How to Get Started Investing in Apartment Buildings

Are you thinking about getting started investing in apartment buildings? Real estate investments continue to be one of the greatest wealth builders in our country. If you can get in the door of a great apartment building, you can be on your way to some great investment income.

But how do you get started investing in apartment buildings? Where should you begin? Whether you have rental experience with a single-family home or no rental experience at all, investing in apartment buildings is overwhelming. That’s okay. Take a deep breath and dive in to learn some of the basics on how to get started investing in apartment buildings.

An apartment building is considered a multi-family residential building. They are also known as a multi-unit dwellings or MUD. A multi-family residential building can be as simple as a duplex or as large as a 300-unit apartment complex. It can also be everything in between.

Where to start with commercial properties?

The opportunities to get started investing in apartments are open to anyone and there are many levels of entry. You can start with an owner-occupied duplex or you can jump right in to a large apartment building. It simply depends on your interests and comfort level.

Just remember, the larger the apartment building, the greater the income potential. But with greater income potential comes higher startup cost, increased liability and increased responsibility. So, have a good, thorough sit down with yourself and decide what you are comfortable taking on.

Educate yourself.

One of the first things you must do if you are getting started investing in apartment buildings is educate yourself. There are many ways to get a great foundation for multi-family real estate investing without risking a single penny.

Find a mentor: Find a mentor that is successfully doing the type of investing you are looking forward to. Take this person out for coffee – better yet, dinner – and ask them a lot of questions.
Read some books: The internet is a great source of information, but a book is going to give you a complete picture in one neat little package. You can check out this article for one investor’s top seven picks.

Join a real estate investing organization.

Joining a professional organization has many benefits to help get you started investing in apartment buildings. The American Apartment Owners Association (AAOA) has been around since 2004 with a mission to “provide superior property management services that will equip landlords to better manage their investment properties.”

The organization has 85,000 members and offers services ranging from education, a background check system as well as landlord forms by state.

Start small.

The pull to jump into owing a large apartment building can be strong. Many popular and charismatic investors such as Grant Cardone, say the more doors in your building, the better.

This can be true to some extent, but if you are just getting started in investing in apartment buildings, you may want to start small. Investing is a long-term endeavor and there really is no such thing as an overnight success. So, take your time.

Are you ready?

Take stock of your current situation and give yourself a pulse check. Do you have any previous experience with rental properties? Have you invested in a single-family home rental? What is it about multi-family dwelling investments that you are attracted to? Do you have capital to invest and capital for reserves?

Go with owner occupancy.

If you’re just getting started in investing in apartment buildings, you may want to try an owner-occupied situation. If the building is four units or less and you occupy one of the units, you can qualify for special owner-occupied financing, and may have to come up with only a minimal down payment.

This is a great way to get started investing in apartment buildings because it generates income and the special financing allows you to keep more capital in your pocket that you can then use for other investments as you grow.

Consult with professionals.

Buying your first multi-family property can be overwhelming. Make sure you hire an experienced commercial real estate broker to help you through the process. This step requires a lot of due diligence.

Not only must you inspect the physical condition of the building and the property, but you must also get familiar with its past income and loss. A professional commercial real estate broker can guide you through this process.

Inspect the fine print.

Finding an apartment building you want to purchase is exciting, but don’t get too caught up in the excitement and forget to analyze the building’s income potential. Ask the seller for paperwork. You will want to examine profit and loss statements, rent rolls and any contracts that are set up for service or maintenance work.

In short, you want to make sure the prior performance of the investment matches up with your projection. If it doesn’t there may be a problem.

Knock on some doors.

Getting to know the neighborhood and the tenants can give you more insight into the income potential of an apartment building than the paperwork.

Inspect the neighborhood. Get to know what the vacancy rate. Also, talk to the tenants about the building. Ask if they have had any maintenance issues and if the building stays well occupied.

Get to know your state laws.

Every state has different laws concerning eviction and tenant / landlord relationships. Get to know the legal ins and outs in your state regarding tenants. These laws are known as Landlord Tenant Laws and they exist to protect both landlords and tenants. Landlord Tenant Laws may govern thing such as:

Security deposits
Access to the premises
Rights of tenants to violate lease agreements in cases of disability or domestic abuse

The AAOA is a great resource for information on Landlord Tenant Laws.

Learn how to evaluate rental properties.

Evaluating rental properties probably won’t be easy at first. It is not the same as evaluating a single-family home which is based on square footage and construction.

Still, evaluating a rental property is something you must get familiar with if you want to get started investing in apartment buildings. A rental property should be evaluated on income and expenses.

Here are a few things to consider when calculating your income and expenses:

Rental market in the area: You must know what the rental rates are in the neighborhood. This will help you project rental income.
Vacancy rates: Your occupancy rate will not be 100 percent all the time. You can get information on vacancy rates from the current building owner. Also investigate vacancy rates in the neighborhood.
Insurance, maintenance and operating expenses: Don’t forget to factor in your cost for these regular ongoing expenses, like apartment building insurance (Get a free quote here!). The positive element about these costs is they are primarily fixed and can be estimated with some accuracy.
Cash reserves: If you are investing in an apartment building you must have cash reserves on hand for emergencies. There will be unplanned expenses and emergencies.

Unlike a home, an apartment building operates as a business, make sure to evaluate carefully the potential income and expenses before investing in an apartment building.

Terms to know when evaluating rental properties.

When you first begin evaluating rental properties it can feel like learning another language. But once you understand some of the lingo, you will be able to evaluate apartment buildings with ease and determine whether they can be profitable for you.

Here are a few terms to know:

Profit & Loss Statement: This is also referred to as the P & L. It is a document that outlines the profits and the expenses of an apartment building. Examine the P & L closely to make sure it makes sense and corresponds with your projections.
Rent Roll: The rent roll is a list of tenants. It also contains all the lease terms for each tenant. This document will give you some insight into what you can expect as far as occupancy in the near future. The rent rolls will also indicate the rental income of each unit.
Net Operating Income (NOI) The net operating income is determined by the total yearly income of the apartment building minus expenses and vacancy costs.
Capitalization Rate This is also known as the “cap rate.” The cap rate is a percentage that indicates the value of a rental property. It is based on the ratio between the sale price of the property and its NOI. It is typically determined by a commercial real estate appraiser who uses sales figures from similar and recent sales in the area.

Getting started investing in apartment buildings can feel overwhelming at first. But if you take your time, educate yourself, consult with professionals, and learn to evaluate properties, you can be successful.

Just remember to make the right investment for you. Many people make their initial investment in large apartment buildings and never look back. Many experienced investors stick with single family rentals. The choice is yours, and it depends on your preference, capital and interests.