Buying an apartment building can be one of the best investments you make. It can also be one of the most difficult. Make sure you are thoroughly prepared before you head down that path. Here’s a game plan to help you navigate the process.
Assemble Your Team
Buying an apartment building is a complex undertaking requiring significant professional advice. The key people to engage when thinking about rental property investing include:
- Real Estate Attorney – Help with purchasing documents, escrow management, title search.
- Commercial Property Inspector – Inspection of overall condition, electrical, and plumbing systems.
- Accountant – Advice on investment calculation and tax implications.
- Real Estate Agent – Help with finding a larger pool of buildings, providing neighborhood insight, and representing you when making an offer.
Locating a mentor experienced in the commercial real estate space is your best source of knowledge. They’ve “been there and done that” so tapping into that experience can be invaluable. You can also read books, take seminars and join investment clubs.
Find the Right Building
Start with a thorough online web search using phrases such as “apartment building for sale in x location.” Expand your search by checking newspaper and local website listings, and by consulting with real estate agents, other investors and real estate attorneys.
Your number one consideration should be location. Look for proximity to schools, area crime statistics, future developments, and insurance risks from flooding, earthquakes, or other natural disasters. Research the building’s property taxes, building amenities, and unit vacancies in the area.
Examine the Numbers
After locating your target building, you’ll need to run the numbers that the bank will want as part of the mortgage approval process. The basic formulas they’ll want to see include:
- Net Operating Income (NOI): Annual Rent – Annual Expense
- Cash Flow Rate = Annual Rent – Annual Expenses – Annual Debt Service
- Cash on Cash Return = Cash Flow/Down Payment
- Total Financial Benefits/Down Payment = Return on Investment (ROI)
Secure the Financing
There are two main types of commercial mortgages and both will likely require a 20% down payment.
For properties worth more than $2.5 million, you can apply for a Non-Recourse Loan. With this limited liability loan, the property itself becomes the bank’s collateral. If you fail to meet your payments, you will lose the building but your personal assets won’t be affected.
For properties worth less than $2.5 million, you can obtain only a Recourse Loan. With this instrument, you are personally liable. If you fail to make your payments, the bank can come after your personal wealth.
You or your business can significantly increase the value of your asset portfolio by buying an apartment building. If you follow the right game plan and take the appropriate steps, apartment building ownership can be successful and profitable.
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