The share of global real estate investment held by apartment buildings and other multi-family properties has been growing steadily over the last few years. Apartment investing is also a segment where smaller investors have more opportunities than at any time in recent history.
If you think about it, there are probably dozens – if not hundreds – of apartment buildings where you live. These properties are popular for a good reason: There’s an ever-growing demand for rental housing that offers a level of convenience and amenities not offered by traditional single-family homes. The right kind of apartments can be both profitable and personally rewarding. Here are 4 things to consider before investing in an apartment building
Research the market and understand your competition
In any real estate market, understanding your product’s demand is essential. Apartment buildings are no different. There are specific markets better suited to the rental model than others. It’s critical to understand the market for rental housing and the current state of the market when deciding where to invest. Studying the amount of available rental housing in your area, the average rental rate, and the length of time it takes to lease a unit can give you a good feel for the current state of the market.
Estimate renovation costs and check the math
You don’t want to get too excited about a particular apartment building if it’s going to cost you more to renovate the units than you can reasonably charge for them. You don’t want to get caught in a situation where you’ve overpromised on your revenue and can’t generate enough profit to pay off your mortgage. Make sure to include all the costs associated with the renovation, including permits, contractor labor costs, materials, and any fees associated with getting the project approved. You should also include any future maintenance costs associated with the renovation and security features you will need, such as keypad entry, biometric entry, or an apartment video intercom.
Commit to a smaller property and plan for growth
If you’re starting as an apartment investor, you don’t want to bite off more than you can chew. If you lock in a 30-unit building with all the necessary financing, you’ll be stuck there for a long time. You’re in a challenging position if the installation doesn’t produce enough revenue to pay back your loan. If you commit to a smaller property, you can build up your equity and work toward a larger building with a longer lease term. This gives you time to build up your financing and slowly increase your debt load. It’s important to remember that equity is the key to growing your real estate investment. You can find a smaller building that’s profitable, but if you can’t leverage your equity, it won’t be easy to grow your business.
Be prepared to handle tenant turnover
Real estate investing is cyclical. Just as people are getting priced out of cities like New York, San Francisco, and Austin, Texas, other people are getting priced out of smaller markets. This means that you’ll probably experience tenant turnover throughout your investment. You want to ensure that you’re prepared for this financially and operationally. Make sure you have an experienced property management company managing your building. It’s essential to have a company that knows your building, market, and financial situation. A good property manager can help you avoid problems with tenants and can help you find new tenants when a resident moves out.
Real estate investment is a fantastic way to build wealth, but only if you make smart decisions with your money. Before investing in an apartment building, it’s essential to understand the risks and rewards of this type of investment. It’s also important to ensure that the building you’re investing in is a good investment and one that you have a reasonable chance of succeeding with.
Image Credits: PhotoMIX Company