In part one I discussed why apartment buildings are good investments.
Let’s go deeper….
Some investors don’t mind ‘war zone’ or low-income areas. Some only invest in more middle class areas where the crime rate appears to be lower and tenants are more likely to stay for longer. It’s totally up to you what area you invest in, but do keep in mind that generally speaking you will find cheaper deals in low income areas, heck maybe you can even pay cash for them. But in other, more prominent, well maintained middle class areas you will more than likely have to get financed for the deal.
How do you obtain financing for a large apartment building or complex? It’s obviously going to be more expensive than a SFR, so unless you’re blessed enough to be super rich, you’re going to need financing.
Contrary to popular belief, It’s easier to finance a multi-million dollar apartment building than a single family investment property. With commercial financing, the properties qualify for the loan, not you
Ok, so you want to buy an apartment building. Things these are made for two reasons. To provide affordable housing and to cash flow.
One way to do a quick analysis on a property in order to determine if you should investigate further is to use something called the 1% rule.
The 1% rule is calculated like this:
Take 1% of the purchase price or value and compare that number to the existing annual gross income of the property.
Value/purchase price – 150k
1% of 150k is $1500. This is your rough estimate in debt service (The series of payments of interest and principal required on a debt over a given period of time).
You then compare that number (in this case $1500) to the existing annual gross income of the property. This will give you a pretty good idea if the property is/will cash flow and how for how much. If the numbers are close or the debt service is higher than the income, pass on the deal.
After that you’ll want to do a full cash flow and commercial income property analysis.
What about rent? How much should you charge when you take over the property? Any easy way to find out is to ASK someone. A tenant in a neighboring developlment or rental house. ASK your Realtor what the average rent is for the area. You do have a Realtor don’t you? ASK www.Rentals.com. search by zip code and look for comparable places that are available.
Doing your Due Dilegence and ASKing Questions are two of the most important pieces in being a successful investor.
The King of The City