Apartment buildings offer great benefits for commercial real estate investors due to their scale and potential for high returns. Demand for rentals is currently high because of a low-cost housing shortage in most American cities.
With the right financing, owning a property with multiple units can be incredibly lucrative. A report released in June of 2020 revealed that national median rent for a one-bedroom apartment was $1,097 and $1,298 for a two-bedroom. Multiplied by, say, 100 units, and an investor could be making upwards of $100,000+ in rental income per year.
Multifamily properties, however, can carry a hefty price tag and aren’t necessarily the most straightforward purchase. That being said, not all apartments are ultra-expensive, and some buyers can find multifamily properties for little to no money down.
This article will offer tips on purchasing and managing an apartment building with cash flow as well as cover creative ways to passively invest in multifamily housing without actually owning property.
Finding a Multifamily Property
Before investors can start making money, they must find a property that matches their budget, goals, and needs.
Set your budget
Step one to buying an apartment building is setting your budget. In addition to setting aside money for a down payment, calculate how much you’re willing to spend on repairs, maintenance, and other associated costs such as building security.
Use a realtor
Use a local realtor who specializes in helping investors find commercial real estate. These agents will have access to properties that have not yet hit the market because of their connections. They will be able to find properties that match your goals and budget.
Choose a market
Choosing the right market is hugely important to finding a property that will generate significant cash flow. Check to see if rental prices in the neighborhood you want to buy in have been increasing or decreasing in recent years. Determine if the property is in an area with job opportunities for tenants, or near where you currently live (it’s easier to manage a property you can drive to rather than one that’s out of state).
Pick the right financing
Another important step to buying a multifamily property is choosing the right type of financing. Some options include:
- Commercial loans: Banks will offer lenders a traditional mortgage for properties with four units or less. For an apartment complex, however, you will need to get a commercial loan. These types of loans have different requirements than residential home loans and often require larger down payments.
- Find a partner (or several): Some investors may decide to pool their money together to purchase a multifamily property. By finding a partner or partners, an investor can buy a larger property, increasing their potential ROI and decreasing their risk.
- Find a hard money lender: If an investor does not qualify for a commercial loan (either due to previous credit history or the condition of the property), they may consider finding a hard money lender to give them cash. Hard money loans have higher interest rates and shorter time frames than traditional loans.
- 1031 exchange: 1031 exchanges are named after section 1031 of the internal revenue code. The rule is triggered when the sales price of a property exceeds its purchase price, therefore producing a profit or a “capital gain.” Capital gains are subject to taxes, but under a 1031 exchange, investors can defer these taxes. 1031 exchanges have strict rules and only work if an investor swaps one property for another property of equal or greater value. While this is not financing per se, it can help during the purchasing process and helps increase overall ROI.
Hire a real estate attorney
Commercial real estate transactions are much more complicated than residential transactions. When you deal with a complex transaction, it’s always best to hire a real estate attorney.
Although lawyers often range between $150 to $300 per hour, they will help develop contracts and agreements and also carry added weight during negotiations. If the investment is a joint purchase, a lawyer can make sure the co-buyer agreement clarifies precisely how each party will hold the title. Many common gray areas emerge when people sell properties that need to be put into writing to protect both parties.
Owning a Multifamily Property
After buying the perfect investment property, the investment journey truly begins.
Maintenance & Upkeep
Owning an apartment complex is a huge responsibility, and maintenance will take a large piece out of the bottom line. It’s best to research the average rate of common renovations and repairs where the property is located before buying. Renovations can include:
- Repainting the exterior and interiors
- Redoing the landscaping.
- Fixing the flooring
- Changing light fixtures
- Updating appliances
There will also be additional associate costs such as insurance, security, cleaning, property taxes, and more.
Attract quality tenants
Owners need to make sure their property has a wow factor. In addition to choosing the right location and maintaining the property’s appearance, there are several things investors can do to attract quality tenants. These include:
- Creating a well-written listing with high-quality photographs
- Installing amenities found in nearby popular communities
- Using digital tools for applications and leases
- Interviewing tenants and performing a background check before lease-signing
- Laying out clear rules and criteria for tenants before they move in
A real estate attorney or agent can help owners create and implement some of the above-mentioned items. They also can offer references for contractors, insurance agencies, staffing offices, cleaning services, and more.
Keep residents happy
Owners and building managers need to listen to their tenants. Making necessary repairs promptly, using online tools for rent payments and amenity requests, and responding quickly to concerns are a few ways to keep residents happy. In the long run, ensuring the happiness of a property’s tenants will determine the popularity of a property and the quality of tenants it attracts.
Options for Passive Investors
For some investors, owning an apartment complex is perhaps out of budget or carries too much responsibility. However, they may still want to invest passively in commercial real estate.
One of the most popular ways to passively invest in commercial real estate is through a real estate investment trust (REIT). These companies own, operate, and/or finance income-producing real estate such as apartment complexes, hotels, retail centers, office buildings, etc. Most REITs are publicly traded on a stock exchange so adhere to their rules, hours, and holidays. REITs also produce high dividends, so many investors will compound their dividends by reinvesting them into a non-taxable retirement account.
Similar to REITs, crowdfunding platforms offer individuals the chance to invest in property without physically buying and managing it directly. Unlike REITs, crowdfunding platforms are not publicly traded on an exchange. Investors can choose the exact property they want to invest in and are paid through the profits a property earns (e.g., via rental income, flipping the property, etc.).
Whether an investor decides to own and manage an apartment complex or passively invest via REITs and crowdfunding apps, they should not be afraid to dive into the world of commercial real estate. With proper research and dedication to an investment, multifamily property owners have the potential to earn high ROI and quickly diversify their portfolios.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.