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6 Considerations Before Investing in an Apartment Building

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Considerations Before Investing in an Apartment BuildingThough there are a number of different types of rental properties you could add to your portfolio, nothing compares to the benefits of investing in an apartment building.

Aside from the impressive amount of cash flow you’ll enjoy, you also won’t face the same occupancy challenges you would with a single-family home.

Still, to enjoy every advantage of this kind of investment, you need to understand the steps required for making the best possible purchase.

6 Steps to Successfully Investing in Apartment Buildings

While investing in an apartment building may involve some unique steps depending on your portfolio’s specific requirements, there are six that you can’t afford to skip.

1. A Central, Convenient Location

As every real-estate investor is well aware, the first aspect you need to look for in a property is “location, location, location.”

The same certainly applies to investing in an apartment building, too. You want to find a building that is nearby grocery stores, restaurants, retail centers, gyms, public transit, and other common destinations.

Obviously, you’ll need to think about your unique market, as well, and what they want from an apartment building’s location. For example, older, well-off renters probably won’t care as much about public transit as younger people who may not own cars.

2. A Diverse Mix of Units

Speaking of your potential market, what kinds of apartments are they looking to rent in your area?

If your building only features a single unit type (e.g., a one bedroom), you won’t have as many options to attract potential renters as if you also had two- and three-bedroom units. Again, you’ll need to think about what your ideal tenants are looking for most in an apartment building.

With that said, studio units are usually a bad investment. They don’t justify much in the way of rent, so look for buildings where the smallest unit is one bedroom.

3. Multiple Sources of Potential Income

Another classic tenet of investing is always buying an asset that still has plenty of room to grow in value.

When investing in an apartment building, this means finding one that would only require minor improvements in order to raise the rent. Maybe it’s been years before the hallways had new carpets or saw a fresh coat of paint, but there might be other opportunities of much greater potential that involve:

  • Parking

  • Storage

  • Laundry

  • Vending

Try thinking like a prospective tenant. What are they most likely to look for in an apartment in that area? Compare apartment buildings nearby to get a sense for what your investment might need in order to compete better.

4. A Motivated Seller

When investing in an apartment building, it will help a lot if you find an owner who is ready to sell. While that’s not to say you can never convince an owner to sell, that’s adding a lot of extra steps to the entire process. Ideally, things will go a lot smoother, and you’ll enjoy a much better price if you can find someone who is ready to sell their building.

Generally, the longer someone has owned a building, the more motivated they’ll be to sell.

Fortunately, there are also plenty of websites that facilitate apartment-building sales. You can also approach off-market property owners to gauge their interest in selling.

5. At Least 70% Occupancy

Inevitably, you’ll probably find that there are plenty of owners who are extremely motivated to sell simply because their properties are no longer promising investments. They’d rather take what they can get now than risk losing money on the apartment in the future.

How much risk you’re willing to take on when investing in an apartment building is a matter of personal preference. Some investors love the challenge of turning around the prospects of a building that is currently losing money for the owner.

In any case, the rule of thumb when investing in an apartment building is that you should usually stay away from any building that doesn’t currently have a >70% occupancy rate.

Below that and cashflow problems are almost inevitable. You’ll also have to make improving that occupancy rate your top priority, which will require money you might have otherwise spent on other improvements to the building.

6. Documentation That Goes Back 24 Months

Finally, successfully investing in an apartment building requires a little leg work in researching how a potential property has done over the past two years.

No matter how incredible the apartment building may look now – even if it has an impressive occupancy rate – you want to make sure there isn’t any financial history that will point to future problems.

When working with a seller, ask to see their:

  • Capital Improvement Records

  • Leases

  • Maintenance Records

  • Profit & Losses

  • Rent Rolls

This kind of full accounting of the apartment building’s past will help you better manage your own expectations about the years to come.

For example, without the rent roll, you might be excited about the current monthly revenues of a building. After requesting them, though, you learn that the rent amount has been consistently dropping for the past two years.

The further back the financials go, the better. At the very least, though, you want a record of what the last two years looked like for a potential building.

The Most Important Step to Investing in an Apartment Building

Obviously, before you can purchase any property, you need to secure the required financing.

The same goes for investing in an apartment building.

However, with an investment of this size, it’s vital that you understand which type of financing will work best. Make the wrong decision, and you could struggle against unfavorable terms or simply miss out on upcoming opportunities because of a lender that doesn’t understand this kind of investing.

At Rental Home Financing, we’ve made it our mission to provide experienced property investors like yourselves with the unique financing products they require to build robust portfolios.

This includes multifamily loans with “no-limit financing” options. Contact us today to learn more about how your lending services can help you build the ideal rental-property portfolio.

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