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Real estate is a flexible investment type. Investors can use different strategies and invest in different types of real estate to grow their wealth. But in order to succeed, investors need to know what they are doing. This involves understanding the potential risks and rewards of each real estate investment.
For example, buying an apartment complex is a popular choice because it is known to be profitable. But there are pros and cons that you should know about before getting into this type of investment.
Compared to single-family properties, investing in apartment complexes. Typically, investors will have to play the role of landlord and handle everything unless they spend money on a third party property management company. There is also the option of multifamily syndication, which we will discuss later on.
But for now we will assume that the investor is interested in purchasing and running an apartment building. In this case, there is a lot of work to be done. Here we will cover some of the things investors need to know about multifamily real estate investing, particularly apartment complex investing.
What to Know When Buying & Running an Apartment Complex
The first thing to consider when investing in an apartment complex is whether or not this type of real estate investment is right for you. Some real estate investors are better off renting a single-family property. Others, particularly accredited investors, may gravitate towards multifamily syndication. Some real estate investors don’t choose to rent out their property at all, preferring to flip houses.
Weighing the pros and cons is a good way to see if apartment complex investing is the right fit for you. Generally speaking, multifamily investing takes more research, time, and effort on the part of the investors. But the benefits of this real estate investment approach are undeniable.
Multifamily real estate investing gives you access to recurring income that’s consistent, making it a safe investment. Because multifamily properties have more than one unit, they provide a continuous cash flow. Even if one or two units become vacant, investors still get rent from the remaining units. If the property is in a good location or has amazing amenities, these units won’t remain vacant for long. On the other hand, if a single-family property becomes vacant, the cash flow stops until new tenants move in. [1]
Investing in an apartment building may even lead to higher returns compared to “safe” stocks. Just keep in mind that this still depends on market conditions and other factors. [2]
Recurring income is one of the biggest reasons why investors go for multifamily properties. A multifamily property can be any real estate property with more than one unit, so this includes duplexes, triplexes, four-plexes, apartment complexes, and condominiums. All of these multifamily properties can bring consistent income as tenants pay rent on a monthly basis. Apartment complexes are even more reliable because of the number of units.
Because of this setup, apartment buildings tend to mitigate the effects of a high vacancy rate. Unlike single-family properties that lose 100% of their income when the family moves out, apartment complexes can diversify income, generating income even when there are a few vacancies. Multifamily investing is a good way to generate positive cash flow. [1]
There is also the option of generating supplementary income by adding vending machines, laundry machines, parking spaces, etc. [2]
Apartment complexes make good investments because they can offer substantially lower risk for the investor. But no investment is perfect. There are a few drawbacks you should know about before putting money into multifamily real estate investing.
For starters, buying an apartment building is a lot more complex than acquiring a real estate property with just one unit or even just a small multifamily property. These buildings are more expensive and are therefore harder to acquire in the first place. It can be difficult for the average investor to buy an apartment complex on their own.
This is also a very competitive industry because experienced investors know how lucrative it can be. All of the best apartment complexes likely have multiple investors wanting to purchase it.
In terms of management, apartment complexes are more intensive. You have to take on the responsibilities of being a landlord: managing tenants, handling emergencies, and taking care of the facility itself. It also involves more frequent maintenance, which can be expensive in the long run. [1]
For first time owners, apartments can be extremely hard to manage. That is why a lot of investors choose to outsource this part of the job to a property management company. This is a good option since apartment complexes bring in enough income to justify the added expense. But between this and the increased maintenance costs, managing an apartment building can be expensive. [2]
Finally, apartment complexes are not particularly liquid, unlike stock. An entire apartment can be difficult to sell, even in a seller’s market. Finding a suitable buyer and successfully closing the deal may take a few months. [2]
Whether or not multifamily real estate investing is a good choice depends on you and your personal goals. Because of its several benefits, it could be the perfect fit for a lot of experienced investors and even high-net-worth individuals (HNWIs).
What to Look for in an Apartment Complex
If you have decided that multifamily real estate investing is the right choice for you, then the next step is choosing an apartment building to purchase. This is no simple task and you should do your due diligence before making a decision. You have to take a look at your personal and financial criteria to assess prospective investments. Here are a few things to consider when choosing an apartment building.
Investors need to consider not just their budget but also their risk threshold as this will affect the choices that they make. Think about how many units you want your investment property to have and what kind of return on investment (ROI) you are going for.
