How To Buy Your First Apartment Building
While buying a single-family home might sound like a good idea because you don’t need too much cash for a down payment, it’s awfully risky. Why? Well, if and when your tenant leaves, so does your cash flow. When it comes to property management, I like the diversification that comes with a multi-unit or apartment building. One bad apple won’t sour the entire bushel.
So, how do you make the leap to owning a real apartment building? It may seem daunting since it’s more expensive and the management burden is greater, but here are five tips to get you on your way:
- Do your homework – People live in apartment buildings for a reason. It’s close to work, it matches a financial need (either budget or luxury), or it’s near entertainment or other desirable activities. Make sure you can answer the question “Why do people live here?” so that there’s still a reason to live in your building should a recession, company relocation, or other event happen in your community.
- Make friends with your banker – Unlike a single-family home, it’s difficult to find 80%+ financing for apartment buildings. It exists, but it’s not for the faint of heart. The best way to position yourself to find debt that works for you and your building is to network with your local real estate banker. If you’re honest with them, you’ll know your parameters and they’ll become your trusted partner.
- Keep an eye on your broker – I like apartment brokers, I really do, but be careful. Not only are the numbers in their investment packages never correct, they still only get paid to sell you something. Trust but verify.
- Let someone else manage it – No property manager will ever operate your building like you would. However, your time is far too valuable to deal with the dreaded stopped up toilet or to go on numerous leasing tours. Plus, in apartments, the fee that property managers charge is much less than the single-family home industry.
- You must believe – The hardest part of the move to apartment ownership is finding equity. For those of us who didn’t receive a large inheritance from a distant relative, where does one start? Hopefully you’ve saved up a decent amount to get started. No potential investor wants to invest with a sponsor who isn’t willing to “eat his own cooking”. If you’ve found a compelling deal that you believe in 100% and are willing to put a meaningful personal investment in, you’ll find others willing to do the same.
Protecting and growing your cash flow is the way to move forward in real estate investing and apartments are the best way to accomplish that.
Also, it’s okay to start small. Finding a 5-unit property is much better than one single family home. Having 5 times the diversification will show you the ropes in multi-unit investing and you’ll want to parlay that into a 10, 20, or 100 unit building in the future.
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