- Apartment buildings are valued differently than single-family homes
Single-family homes are appraised on the basis of comparable homes, which mean that their value is limited to that of similar properties in the area. This is something you have little control over, though you can make home improvements to raise your property’s value.
Apartment buildings, on the other hand, are appraised based on how much profit they’re likely to generate each year. This is something you can influence by keeping the vacancy rate low and making sure your property’s Net Operating Income (NOI) exceeds operating expenses.
- Certain areas have a strong apartment market
States like California, for instance, have a robust apartment market. Generally, areas where it makes more financial sense to rent rather than purchase a home because of soaring home prices tend to be good bets, along with cities where there’s limited space and a high demand for apartments. Investing in apartment buildings in these areas is likely to net a profit.
- Negotiable financing terms
It’s common for investors to take out loans for apartment building purchases. Bank requirements, interest rates, and loan terms vary, but most borrowers should expect a loan of five to 10 years, with payments based on a 15- to 20-year amortization.
Most of these terms are negotiable. Try to discuss them with the lender especially if you receive approval from multiple institutions.
- You can buy through a corporate identity
It’s common for experienced real estate investors to use a legal structure known as Limited Liability Company (LLC) or Limited Partnership (LP). You can even use a separate LLC for each real estate investment you own.
This technique, called asset separation, protects you and your holdings – if one of your apartment buildings get into legal or financial trouble, you’ll be able to put it into bankruptcy without affecting others as long as you don’t cross-collateralize your liabilities.
- Higher returns
As opposed to single-family homes, investors enjoy multiplied cash flow on apartment buildings due to the sheer number of rental units. Even a small apartment complex with just 5 to 10 units will bring in hundreds, if not thousands, in your pocket.
Expenses like taxes, insurance, and maintenance can also be spread out over the number of units you have. Moreover, if one or two units go vacant, occupied units will ease the burden.
- Hiring a property manager is more cost effective
Hiring a property manager makes more financial sense when you invest in an apartment building. Running a property with multiple units takes considerable time and energy, and so getting a third party to manage it is a cost-effective option.
When investing in apartment buildings, it helps to have the guidance of a real estate professional. Call Lambert Investments Inc. at (310) 453-9656 or send an email to info@lambertinc.com.
