How To Buy Apartment Buildings

November 2, 2007 by

apt buildingWhy buy apartment buildings? Well, you should get more cash flow than with rental houses. Of course, big projects do take more time and research and cash, but then they pay you for year after year.

It is easier to start investing in single family homes than apartment buildings. If you have done so, however, you have noticed how difficult it is getting to get positive cash flow from houses. Even if you do squeeze a little out of each, it can take a lot of them to have a decent income.

Like in a Monopoly game, at some point you may want to trade in your little green houses for a big red apartment building. One apartment building may provide as much cash flow as twenty little houses. And once you have management in place it may be a lot less work.

How To Buy An Apartment Building

Rule number one? Buy properties that will have positive cash flow from the start, based on the current income and all of your projected expenses including management. If the current owner doesn’t have management, that is his problem. You are an investor, not a manager, and a good income property should pay for management and still produce positive cash flow.

Do your due diligence? Here’s a simple definition of the term: “Investigation and verification of the details of a particular investment.” You can start this process before you make an offer, but you should also have clauses in the offer that allow you to have inspections done, and reviews of the books and certain documents.

Look at the files, to verify income. There should be rental agreements signed by tenants, and rental histories showing if there are any problem tenants or late payments. Look for rental deposit documents also, to see amounts and where the deposits are kept.

Ask to see service contracts and agreements. Do they transfer, or are you free to seek better deals? These can include property management agreements, landscaping, snow plowing, pool cleaning service, and cooling system maintenance agreements.

Get the last 24 months income and expense statements, and look for anything unusual, like expenses that are too low or income that seems too high. Review the rent roll, and find out if the rents are over or under the market rates for the area. If there are employees, look at the payroll records for any surprises, like accrued vacation time that you’ll have to pay.

Do an interior inspection to learn about the place, the tenants, and any problems that you will have to fix in the coming months or years. Look for pests, water and fire damage, as well as obvious “problem tenants.” Are there any empty apartments that are listed as occupied? Use professional inspectors as needed for pest inspections and safety inspections. The local Fire Marshall may do a free inspection to verify that the building meets current codes.

For the exterior inspection, you will want to first walk around and take notes. Watch for anything that looks unusual or in need of repair. Then you can get professional inspections, if necessary. You want to verify that the electrical and plumbing systems are up to date and meet current codes. You also want to get an estimate on how many years of use the roofing has left. You’ll look at driveways, landscaping, and exterior paint condition.

Call local authorities and check for any permit problems or zoning or encroachment problems. If there have been fire code violations, were they corrected?

Get the help of an accountant to decipher the books. Have a lawyer review your offer and any documents. Ask what other things you should be doing.

Take notes, and list problems, and estimated costs to correct them. You can use these notes during subsequent negotiations. The problems investors run into when buying income properties are usually not unforeseeable. They can be avoided or resolved if you just do your due diligence. Use a checklist so you won’t forget anything.

Prices are based on income. When buying apartment buildings, many investors will look at the “cap rate” of a property to determine if it is a good investment at a given price. Not sure how to figure capitalization rates? Just be sure that there is more income coming in than the total money you’ll be paying out each year. Then make sure that this cash flow is enough to justify the cash you invest.

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19 Responses to “How To Buy Apartment Buildings”

  1. Cedrick Reese on January 3rd, 2008 10:39 am

    I have been looking into buying an apartment building. This article has been very helpful. Maybe you can take from the article and do a series.

  2. Scott on February 6th, 2008 9:01 pm

    Cedrick:

    We are called “added value” apartment builders. We buy buildings that are in disrepair, poorly managed or have a variety of issues. We then spend 22-25K per unit, increase the rents 150-200 per door and bring them back with cash flow.

    If you want to get a step by step process of doing apartments the way we do them; we can assist. If you are in the Denver Metro area, you can swing by and visit our properties for a personal discussion and/or a coffee.

    http://www.newberryproperties.com

    Regards,
    Scott

  3. Nicholas Peters on March 8th, 2008 2:51 pm

    They are recognized by Leading International Agents & Developers as one of the Most Productive Brokers in the United States, by Who’s Who in Luxury Real Estate, by Unique Homes Magazine as “Leaders in Luxury”, and by Castles and Estates as “International Real Estate Specialists”. Our firm is committed to providing outstanding client representation, detailed market knowledge, hi-tech marketing solutions, and North Carolina’s largest luxury marketing campaign. For more information contact Nicholas & Miriam Peters at http://www.yourleaderinluxury.com

  4. mike on September 22nd, 2008 1:09 pm

    Hi I would like the step by step of how you purchase your properties. I am looking to do the same thing in the Des Moines, Iowa area and am new to real estate investing so any help would be appreciated. Thanks

    Michael Surdyka
    Premium Rental Properties, LLC
    515-864-9737

  5. Nicholas Peters on September 26th, 2008 5:01 pm

    They are recognized by Leading International Agents & Developers as one of the Most Productive Brokers in the United States, by Who’s Who in Luxury Real Estate, by Unique Homes Magazine as “Leaders in Luxury”, and by Castles and Estates as “International Real Estate Specialists”. Our firm is committed to providing outstanding client representation, detailed market knowledge, hi-tech marketing solutions, and North Carolina’s largest luxury marketing campaign. For more information contact Nicholas & Miriam Peters at http://www.realestatecharlottenorthcarolinanc.com

  6. Joe on November 11th, 2008 1:36 am

    Wonderful article. Thank you for posting it.