The number of units is very important because this will determine your cash flow. It will also affect the price because larger apartments with more units tend to be more expensive. If you only need a way to supplement your income, then sticking with a modest building no larger than six units may be a good idea. If you have a higher risk tolerance and are looking for a higher income, you should consider a larger building with 12 or more units. [1]
Next, you should think about what kind of apartment you want to invest in. There are houses that have been converted into multiple units, two-story garden apartments, and buildings with more than a dozen units. Apartments come in a variety of forms.
You can also narrow down your choices based on asset class. There are Class A, B, C, and D apartments—categorized by the caliber of the property. Newly-built apartment complexes that are well-located and have great amenities are considered Class A. Class B properties are well-maintained but may be older or in need of maintenance. Class C properties are much older buildings with limited or no amenities. Class D apartments are low-income properties that are in need of renovations and repairs. [1]
While there is no official way to categorize a building into these specific asset classes, these terms are often used in real estate to quickly communicate the quality of a particular property. Some investors focus on Class A properties because those are the most profitable. These are apartment complexes that people want to live in.
Other real estate investors go for Class B properties and renovate them to bring them to Class A. And then there are the investors that go for Class C properties because they cost much less than Class A properties. There are many different strategies you can employ.
Finally, you should take note of the apartment’s amenities. This is one of the factors that can attract renters. A well-located property with good amenities basically sells itself. You don’t need to spend on marketing the apartment because a lot of people want to live there.
Choosing a Location is Key
Evaluating the neighborhood is just as critical as assessing the property itself. It may be a cliché, but real estate is all about “location, location, location”. This is a popular saying for a reason. Whether you are going for a single-family unit or a multifamily property, location is very important. You need to choose a location that you can be confident about. [2]
An apartment that is close to schools, shopping centers, museums, restaurants, transportation, and major employers are bound to attract a lot of renters. This often guarantees your cash flow if you invest in an apartment complex in such a location. These places are in high demand and would have very few vacancies—if any.
Just like any other real estate investment, your goal would be to purchase a property in a desirable area. This is arguably more important when it comes to apartment complexes because you want your property to naturally attract renters. Some investors go for cheaper apartments in less desirable neighborhoods and end up struggling to attract tenants. Others can make it work for them, but this approach is riskier. If you do not have the skills to manage properties in these locations, you may be better off putting your money elsewhere. [1]
Before purchasing an apartment building, investors need to consider factors like employment and economic data, population growth trends, crime and safety, and economic health of local employers. Neighborhoods with low crime and great job opportunities attract higher quality tenants. The apartment’s location should motivate tenants to stay for a long time. [2]
Finding an Apartment Complex to Buy
There are many ways to find an apartment building for your real estate investment. You can approach Real Estate Investment Associations or REIAs, work with real estate agents and business brokers, or just find one yourself.
Try looking for apartments that are “For Sale by Owner” (FSBO). You may be able to negotiate 6% to 7% off the asking price of FSBO properties because sellers are not paying a real estate commission. In fact, this is such a common trend that some FSBOs list higher prices, expecting buyers to deduct commissions from their offer. [1]
If you do want to search for an apartment complex yourself, you should consider joining a local REIA. You can network with other investors in these groups and easily find apartment buildings for sale.
There is also the option of working with a real estate agent. This should give you access to the biggest body of properties for sale—and this includes apartment complexes. Real estate agents have access to one or more Multiple Listing Services (MLS) that list all of the properties for sale by every agency within that MLS. This database includes multifamily real estate properties that you may want to invest in. [1]
Not only can real estate agents help you find investment properties, they can also negotiate with sellers so you can get the best prices.
Think About Financials
After locating the ideal apartment complex for your real estate investment, you should evaluate its financials. Evaluating basic numbers should give you an idea of a prospective investment’s financial performance. You should consider things like gross operating income, vacancy rates, and expenses to determine whether or not a property would make a good investment.
For example, gross operating income is the total rent collected from the property. With this, you should get an idea of how profitable an apartment could be. But there are other factors to consider such as expenses.
Expenses would include things like interest, insurance, mortgages, repairs, maintenance, utilities, municipal costs, taxes, fees, management expenses, and advertising. Before you even purchase an apartment complex, you need to know what the total expenses would look like for a year. Also take a look at how much you would spend on the property to keep it running for a month. [1]
Use all of this information to determine your net operating income (NOI). This is how much you are going to earn from your apartment once all the expenses have been accounted for. Figure out what the property’s annual and monthly NOI is going to look like. This is your cash flow. As an investor, you need a real estate property that generates a positive cash flow. If your NOI is negative, that means you are losing money within a given period.
