Real Estate investors are flooding back to the market, buying residential pre-foreclosures at a 20-30% discount. Single family homes are the focus of most investor portfolios and residential properties seem to get all the media attention. Naturally, investors feel more comfortable buying what they know and avoid seemingly different or more complicated products. Fortunately for savvy investors, apartment buildings don’t get the press they deserve and common misconceptions scare main-stream investors away from these cash-flow monsters. Here are 6 of the most common misconceptions people have about investing in apartment buildings and the money-making truth.
Misconception #1: You need highly specialized knowledge – Just like with residential investing, it pays to surround yourself with a good team of professionals that can help make good decisions. What most people don’t realize is that residential real estate professionals are rarely investment experts. In an apartment transaction, commercial real estate professionals strictly view the property as an investment. If a deal doesn’t make financial sense, both the buying agent and the lender should stop the transaction.
Misconception #2: You need good credit – When applying for an apartment loan, banks look much less at the borrower and more at the property. If the property cash-flows adequately, you can get financing with a 600 credit score. Loans are available up to 90% of the purchase price and some lenders don’t require verification of income or assets, making it easy for first-time investors to get in the game.
Misconception #3: You need a lot of time – In most cases, the time spent acquiring an apartment building is equal to that of a single home purchase. However, when you consider that you can purchase 30 units in a single apartment building transaction versus the time (and additional costs) it would take to purchase 30 individual homes, apartment buildings have superior economies of. Keeping everything under one roof also makes maintenance of an apartment building relatively easier. There is only one roof that can leak, one yard to maintain and one pool to fix. So the economies of scale save you not only time, but also money.
Misconception #4: You need experience – No experience is required and a good real estate team can make buying an apartment building simple. Financing is available for first-time investors and streamlined loan processes make approvals quick and inexpensive.
Misconception #5: The deals are harder to do – A commercial real estate contract is written a little different than a residential contract but the differences are subtle. Because apartment buildings are rental properties, data is available from the current owner to support the net income and determine the cash flow of the property. Additional time is provided to complete due diligence and secure financing.
Misconception #6: There are a lot of tenant problems – Rule #1 in becoming an apartment building investor is to never directly manage the property. Hire a property management company that gets paid on a % of the gross rent received to handle filling the property and managing tenants. If you set things up right, you will never have to meet a tenant or deal with a problem.
When shopping for an apartment building, some unique terms are used to describe the investment opportunity. Investors buy and sell properties based on Cap Rates. Cap Rate = Net Operating Income/Sales Price. The resulting percentage is usually disclosed by the selling agent and used to determine if the property is producing income above or below market value. If rents in the area are increasing, the Cap Rate % will be higher assuming the sales price stays equal. Cap rates in more upscale communities are typically in the 5-6% range but cap rates can be 11% for discounted properties that still have average rental income.
With lending guidelines tightening on residential properties and personal income increasing for Americans, rents are expected to climb in growing markets. This will make apartment buildings an even more attractive investment over the next 3 years.