You are thinking about investing in commercial real estate? Why not consider buying an apartment building? An apartment building can be an ideal way to invest in the real estate market today. An apartment building in a good location can earn you a high yield on your real estate investment. But 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.
When buying an apartment building, you should make sure that you will get more income coming in than the total money you’ll be paying out each year and this cash flow is enough to justify the cash you invest. So, some investors will look at the “cap rate” of a property to determine if it is a good investment at a given price when they buy apartment buildings because prices are often based on income.
