Buying an Apartment Building? Do Your Homework First
A great investor will get to know local real estate agents and other investors—and find a mentor. Savvy investors won’t allow emotions to govern any final decisions; they’ll do the math and ensure they can afford any loans.
Find the right professionals to help you through the process, especially if this is your first time buying an investment property. The more expert eyes on your deal, the more likely it is you’ll cover all your bases.
- Real estate attorneys: Don’t write your own legal documents. A real estate attorney should write or review all purchase documents. They’ll be responsible for things like managing escrow, writing repair requests and investigating the title on the property.
- Inspectors: Take the time to find an inspector who has experience with commercial properties. Before you commission an inspection, discuss what the inspector will check and make your expectations clear. A standard inspection will assess the condition of the building structure and electrical systems. A standard inspection won’t check for things like a wet basement or faulty pipework underneath the building. You may want to commission extra checks for these.
- Accountant: Basic bookkeeping falls to you, most likely, but the ins and outs of local and federal taxes can prove a minefield. Requirements can constantly change. And you’ll want a professional who can ensure that your checks balance.
- Real estate agent: A local agent will have invaluable information on the areas you want to invest in, and a REALTOR® will generally have a greater choice of properties on the market. A good agent will represent you when it comes to making an offer and advise you on your options based on their extensive knowledge of what the market can bear.
- Property management companies: Most investors don’t manage their buildings personally. A good management company will keep your building in good condition and ensure you get your rent payments from tenants on time. For an investor with multiple properties—or a day job—a property management company can save the owner a lot of time and headaches.
Do the Math on the Apartment Building
For example, you will want to calculate the net operating income of the building, the cash flow rate and the return on investment. Most mortgage lenders won’t finance a building unless you can show the building already turns a profit—and they’ll want to know how you calculated that profit.
There are two common types of investment loans:
- Non-recourse loan: These are for properties worth more than $2.5 million. Collateral is placed on the property itself (or sometimes another specified property in your portfolio). If you fail to make loan repayments on time, the property in question will be taken by the lender. You will not be personally liable for the loan, so the lender cannot take money from your personal bank accounts or from any other properties you may have. This is a limited liability loan.
- Recourse loan: This is a type of loan where you (and all of your wealth) will be personally liable if you fail to meet your loan payments. If your chosen property is worth less than $2.5 million, you are not eligible for a limited liability loan—and you will have to personally qualify for a recourse loan.
The Right Apartment Building
The easiest way to find property is through a real estate agent. You can also take a look at local papers for buildings for sale. Talk to investors in the community, as properties often sell through word of mouth with no advertising.
Contact local real estate attorneys to see if they know of any properties on the market and consider using a real estate agent. You will have to pay the agent a fee, but for a first-time buyer, an agent’s experience and market know-how is incredibly valuable.
Finally, don’t forget to put your emotions aside. Vetting and choosing buildings should be a purely business decision.
Based on an original article by Cassie Daniels.