Do you want to invest in properties but lack the knowledge? If YES, here is a complete guide on how to invest in apartment buildings and complexes with no money.
Investing in apartment buildings and complexes is a big commitment to make, both financially and otherwise. It is therefore little wonder that is it sometimes described as a career, and not just an investing strategy. Managing apartment complexes requires a deeper level of involvement when compared to managing single-family units, both physically and financially. Then again, investing in apartment buildings comes with its very own advantages that are very unique to the niche.
Why Apartment Buildings and Complexes are a Great Investment
- Equity Accumulation: Multiple tenants pay down your mortgage. With fewer deals, you can amass a sizeable portfolio of assets for legacy planning in far less time.
- Leverage: The cost of capital has never been more attractive, and there is diverse set of loan products to choose from. Now is the time to lock in long term debt and pay down significant principal over time.
- Cash Flow: Stock portfolios do not create cash flow unless the stock pays dividends. Apartments traditionally have more stability than stocks.
- Hard Asset: An apartment building is not a paper asset — it is a lot more tangible. If you buy the deal right, its value can never go to zero. Apartments are universally considered an excellent inflation hedge (one day, inflation will eventually kick in).
How to Invest in Apartment Buildings & Complexes With No Money
Learning how to invest in apartment’s buildings and complexes is by no means an easy feat, but these steps below can help make the process easier. To get started, first make sure that entering the investing niche is absolutely the right thing for you:
1. Make sure that investing in apartments and building projects is the right investment for you
Whether you have already built up a portfolio or are completely new to real estate investing, you should be absolutely sure that investing in apartment buildings is right for you. There are a lot of things you have to consider including the cost involved and the time component. The costs of owning an apartment building includes the initial capital requirement, as well as an ongoing cash flow matrix associated with managing several tenant units at a time.
Secondly, managing an apartment building requires more involvement and management, such as dealing with tenant turnover, leasing paperwork and addressing maintenance issues. Before you make the financial decision to undertake this line of investment, you should make sure that you schedule can accommodate it and that you also have the wherewithal to shoulder the expenses that are involved.
2. Choose the type of apartment building to go for
It goes without saying that all apartments are not the same. The come in different shapes and sizes. One building could be a rehabbed Victorian mansion that has been divided into several units, while another may be a modern multi-story building in a metropolitan area.
Determining how much apartment you can afford will help narrow down your search, as well as identify what types of buildings will offer the best return on investment for your budget. Investors face a tricky trade-off between purchase price against the costs of repairs and renovation.
3. Identify a Property
As soon as you have made up your mind on the type of apartment complex you would like to own, the next logical step is to hunt for properties. You can choose to search for properties on your own, with the help of a professional or service, or a combination of both.
One way to search for a deal autonomously is to join your local real estate investing club or association. By networking with other professionals, chances are that you will connect with a fellow investor who will know about a property for sale.
On the other hand, real estate agents, especially commercial real estate agents, can prove helpful in this process. Not only do they have access to multiple listing services, they often have listings from commercial brokerages. However, note that the commission fee on commercial deals are slightly higher than those of residential deals.
4. Mind your due diligence
Before you make an offer to purchase an apartment building or complex, you should mind your due diligence and perform a very thorough analysis of the deal. If you intend to buy an apartment, the factors that you should have in mind include, the location, the number of units in the building, available amenities, as well as the building’s condition.
These aspects will help you calculate how much rent you might be able to charge, as well as how much you will need to spend on necessary repairs and improvements. In addition, the overall condition of the building can help signal how often repairs might affect your monthly cash flow.
Moreover, the location of the property will point to local socio-economic factors that will affect profitability in the long run, in terms of rental yield, occupancy rates, or resale value. Once you are serious about a particular property, be sure to hire an inspector, and obtain copies of leases, tax returns and any other legal documents from the prior owner to help identify any hidden problems, if any.
5. Make an offer, finance and close the deal
To make an offer, the value of the apartment building can be appraised using market comparisons, potential income, as well as the replacement approach, where investors estimate how much it would cost to build a similar building. Because properties with five or more units do not qualify for government-backed loans, commercial loans typically come from traditional and private lenders.
Be prepared for when lenders require interest and cash reserves, as well as for when they favor properties with good market potential and high occupancy rates. However, the good news here is that commercial lenders tend to emphasize the income potential of the property, and not focus less than the investor’s personal finances and credit history.
