Buying an Apartment Building – Step By Step

Have you ever thought about apartment investing – or how to buy an apartment building? You can get started investing in apartments – even if this is your first real estate investment. The first thing I want to cover is this: it is a complete lie that you have to invest in houses first, and … Continue reading “Buying an Apartment Building – Step By Step”

Have you ever thought about apartment investing – or how to buy an apartment building? You can get started investing in apartments – even if this is your first real estate investment.

The first thing I want to cover is this: it is a complete lie that you have to invest in houses first, and then “graduate” to apartment buildings. This is absolutely false. You can get started investing in apartment properties from the beginning – with no “prerequisites.”

Top 4 Reasons to Buy an Apartment Building:

1) Cash Flow
You will receive cash flow in the form of rents while you own the building, as well as your biggest cash flow of all – when you sell.

2) Appreciation
An apartment building can appreciate both organically (over time) as well as through sound property management.

3) Principal Reduction
Your tenants pay down your mortgage balance every single month, building your wealth a little at a time.

4) Tax Benefits
Buying an apartment building can provide tax benefits through depreciation deductions, as well as being able to defer your capital gains when you sell. Try selling a stock and not paying capital gains tax!

3 Steps to Buy an Apartment Building:

1) Education
Invest in yourself first and start with your education. Purchase some books and educational materials specifically geared to help you get started investing in apartment buildings. Take the time to get through some of these materials before you get started.

2) Passive or Active Investor
The next step is to decide whether you want to be an active investor, or a passive investor. Here is what I mean:

An Active Investor is “hands on” and involved with the day-to-day management of their properties.

A Passive Investor outsources the day-to-day maintenance and management activities.

There is no right or wrong answer here. I have seen investors become successful using both methods – just be true to yourself and the time commitment you have available.

3) Identify Your Investment Goals
Dream big, but be realistic. What do you realistically want your finances to look like in the next 12, 24, 36, and 60 months? How much cash flow? How much net worth?

Every investor has different life circumstances and goals. Make your goals personal to you.

4) Get Started
Take action, and start small. Once you have invested a little into your education and established some of your goals, it is time to take action. Don’t make the mistake of getting stuck on an endless cycle of education because your education never ends. Get started with some smaller deals first, and then move your way up. It can happen a lot faster than you think, but it all starts with your first property.

5) Keep Going
Once you get started, keep going. It is very difficult to become financially free from your first property. Maybe impossible. Do not look for the “one property” that is a home run. Great wealth can be built over time with a variety of properties working together to build your income and net worth.

Reason #2. Predictability

I have often hear, and repeated the statement that, “People will always need a roof over their heads.” This is more true today than ever.

When the economy is bad, more people look to rent, rather than buy their own homes. In fact, as I write this, we are experiencing a large shift from an ownership society to a rental society. This is happening for several reasons:

– Economic uncertainty
– Flexibility to move
– Lack of available credit to purchase a home
– Lack of affordable housing

Apartment investors provide a valuable service to our residents because they need a safe, clean, affordable place to live.

Reason #3. Control

There are several forms of control that I like about apartment buildings:

1) Invest how you want.
You can invest on your own, through a partnership, or in a group investment. You are able to decide the type of properties you invest in, and their locations.

2) Invest when you want.
You are not bound by any terms and conditions of a regular stock or mutual fund trading account. You can choose when to buy, and what to buy.

3) Outsource the day-to-day management.
An apartment building is one investment where you can have everything managed for you from the beginning – without having to reinvent the wheel. This activity is easily outsourced.

4) Ability to increase your property value.
This is probably the #1 reason to buy apartment buildings. This is because with an apartment property, you actually control the property value. You do this by increasing the Net Operating Income of the property. A building that produces more cash flow is simply worth more money because of the returns to the investor.

Apartment Building Investments – Ninja Deal Finding Tricks

Income less Expenses equals Net Operating Income The value of any income property is based on the annual income that the apartment building, or other commercial property creates for you. This annual income is composed of rents and other sources, less the expenses, and is called the Net Operating Income. This is also known as the NOI. The higher the NOI, the more your apartment building is worth.

So if everyone knows this, how can you find great deals on apartment buildings for sale? You would think that every apartment building owner would make sure to increase their rents every year. After all, this gives them more cash flow and it increases the value of the commercial property.

Lazy Landlords and How to Profit From Them
You might be surprised to learn that there is a small niche of apartment owners who fail to keep their rental amounts up to market rates. I call this group of owners “Lazy Landlords” because they are not taking the simple steps to get all the cash flow from their apartments that they could easily get. In addition to this, because the value of a commercial property is based on the income it brings in, all you need to do is to find apartment buildings owned by Lazy Landlords, negotiate to buy the property, and then increase the rents to market rates.

What this means to you is that even if you agree to pay full price, based upon the current income, once you take over the apartment building, and raise the rents, the actual value will be much higher. If you are able to use one of the creative methods of buying apartment buildings that I will be sharing with you over the next few months, you’ll also have the opportunity to get in without using your own cash or credit.

