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How to Invest in Large Apartment Buildings

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One of the more underpenetrated areas of the investment property market is that of larger apartment buildings.  I’m not talking about 2-4 unit multifamily homes here; I’m talking about properties that consist of 20 or more units.  Similar to the housing market as a whole, apartment buildings have lost value thanks to the crash, which has not only reduced prices but has also resulted in an increased number of foreclosures.  Thus, if you’re ever planning to move in this direction, now is probably the time.

However, it is still very difficult to get an absolute steal of a deal, so you must temper your expectations accordingly.  Yes apartment building prices are depressed at the moment, but there’s also a proverbial shark fest of deep-pocketed bargain hunters trolling around.  Therefore, you’re unlikely to find a “steal,” but you can still find large properties with better returns and cash flows than you could find with other investment vehicles, with the upside of price appreciation as the market improves.

The 2 most critical factors to evaluate when considering an apartment building are the same as they are in any other real estate market: location and cash flow.  Location is obviously important because you want the opportunity to have the best tenants you possibly can; in other words, stay out of “the hood.”  Plus, you’ll want to make sure the location has the amenities that will be necessary for your tenants.  For example, if you expect that most of your tenants will not have a car, then the apartment building better be located near public transportation.

In terms of calculating the building’s cash flow, you’ll want to do the standard method of adding up all the rents and subtracting all the expenses.  Note that when you calculate your total rental revenue, look at the building’s current rent roll, and also research the rental rates of similar apartment units in the area.  For the expenses, remember to include a vacancy rate (10%), property manager costs (10%), and property maintenance costs.  Also keep in mind that apartment building mortgages are approximately 1.5% higher than rates on single family homes.  The rule of thumb is to aim for a 10% cap rate.  In other words, if the property will generate net income of $20,000 per year, your target purchase price will be $200,000.

In the final analysis, investing in apartment buildings is a great idea, but don’t expect to get a steal.  Look for apartment buildings in relatively decent areas, thoroughly analyze the numbers, and aim for a 10% cap rate.  If you follow this advice, you’ll be in good shape.

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