Buying an apartment building beginners guide. No doubt, buying a multifamily property is a great idea to begin building wealth and cashflow for years to come. But if you want to make a success of your venture, there are a few things to bear in mind.
First, unless you want to be stuck managing an apartment property yourself for not much money, or worse, that is costing you money, you must identify a property that has “upside”. Upside is a term that basically means potential for increase in value.
Apartment buildings are income property, the amount of income they produce determine their value. So when a property has vacant units, below market rents, and deferred maintenance that may be causing good tenants to not want to live there, the property has “upside”, or potential to increase the income, and therefore the value of the property.
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In his moving account, Michael Blank describes how saw the potential upside in his first deal:
The seller was a widow who was slowly selling her deceased husband’s assets, including this building. She was motivated, but not super-motivated. My sense was that the purchase price would be at fair market value based on the financials on the building, but that this might be a value-play opportunity. I felt that if the rents could be increased from $500 per unit to $750, we could add significant value over time.
The “value play” mentioned is the presence of the elements, like below market rents, vacancies, that give you the ability to increase income when you correct them. It is important to buy properties with value plays as it gives you the ability to have a low cost basis, and strong cashflow 12-18 months after buying, putting you (and the property) in a strong financial position.
Second, you want to be under no illusions; buying income property is an exercise in mathematics. Yes, your character will be tested, and you’ll need oversized portions of faith to see your project through, but unless you have a keen grasp of the numbers of the property, you won’t get very far.
Whether the property is pretty or ugly, the value of the property, and your ability to influence it comes from the numbers the property generates and how you make them go up or down, respectively. An apartment building is a business, so you have to judge it, and tend to the issues affecting it by the numbers it produces.
As Jay Jenkins writes in his article for The Motley Fool, the P&L and Rent Roll are key to understanding this:
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… when evaluating an apartment building, you will want to review both the property’s profit & loss (P&L) statement and a document called a “rent roll.”
The P&L is obvious — just like you’d want to review a rental home’s historical income and expenses, you also need to see the apartment building’s profits over time as well. Don’t just accept the P&L given to you by the seller as 100% accurate. Review it with a critical eye and make sure that the profits haven’t been inflated to make the investment look more attractive than it really is.
The rent roll may be a new concept for beginning apartment investors. The rent roll is a list of all the current tenants with a summary of the terms of their lease. You’ll see that Unit A is a two bedroom leased for $1,500 per month to John Doe. You’ll see that Unit B is a studio apartment leased to Jane Doe for $800 per month, and so on for every unit in the complex.
As a beginner to apartment investing you may be thinking more about how you are going to get financed, or find a good broker, property inspector, real estate attorney to help you. Without a doubt, those things are important. Hell, they’re part of the process.
But whether your first foray into multifamily investing is a cash-flowing success, or a demoralizing failure depends on these two mindsets, and adopting them before going out and buying a property.
Buying an apartment building is an exciting time for beginners. They are the first steps on your path to building potentially great wealth. Make sure you take the right steps. Buy property with value plays and legitimate upside, and keep a keen eye on the numbers … always.