Checklist to Find Undervalued Apartment Buildings So when you’re looking for Lazy Landlords it helps to have an idea of the typical owner who might have made the mistake of not keeping their rents up to market rates. Usually, the apartment building owner that you are looking for fits into one of these categories:

1) The apartment building was purchased at least 15 years ago. Let’s face it, most investors do a good job when they first get their commercial property. They fix everything up, make sure the rents are at market rates, and they stay on top of their property manager to keep the expenses down. But once they’ve owned that same apartment building for 10 or 15 years, the tendency for most people is to get lazy. This is true of many investors and you’ll be able to use this to your advantage when you are looking to get a great deal. To put together a list of apartments that were purchased at least 15 years ago, contact your County recorder’s office or find a local information provider company that resells the information from the County office.

2) The rents are below market rates. Most beginning investors plan on getting all of their deals from Loopnet or other commercial property listing services. If you want to catch the big fish, sometimes you have to find a pond that no one else knows about. This means that instead of chasing after all the same commercial property listings that everyone else is going after, you need to seek out potential deals that no one else knows about.

You can do this by doing a “Rent Survey”. I discovered this “Ninja Deal Finding Trick” while doing the due diligence on a property we were taking over. All you need to do is visit some apartment buildings and knock on several doors in each building. You’ll ask:

“Can you please tell me what other folks around here pay in rent for these apartments?”

The reason you ask about “Other folks” is so that they don’t think you’re too nosy. I’ve found that most tenants are very willing to share what they pay along with what they know about the other apartments in the building. Make sure you wear clothes that are similar to what the typical tenant might be wearing. You don’t need to go in to each apartment, but you can get a good look into each unit to see how the building compares to other commercial properties that you have looked at.

You might be tempted to take a shortcut and look at rent amounts online, ask a property manager, or do something that takes less time than actually going out to the areas you are going to be investing in. The reason that this works so well is because most people don’t invest the one or two hours to do it.

Rents Are Low – Now What? So once you find a property or two with rents that are well below other similar apartment buildings in the area, what do you do next? The next step is to contact the owner and negotiate your way into a great deal.

Apartment Building Investments Are a Profitable and Easy Inflation Buster

Why Buy an Apartment Building?

Buying an apartment building for your portfolio is a great way to beat the ravaging effects of inflation. Prices of goods and services are skyrocketing around the world. Soybean prices have tripled in the past 3 years. Oil is at record highs. Gold is making a comeback. This startling escalation in core commodity prices, combined with a US Dollar in the doldrums makes a perfect storm for out of control inflation. What makes inflation hurt so much for the individual investor is the fact that prices are rising while the value of the dollar is actually dropping. In other words, people are paying more for goods and services even while the value of their assets is decreasing. The value of an apartment building, however, is determined by the Net Operating Income of the property. Therefore, as rents continue to rise along with other consumer prices, the value of a multifamily investment should continue to appreciate even during an economic downturn.

Multi-family Gaining in Value

Paper assets such as stocks and bonds are extremely vulnerable to inflation because even if an investor is fortunate enough to own stocks that are rising in price, the value of the paper asset is actually dropping because of the falling dollar and rising prices. Most stocks however are declining in price even while the value of the dollar is plunging. What this means is that your stock portfolio is like a large ship, slowly filling up with water from a small leak while the binges can’t keep up with pumping out the water. Unfortunately, this financial melee is happening at the same time as the worst residential real estate crisis the US has ever seen. Apartment Buildings are poised to gain in value as rents rise.

Smart Investors Heading to Commercial Real Estate

Smart investors can protect their net worth right now by investing in hard assets like real estate. I don’t recommend buying residential real estate right now because it could take years to fix the home mortgage mess created by sloppy underwriting and speculation. What investors need are hard assets that produce a steady stream of monthly income. Investors need a place to put their money that has price flexibility. This is why many intelligent individual investors and institutions are flocking to the multi-family sector of real estate. A strong stream of income and low vacancies are the keys to a successful apartment building investment.

Multi-family properties are an Investment Bulwark

Multi-family buildings are a bulwark in a recessionary economy because people will always need a place to live. Multifamily properties have a distinct economic advantage over paper assets, residential real estate and even most other commercial real estate investments. For example, a triple net lease income property may not be equally insulated against economic downturns as an apartment building because the tenant, a corporate retailer such as Tire Kingdon or a restaurant like Applebees may be forced to scale back operations in a recession. Meanwhile, the average consumer will be going out to eat a lot less and they may not buy a new set of tires for another few thousand miles but they will certainly not chose to live in the streets. The first bill people will pay at the beginning of the month is their mortgage payment or their rent check. This fact leaves the apartment building investor in a good position.

