Apartment buildings are largely considered one of the best commercial investments around. With that said, there are still some pitfalls to consider or avoid when determining whether apartment investing is for you.
Investing for the first time is exciting, and whether you are a real estate virgin or just new to commercial investing, the excitement lingers in the air like a cheap aerosol spray. Commercial property veterans warn newbies that approaching the purchase of an apartment building without much thought and preparation will inevitably end in disaster. When you become the owner of a commercial property such as an apartment building, you essentially become the owner of the apartment business. Few people will start a business without a business plan, yet thousands of newbie investors will invest in commercial buildings without one, to their peril. Having a proper business plan in place can not only help in securing a loan for your apartment building, but will often negatively impact your bottom line profits.
Another area requiring investor’s due diligence is possessing knowledge of the local area where you choose to purchase. In some cases, it may be impossible to have first-hand knowledge, especially if the property is purchased out of state. The wise choice here would be to purchase only in an area where you have a trusted person who knows the area and can provide a thorough analysis of the area and the neighborhood in which you’re buying.
Timing really is everything when making real estate purchases. Purchasing that ‘great deal’ is only truly a great deal if it will produce a great profit, and consistently. It may be that you were able to purchase that property at a low price because the neighborhood is on a downswing and is, therefore, undesirable and will be difficult to lease or resell. A perfect example of this is a small two bedroom condo on a beautiful man-made lake in Charlotte, NC which sold for $25,000 with a monthly rent amount of $650. On paper the numbers looked incredible, and well, too good to be true. Turns out the condominium association was falling apart, management changed every eight or nine months, and the apartment was vacant far more than it was rented. The neighborhood was on the decline and had developed a reputation for being drug-infested and reminiscent of the ‘wild, wild west.’
Working with an expert in the area will help to combat this. Similarly, a higher-priced property may not be such a bad deal if you know the area is up-and-coming. Paying a slightly higher price now may mean a big payoff later.
A good deal is defined in many ways depending on the investor’s goals, but the numbers should never be ignored when evaluating whether the deal is workable or not. Never assume that the value will appreciate; if the numbers don’t work today, it’s a bad deal, period.
Buying real estate of any kind is a serious up-front expense that should not be entered into lightly. Investing time in due diligence can pay off in many ways and should be a mandatory step in every investing decisions. Due diligence requires digging a little further than the obvious tax records and the information derived from the listing agent and perhaps the seller. Ask the seller for the previous three years’ profit and loss statements, talk to the neighbors about the neighborhood and inquire about the property as well. You might be surprised to learn what the neighbors know about the history of the property.
Who manages the apartment building matters as well. Bad management can cost you a lot of wasted time and, of course, money. Be smart and interview several management companies, if you don't already have a strong relationship with one. Ask the right questions and pay attention to small things like the amount of time they take to return your call and how they communicate. If you have difficulty getting in touch with them, it’s likely your tenants will also. Also, you want to know whether they have their own maintenance team or rely on contractors.
Lastly, not enough emphasis can be placed on the importance of planning. Long before you set out to find your first apartment building, have a plan in place. Inevitably you will make some changes to the plan, but failing to plan is indeed planning to fail.
Do you currently own any apartment buildings? If not, is apartment building ownership a part of your future plans? What is the biggest reason why you would or would not consider owning an apartment building?