    I have been looking for an apartment building in the Ohio area, where I will be retiring, and found one that I like. I am not as familiar with the area as I would like to be and do not have enough experience buying property to be 100% confident I am making a sound decision. What type of professional would be best suited to assist me in my decision. I have considered contacting a local real estate lawyer, account, and or a finical planner. I am just not sure which one of these would be best to start with or maybe there is another professional I would be better of contacting.

  7. apartemen on December 18th, 2008 2:39 pm

    What an excellent explanation but so complicated work. Steven or anybody, don’t you have any example of checklist document that lead us inspecting the property / apartement thoroughly ? I think it’s favorable too for any kinds of properties such as; home (rumah), regency, office and residence, apartemen etc. Thank you again for the precious article.

  8. real estate in philippines on April 14th, 2009 7:19 pm

    Nice article.. But for me, I also find it to be difficult to accomplish.. I’ll guess i will stick on house and lot in old way…

    -david

  9. Staten Island Real Estate Agent on August 11th, 2009 6:05 am

    Like any investment property, apartment buildings need to be inspected. They need to be inspected so you can feel comfortable with your investment. Apartment building can be a great income producer. You just need to be smart as too what building you buy.

  10. Achieve Financial Freedom & Escape The Rat Race on September 5th, 2009 4:00 pm

    Free Property Inspection Form Download…

    When I go on a property spending spree I usually arrange to view and inspect at least one hundred properties in a week; this in itself is no easy task.  Out of these one hundred I will usually bid on about ten of the best ones.
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  11. Ashley Keller on September 15th, 2009 12:43 pm

    If you want to learn about buying a property just go to Bank Owned Investor Insider’s Guide and you will learn how to buy properties.

  12. Joel on February 3rd, 2010 1:15 am

    This article is very informative, thank you very much. Actually, it’s funny. I work with cars.com and I just watched their commercial that they are going to premiere during the Super Bowl this Sunday. It’s about a little boy who knows the answers to everything except for how to buy a car, and reading this article reminded me of that little boy! If you want to see what I’m talking about, the link to the commercial is here – http://www.viddler.com/explore/nkraft/videos/1/

  13. caitlin on April 27th, 2010 7:05 am

    Hello,
    My name is Caitlin
    i want to do the same thing you are doing or well, simular
    I WANT to buy a property, renovate, and then price it higher..
    After/IF i make enough money to buy Apartment complex’s Way
    down the road. i want to do the same buy, renovate, and price higher. i just dont know how i will get enough money to purchase the apartment complex? I want to buy/renovate/rent-out
    Single family homes. then, apartment buildings. Does that seem possible?

    Please, will you give me the nitty-gritty facts on this?
    thank you,
    caitlin

  14. Homes Real Estate on July 16th, 2010 9:18 am

    This article very nice one and thank you very much.

  15. Homes Real Estate on July 16th, 2010 9:19 am

    this is very good article. and thank you so much.

    Homes Real Estate

  16. alex on January 18th, 2011 5:29 pm

    apartment building investing is the way to go. what we did was use business credit to get money to get started. bought one of david lindahls programs off ebay (its much cheaper that way), but it is nearly the same as monica mains on the web and hers are $100 which are a eversion but not bad. although her coaching was a joke. we get all our leads by contacting property owners and dont try to get them from listings as brokers have them inflated in price. we also get deals from austin davis and his group. we have bought a lot of books off amazon too and they are helpful but really you just need to get out there and start making offers.

  17. James on April 12th, 2011 7:58 am

    I know I can use business credit to start however if my personal credit is bad and I’m a sole proprietor my personal credit will still need to be show on a loan application . Do I need to have a partner to fix this issue? I’m having a time of getting another party involved , how do I convince someone that an LLC will indeed protect them from any repressions a potential failed business deal might cause to them or their personal credit and assets ?

  18. Residential property on August 24th, 2011 4:32 am

    I really liked the way you laid it out in nice and easy steps. I have found that a lot of people looking into real estate are looking for someone to provide them with easy to use information.

  19. The Apartment Consultant eBook | on October 3rd, 2011 3:36 pm

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