Foreclosures Drive a Drop in Apartment Building Vacancy

Foreclosures around the country are at a record level. Families are abandoning their homes. They still need a place to live and apartments offer an excellent alternative. Another bonus for the apartment building buyer in today’s market is the fact that banks are not easily lending money for the construction of new multi-family properties. Banks are hurting from their bad residential loan underwriting during the past five years and they are not very willing to lend money on the speculation of a brand new apartment building. This creates a potential shortage of affordable housing in major cities and it could have an upward impact on the long term value of multifamily real estate.

If you are worried about the effects of an eroding US Dollar and climbing inflation on the returns in your portfolio, now is an excellent time to consider the many benefits of a strategic investment in the apartment building sector.

Buy Apartment Buildings For Profit in Almost Any Economy – Apartment Building Owners

The three factors that contribute to the profitability of an apartment building investment are:

1. Amortization — The payoff of the loan balance over time
2. Appreciation — The increase in real estate value over time
3. Leverage — Controlling a high value investment with relatively little money

Generally, the first time apartment buyer will approach his new investment vehicle using an analysis that only takes into consideration the first one or two years of ownership. This is a mistake because it doesn’t reflect the fact that apartment buildings will see a greater rate of return as the time of ownership increases.

Determining the returns on investment or ROI for the apartment building should initially include an analysis that at least covers the first five years of ownership.

Unless the investor plans to quickly improve the property and quickly sell it for a profit it is much more beneficial and realistic to do an economic analysis of the property that encapsulates the first five years of ownership because, as will be shown, the financial benefits of apartment building ownership increase exponentially over time.

For a realistic example, we will assume that we are purchasing a $500,000.00 apartment building.

We are going to mortgage the property with a 25 year, fixed rate commercial loan at an interest rate of 7.0%.

The mortgage loan amount is $400,000.00.

The Net Operating Income is $47,000.00.

We also are going to figure in about $12,000.00 for closing costs including appraisals and bank fees.

The annual mortgage payment including principal and interest is equal to $33,925.44.

Now do some math:

Net Operating Income $47,000.00

— Loan Payments $33,925.44

= Cash Flow $13,074.56

This means that the total cash flow on the property is equal to $13,074.56. We had a total investment up front of $112,000.00. Our first year annual cash-on-cash return is equal to exactly 12%. That’s not too bad for the first year of ANY investment.

Now, let’s look to see what happens after five years. We will assume that the value of the multi-family building, the net operating income and the expenses have all increased at an average rate of 3% a year. Over time, 3% is a safe figure to assume.

Here are the raw numbers for year 5
(Present Loan Balance: $479,658.00
Net Operating income: $54,485.88.)

Cash Flow: $20,560.44
ROI at Year 5: 18%

Value of Property: $579,636.04
ROI at Year 5: 14%

Amount of Loan Paid Off (amortization): $29,342.00
ROI at Year 5: 5%

Total Annual Return On Investment at Year 5 = 37%

In year five the NOI has increased from $47,000.00 to $54,485.88. Our return now has increased from 12% to 18%. But this does not take into consideration the returns we have gained from appreciation in the property value and the amount of the loan payment that has gone to pay off principal. We have gained an additional $79,636.04 in property equity value due to appreciation and an additional $29,341.00 in value due to the principal being paid off on the loan.

Leverage has made this made this tremendous return possible. Remember, these numbers are based on the fact that the investor is a controlling a $500,000.00 apartment building with a total investment of $112,000.00

An investor can perform this math on any apartment building investment that he or she is investigating to estimate what the returns will be over the next five years. Using the example above it should be obvious that even in an economy that is experiencing a down turn, the intelligent apartment investor can realize great returns.

Apartment Buildings

Apartment buildings are a type of home that many people look at today. While the concept of owning a home is one that is appealing to many people their lifestyles may preclude them from being able to buy or live in the house of their dreams. This is where looking for an appropriate apartment comes in.

The various apartment buildings that you will find are designed to provide prospective homeowners with a place to live. While buying or renting a house is one option which is available it is sometimes harder to find a house which suits your lifestyle requirements.

At these times looking at what services are provided by apartment buildings is a good idea. You will find that most of the newer apartment buildings have a good security system in place. This security also extends to the underground parking area.

There are apartment buildings where the facilities like cable TV and high speed internet connections are put in ready usage for the new tenants. Besides these there are other amenities. These will include a well equipped exercise center in the different sections of the apartment. A good sized swimming pool and sometimes a hot tub to swirl the cares of the day away.

These are a few of the items that house hunting tenants look for when they think of renting a place from an apartment building. In order to ensure that you are getting the apartment that you want it is sometimes best if you ask for a tour of the floor where your apartment is to be located.

Once you have seen the various entrance, exits and emergency exits you can ask where items like garbage disposal and laundry rooms are to be found. While these may seem unimportant at first they are needs which you will have to look into once you move in.

When you look at the many services which are offered by apartment buildings you begin to understand why people like to live in the types of homes. And as finding a good home can put a sizable dent in your income the option to live in one of the many apartment buildings becomes an attractive option to consider.