You Need a Team to Run the Complex
There are a lot of things to consider before purchasing a multifamily real estate property. In fact, this is just the tip of the iceberg, as multifamily investing could get very complicated, especially when you are going after something that has a lot of units. It takes a lot of hard work, and you need to do your due diligence to make sure the investment works out for you.
For something like an apartment complex, acquiring it is only half the battle. Running an apartment complex is an entirely different beast. It’s a very detailed full-time job. This type of investment is a lot more involved than other real estate investments. Done properly, you can enjoy a consistent stream of income from a relatively safe investment, but it takes a lot of work.
Investors should consider hiring an apartment building management company. This is a third party organization who will handle the property on your behalf. This takes a lot of the pressure off your shoulders so you can focus on other investments and business endeavors. Since apartment complexes bring in a lot of income, it is one of the real estate investments that can easily justify hiring a property management company.
When choosing a property management company, you need to find one that fits your needs. Intelligent hiring is essential. Look into the company you want to work with and see if they train their employees adequately. Their services will reflect upon you as the property owner because they will be managing your tenants. [3]
Apartment complex management companies will be working with your tenants directly. They will help them with maintenance issues, making payments, etc. This means an experienced staff could make or break the experience for your renters. Prioritize client service so that your tenants are satisfied.
An apartment manager’s job is to handle all the day to day activities involving the apartment. They will take care of tenant complaints and requests. They will also collect rent, deposit money, and also contact tenants who haven’t paid their rent on time. They also handle prospective tenants, showing the apartment to them if they express interest. [3]
Property managers also take care of repairs and general maintenance to keep the property in good condition. This is a very demanding job. It requires a very specific skillset—which is why it is not suitable for first time real estate investors. You may get overwhelmed by all the responsibilities of a landlord. It takes a team to run an apartment complex.
Whether you are investing in a small apartment with only a handful of units or a larger building with a lot of tenants, you should think about working with a professional team for property management. Hiring a property management company should help you save time and energy. It also reduces your stress since you don’t have to get involved in the day to day activities of an apartment complex.
Work with BAM Capital for Multifamily Apartment Investing
There is no doubt that multifamily real estate can be profitable. But investing in an apartment complex takes a lot of work and due diligence to make sure everything goes smoothly. It has a large barrier to entry because of the expensive properties—acquiring an apartment complex is no small feat, especially for the lone investor.
Once you do acquire the property, you become a landlord and then the real work begins. Even if you hire a property management company, it does not make it a true passive investment.
Multifamily syndication solves a lot of the problems that investors have with this investment type. A syndication deal is when multiple investors pool their resources together to purchase a single property. It can be done with any type of real estate property, but when it is done with a multifamily property, this is called multifamily syndication. [4]
Multifamily syndication is very popular among experienced investors because it is a way to obtain properties that they normally would not be able to purchase on their own. This type of investment gives them access to more expensive real estate properties such as large apartment complexes.
A syndicator, also known as a sponsor, puts the deal together. They look for an investment property, secure the financing, and then look for passive investors who will participate in the syndication. Passive investors will then provide most of the capital and earn money from the cash flow and the equity, depending on the deal structure. [4]
Syndication deals may differ from one deal to another, but they all provide a passive income for investors. The best part is that the syndicator also handles property management, which means this is no longer something you need to worry about. They may hire a property management company or handle it themselves, but you as an investor wouldn’t have to do anything.
Some syndication deals are only accessible to accredited investors, while others are open to the general public. If you have been turned off by the idea of being a landlord, this is the best real estate investment for you. You don’t even have to spend time locating an apartment complex on your own. You can still choose which syndication deal to participate in, so all you have to do is find a syndication for a property that you are confident in.
If you want to invest in multifamily apartment complexes without the headache of running them yourself, you should work with BAM Capital.
This Indianapolis-based syndicator has a strong Midwest focus, prioritizing multifamily real estate properties that are Class A, A-, and B++. BAM Capital uses an award-winning multifamily investment strategy that allows investors to grow their wealth through syndication. [5]
BAM Capital mitigates investor risk and uses a vertical integration strategy to create forced appreciation. They have a consistent track record of providing a safe and passive investment for their investors.
BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has over $700 million AUM and 5,000+ units. [5]
Accredited investors can schedule a call with BAM Capital and invest today.
