Decide if Buying an Apartment Complex Is Right for You
Before you start an apartment investing business, you want to make sure it’s the right investment strategy for you. Compared to purchasing single-family homes and small multifamily properties, an apartment building requires more research, more time, and oftentimes more capital and additional expenses. It’s important to weigh the pros and cons before buying apartment complexes.
Pros of Buying Apartment Complexes
There are many benefits to apartment investing. These include recurring income, spreading income across many units, lower per-unit maintenance costs, and the potential for extra income beyond collected rents. Lenders typically base their financing criteria on the property’s performance. The property’s value is often determined by rental income and its overall performance.
Recurring Income
One of the main reasons for buying apartment buildings is ongoing income. If the deal is right and the finances are sound, a good apartment building will throw off recurring monthly income as a positive cash-on-cash return.
Diversifying Income
If you’re an investor who rents single-family properties, you’re probably familiar with a common vacancy problem. If you have no tenants, you lose 100% of your income. Apartment buildings mitigate the effects of a high vacancy rate. If one unit goes vacant, you still have the others to generate income to cover expenses and perhaps still generate positive cash flow.
Lower Per-Unit Maintenance
Economies of scale work in favor of the apartment building owner. For example, if you must redo a roof, it’s not just for one unit. That repair serves all the units in the building. If you need to repaint, you can use the same paint for multiple units and not waste materials resulting from only one unit’s need.
Extra Sources of Income
The larger the building, the more likely you can add additional sources of income, such as vending machines, ATMs, and coin-operated laundry facilities. Renting parking spaces and space for billboard advertising can also provide additional income. One pro tip is to charge additional monthly rent for air conditioning units, upgraded appliances, and upgraded kitchens and bathrooms.
Revenue-based Financing
Unlike a single-family property, financing for apartment buildings is based mainly on the financial performance of the building (as opposed to your personal financial and credit situation). So, banks will look mainly at the financial situation with the building for approving a loan. This is advantageous if your FICO score is low.
Valuations Based on Rent Rolls
When buying apartment buildings, the value of the investment is determined in great part by the financial performance of the building. So, if you can increase rents, you can increase the value of your holding.
