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Apartment Building Owners: Should You Buy an Apartment Building?

Wednesday, May 14th, 2008

Apartment Building Owners: Should You Buy an Apartment Building?

Why do investors buy apartment buildings instead of single family homes? There are a few reasons, let me go over them. As a general rule apartment buildings offer more cashflow per month. Cashflow is how much money is left over at the end of the month after all expenses have been paid. With apartment buildings you are going to have multi-units in one location on 1 lot, so that’s one reason it offers so much cashflow. Certain cities have to allow for the right zoning for apartment building to be built. For example you will see apartments near busy streets and commercial buildings and restaurants. You typically won’t see an apartment building in the middle of a single family neighborhood due to zoning. Apartment units range in size from 4 unit to up to 100+ units. 2 units are generally just called duplexes. 3 units are called triplexes. 4 unit and below can be used for residential loan financing. Once you get to 5+ unit building it’s commercial financing and will take more of a down payment to get financing with a lender. Apartment buildings are valued in a few different ways, one way is the CAP rate, some go by GRM (Gross Rent Multiplier), I can go over some of these valuation methods later on. The better location and quality of the building’s will be rated in the categories of Class A, Class B, Class C, Class D building. Apartment buildings can have a mix of 1, 2, and 3 bedrooms. Some apartment buildings may have the proper location and price where it may make sense to convert the apartment into condos where they would sell for more money per unit. As a general rule in Minnesota and other parts of the country their is a very large supply of condos. I attended a training class about Condo Conversions about the summer of 2007, and they talked about almost a 3 year supply of condos.
As a general rule you are better off having 3 bedrooms, then 2 bedrooms, then 1 bedrooms. If you can get 4 bedrooms that’s even better, but a bit more rare. Once it gets to 4 bedrooms it’s usually a family and they may seek a townhouse or house. Apartments are probably prone to tougher inspections by the city. Apartment buildings should have separated utilities for each unit. As a general rule you will more likely by apartment buildings after some experience in the real estate business. You should know the landlord/Tenant laws for your state well. You should also know the eviction laws. You should be very good at renter applications and qualifying tenants. An apartment building is valued off of the cashflow money that it brings in. An apartment building that needs a lot of work and is half vacant will be worth far less than another similar apartment building that’s full and in a little bit better shape. Investors buy Apartment buildings strictly for
the numbers and how much money they make per month and per year on the buildings. A big building you hear about in Florida or other parts of the country that are 50 stories high with condos in them, that is not an apartment building. As a general rule apartment building has 1 owner. Ownership of an apartment building is more efficient then ownership of many single family houses. You could own a 50 unit apartment building and hire 1 property manager, 1 lawn care, 1 snow removal, and hire part time work for all of this. Owning an apartment building is a business not a hobby, so it should be treated like a business. You will want to analyze all of the numbers of trash pick up, snow removal, lawn care, electric, etc.
You will want to raise the rents the most you can without getting too many renters to move out. The higher the rent and lower you can keep costs, obviously the more money you will make per month cashflow. This will make an even bigger deal when you go to get an appraisal and a new value when trying to sell.
As a general rule you will have more turnover with renters in an apartment building over a single family home. I have heard of many renters with low rent that have stayed in the same 1 bedroom apartment for 25+ years. If you are looking for an apartment building to buy at any size, or if you know of any apartment buildings that are vacant or in bad condition, please email ron@minnesotainvestors.com

Please email any questions you have about real estate at anytime to Ron@minnesotainvestors.com any other questions, I will help answer questions for the person as a contest, whoever adds the most links/description/reviews per day that link to this blog, posted on any of the following social networking site list: Blogs/Forums/Discussions Boards/Social bookmarking/RSS feed/Social Networking sites will be great:
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Apartment Building Owners: Should You Buy an Apartment Building?

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