, snow plowing, pool cleaning service, and cooling system maintenance agreements.
Get the last 24 months income and expense statements, and look for anything unusual, like expenses that are too low or income that seems too high. Review the rent roll, and find out if the rents are over or under the market rates for the area. If there are employees, look at the payroll records for any surprises, like accrued vacation time that you’ll have to pay.
Do an interior inspection to learn about the place, the tenants, and any problems that you will have to fix in the coming months or years. Look for pests, water and fire damage, as well as obvious “problem tenants.” Are there any empty apartments that are listed as occupied? Use professional inspectors as needed for pest inspections and safety inspections. The local Fire Marshall may do a free inspection to verify that the building meets current codes.
For the exterior inspection, you will want to first walk around and take notes. Watch for anything that looks unusual or in need of repair. Then you can get professional inspections, if necessary. You want to verify that the electrical and plumbing systems are up to date and meet current codes. You also want to get an estimate on how many years of use the roofing has left. You’ll look at driveways, landscaping, and exterior paint condition.
Call local authorities and check for any permit problems or zoning or encroachment problems. If there have been fire code violations, were they corrected?
Get the help of an accountant to decipher the books. Have a lawyer review your offer and any documents. Ask what other things you should be doing.
Take notes, and list problems, and estimated costs to correct them. You can use these notes during subsequent negotiations. The problems investors run into when buying income properties are usually not unforeseeable. They can be avoided or resolved if you just do your due diligence. Use a checklist so you won’t forget anything.
Prices are based on income. When buying apartment buildings, many investors will look at the “cap rate” of a property to determine if it is a good investment at a given price. Not sure how to figure capitalization rates? Just be sure that there is more income coming in than the total money you’ll be paying out each year. Then make sure that this cash flow is enough to justify the cash you invest.
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Thank you for this article, just that I was looking for.
Well spoken. I have to research more on this as it is really vital info?
What country do you guys want to bring home the most gold in the Olympics? I’m hoping USA brings home the most gold!
“Discipline is the bridge between goals and accomplishment.” Jim Rohn (Olympics Baby)
Great post. My friend Adam told me about this blog some weeks ago but this is the first time I am visting. I’ll undoubtedly be back.
I would guess that treasury yeilds aren’t going lower. They are at historical lows. The govenment is not going to reduce spending. Obama’s policies will not result in the magnitude of private sector growth required to achieve balance budgets. We will not develop domestic nuclear and natural gas resources. Balance of trade deficits will continue. Fiscal deficits will continue. Default on our outstanding debt through currency debasement is inevitable. Interest rates will rise unless Americans use all of the printed money to by US debt instead of Arab oil and Chinese manufactured goods.
You know, for the past couple of years or so, I have heard so many supposedly smart and connected people say, uh, “It’s almost impossible to recognize a bubble when you’re in it” when the subject of our last el-grande bubble of real estate comes up. You know, the housing bubble I recognized in maybe ‘02, that 90% of others were ‘blindsided” by, including geniuses like Greenspan, Bernancke, 99% of the banks in the WORLD, rating agencies, investment houses, insurance companies, 75 % of the American public, and, of course, Fannie/Freddie, the black hole for the right side of my pay stub. But, for the past almost year, I’ve heard many smart and connected people tell me that the safety of bonds and bond funds are in a bubble. They were in a bubble last summer, and they are more than certain about that, it seems.