Buy Apartment Buildings
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2005
Why 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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