Investing in an apartment building or multifamily property can be a highly profitable venture. While the process may seem complex, it can be made simpler if you work with an experienced broker.
Here’s a guide to the processes involved in buying an investment property:
Work with a trusted real estate professional
Working with someone who knows the ins and outs of the industry is crucial, whether you’re buying for the first time or you’re a repeat buyer. While buying an apartment building is similar in many ways to buying a home or single rental property, there are more details and figures to consider, including price, profitability, financing, and government regulations and requirements.
An experienced real estate broker will guide you through every step of the process so you can make well-informed decisions.
Your broker can also connect you with other professionals whose services you might need, including:
- Real estate lawyers
- Property inspectors
- Property managers
Work on the numbers
You need to look into several figures and documents to determine a property’s potential profitability. These include:
- Profit & Loss (P&L) statement – You will want to review the building’s previous incomes and expenses over a period of time. You may need to go through the P&L statement with an accountant or your broker to make sure the figures are accurate.
- The rent roll–This lists the tenants in the building, and the description and condition of each unit (for example, if it’s a studio or a multi-bedroom unit).
- Net Operating Income (NOI) – This is an estimate of the property’s profitability per year. It’s determined by taking the total projected income, and deducting expenses and the costs of vacant units. You may need an appraiser, who could also be your broker, to help you come up with an accurate projection.
- Capitalization rate-This is the ratio of the projected earnings or the NOI to the price. Generally, the higher the capitalization rate or cap rate, the more attractive the property. A lower cap rate could indicate that the property is too expensive.
Buying an apartment building will involve a hefty investment so it’s typical to finance a purchase with a loan. It’s important to shop around for the right loan package. The down payment terms will vary, but it’s usually 15% to 20%.
You also need to look at interest rates and payback period. Consider your financial situation and long-term prospects, including the income you could get from the building.
The two most common types of investment loans are:
- Non-recourse or limited liability loan – This type of loan often applies to properties worth at least $2.5 million. It will require a collateral, usually the building itself or any other suitable property in your portfolio. If you fail to pay your loan on time, the lender could repossess the building you’ve put up as collateral, but cannot go after your personal assets.
- Recourse loan – This applies to properties worth less than $2.5 million, and will need pre-qualification. If you fail to pay your loan on time, the bank or lender can seek payment through your personal assets.
Consider property management
Will you be managing the property or will you hire a professional management team? Property management is not as simple as it may seem. You have to look after your tenants’ needs, make sure you get payments on time, and be in charge of building maintenance, among other responsibilities. You also have to constantly find ways to keep the building profitable.
If you don’t have the time, knowledge and experience to manage your own apartment building, then perhaps you should consider hiring a professional property management firm.