Factors to Consider When Investing in Apartment Buildings and Complexes
a. Cash Flow: Will this property cash flow? This is the most important issue to consider, and it depends on a lot of factors, including:
- Strength of the local rental market (vacancy and delinquency)
- Type of market you are buying into (C class buildings usually have more tenant turnover and higher repairs and maintenance than A or B class buildings)
- Interest rate on your financing (is it conventional financing or a hard money loan?)
- Size of your down payment
Next, you will have to ask yourself if the property you want to buy will be able to realistically provide income for you. You also need to know this property’s cash flow compared to other potential properties.
For instance, a $150,000 house that rents for $1,000 per month has a better income potential than a $300,000 house that rents for $1,600 per month. A four-unit building that costs $400,000 may bring in $3,000 per month in the same neighborhood. Buying in the right neighborhoods and in the right stage of a real estate cycle is of utmost importance and when done right, it will result into healthy appreciation and profit.
Whether the property will provide income to you begs the question of whether income is important to you. Do you have another source of income that can allow you to spend more of the income on refurbishing the building? Do you need more income now, or is future equity growth more important?
b. Leverage: Leverage is important in investing. This is because the less cash you put down on each property, the more properties you can afford buy. If the properties go up in value, your rate of return goes up exponentially. However, if the properties go down in value, and you have a lot of debt on the property, the result can be negative cash flow. Negative cash flow can be either “bad” or “good.” The “good” kind is short-term and makes you money.
“Nothing down” investing is very attractive for the high-leverage investor, but should be approached with caution. If you are a long-term player, leverage will generally work in your favor if the markets in which you invest appreciate in the long run and your income from the properties can pay for most of the monthly debt service.
c. Equity: Equity can take a number of forms such as:
- Discounted price
- Fixer upper – “upside” potential
- Rezoning opportunity
- Poor management
There are many ways to create equity, but buying into equity is your best bet. Find someone who is interested in selling off their property and is willing to give up his equity for less than full value. Alternatively, you can buy a property that needs work that can be done for 50 cents on the dollar or less. In other words, if the property needs $10,000 in work, make sure you get a $20,000 discount on the price or better.
d. Appreciation: just like it was mentioned previously, buying in the right neighborhoods and in the right stage of a real estate cycle will result in appreciation and profit. But this is not a very easy feat. Timing a real estate cycle is difficult and is very speculative. If you buy properties without equity or cash flow solely for short-term appreciation, you are engaging in a risky investment.
Buying for moderate to long-term (10 to 20 years) appreciation is safer and easier. Look at long-term neighborhood and city-wide trends to pick areas that will hold their values and grow at an average 5 to 7% pace. Combine this tactic with reasonable cash flow and buying into equity, and you will be a smart investor.
e. Risk: a good investor must always evaluate the risk that is involved in any investment before going for it. Ask yourself, “What if my assumptions are wrong?” In other words, do I have a “Plan B”? If you bought a property for appreciation and the property did not appreciate in value, can you rent for positive cash flow? If you buy with an adjustable rate loan and the rates go up, will this put you out of business?
If you have a few vacancies, can you handle the negative cash flow, or will it tell negatively on you and your finances. With investments like this, you should go in expecting the best, but prepared for the worst case scenario.
Warning Signs of a Bad Deal
There are some telltale signs that when you spot them can mean that an investment deal is going to be bad. Some of them are;
- The Numbers Don’t Add Up: You’re in this game because you want to make money. If the numbers don’t add up, and the seller won’t drop the price or give you better terms, then you should look for another investment elsewhere.
- Missing Numbers: If the seller can’t provide you with the year-to-date profit and loss statements, plus the actual numbers from the previous two years, move on to another deal.
- Manufactured Numbers: Pro forma numbers are pure guesswork. They may be educated guesswork, but they are still a projection. Lenders won’t give these made-up numbers any weight and neither should you. This is where your experience plays a big role. After a while, you will quickly be able to figure out “who is blowing smoke” or if the numbers make sense.
- Troubled Property: there are scenarios where a property looks good on paper–the numbers are real and they add up. Yet a site visit shows something quite different. Perhaps it needs major repairs because the seller has been deferring the maintenance, hoping to pass the headache on to the buyer. Don’t let that buyer be you. Look for a better deal elsewhere.
- Wrong Area: Don’t spend your money trying to reverse a trend. If the neighborhood is in decline, the property carries that stigma. Tenants will be moving on, and so should you.
- Months on the Market: Good properties go fast. Bad properties linger in the listings month after month. With detective work, you can figure out why it’s a dud. And that’s a viable learning experience, but your time will be better spent going after good deals.
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