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.
Image Credit: Bigger Pockets
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. Read more…