Passive Investor? Fan of the podcast? Looking to learn about syndication? Welcome to Life Bridge Capital!

Investing in Apartment Buildings 101: Everything You Need to Know

The multifamily investment space has been one of the most reliable markets for investors over the past decade. Investing in an apartment building can be lucrative, but it’s important to do your due diligence and understand what’s involved in the process. In this article, we’ll introduce you to some key concepts that you need to know before investing in an apartment building.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Pros & Cons of Investing in Apartment Buildings

Apartment buildings offer enticing opportunities for steady returns thanks to monthly rent income. They can also be money pits if repairs and upgrades are needed. These two things are just the tip of the iceberg of the benefits and downsides of investing in apartment buildings. When contemplating entry into the apartment building market, weigh the pros and cons of each project you are considering:

Pros of Investing in Apartment Buildings

Apartment buildings can offer some major benefits to investors, including:

  • Rental Income: Rent collection comprises the lion’s share of possible income from apartment buildings. Other real estate investment projects may have no regular income and only produce returns when the property is sold, so apartment buildings are attractive if you want passive income.
  • Supplementary Income: Apartment building owners can charge fees for a variety of amenities and services related to the building. Parking spaces, storage closets, premium pool and gym perks, and party/recreation room rentals all have the potential to bring in extra revenue each month.
  • Tax Advantages: Real estate investment brings several tax advantages, like a lower tax rate for passive income and the ability to front-load the depreciation deduction on taxes.
  • Equity: In addition to income from rent and supplementary fees, owners will hopefully see an increase in equity in the building as time goes on. Ideally, the property will increase in value during ownership to give a nice payout when the investor decides to sell the building. 

Cons of Investing in Apartment Buildings

There are so many benefits to investing in apartment buildings that investors can get the false impression that they are sure-fire investments. Unfortunately, very few things are, and there are some potential pitfalls investors need to keep in mind as well:

  • Tenant Unpredictability: Because tenants are key for revenue, the inability to place or retain tenants can make for a financial disaster. Tenants also bring a human element that can be hard to manage, whether through their demands or conflicts with other tenants.
  • Building Maintenance & Repair: Just as apartment buildings offer a steady stream of money coming in, they will also cause a stream of expenditures. From regular upkeep of the grounds and facilities to fixing things gone wrong, it’s important to plan for expenses. Additionally, to stay competitive, the building may need upgrades and additional amenities to draw in tenants or prevent attrition to more modern buildings.
  • Time Investment: Apartment buildings require hands-on involvement from beginning to end. Choosing and closing an investment property is only the first step. Property management can be delegated to a professional, for a fee, but the timeline for selling the property is also longer than for single-family properties.

Options for Investing in Apartment Buildings

There’s more than one way to invest in apartment buildings, beyond the traditional purchase of a property. Alternative options may reduce potential financial gains, but the lesser financial risk and time investment is well-worth if for many people. If generating passive income while reducing your workload seem interesting to you, consider these options for investing in apartment buildings:

Real Estate Syndication

Real estate syndication is the process by which investors contribute funds to a sponsor company that purchases and renovates, manages, and then sells the property. Multi-family dwellings like apartment buildings are a popular type of syndication, because the monthly rental payments from the tenants can yield early and regular profits. 

Depending on the structure of the syndication, investors may see a larger portion of early returns than the sponsor. This gives a little more certainty about recouping at least some of the funds invested. Investors can search for syndications with a structure that best meets their financial goals and balances their tolerance for risk.

One of the major downsides of joining a syndication is that you will have little to no control over the major decisions that ultimately impact the outcome of your investment. For this reason, it’s important to do you research and find a sponsor that you can trust

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Real Estate Investment Trusts

Real Estate Investment Trusts (“REIT”s) are companies that own or finance real estate properties that produce income. They then pay out at least 90 percent of their taxable income from those income-producing properties to the shareholders.  

Most REITs operate on major stock exchanges, and investors purchase company stock. The stockholders receive dividend payouts. Many people purchase REIT stock through their 401(k)s or other investment plans. This is a very easy way to invest in apartment buildings compared to purchasing an entire building on your own or with a partner. Investing in REITs involves a few clicks on your computer or in an app. 

Purchase an Apartment Building Alone or with a Partner

Whether an investor pursues becoming a full owner or wants to share the journey with an investment partner, purchasing a building will be the most time-consuming and funds-intensive option for investing in an apartment building. That said, purchasing an apartment building also gives the investor the most control over the investment decisions and comes with the greatest chance for risk and reward. 

If you are considering purchasing an apartment on your own, make sure you have a plan for property management, renovations, property sale, and more. If you’re inexperienced in these areas, be sure to work with a partner or partners who you can rely on.

Do Your Due Diligence

Regardless of the size of the investment, apartment building investors need to devote significant time to evaluating and researching potential buildings or investment opportunities. Here are a few things to keep in mind as you weigh the possible risks and benefits of each opportunity:

  1. Building Size. Larger apartments equal more possible income, but they also pose a greater risk due to their more significant up-front investment and the ongoing maintenance and loan servicing costs. 
  2. Rent Rolls. Look at the rent rolls to analyze the current rent rate for each unit and the size of each unit to understand the long-term possibility of the building.
  3. Occupancy Rates. Consider the occupancy rates to learn what percentage of the building is usually occupied by paying tenants. Be sure to take into account vacancy periods to help you understand the attrition and replacement of tenants and the reasonable earning potential of the building.
  4. Capitalization Rates. It’s important to determine the capitalization rate to understand the value of a building. To find the cap rate, divide the building’s net operating income by the market value or purchase price. The higher the rate, the better. Sometimes, buildings with a greater asking price end up being a better deal than a similar building with a less expensive list price based on the cap rate. 

How to Purchase an Apartment Building

If you are ready to take the plunge and become an apartment building owner, here are the main steps to start the process:

Obtain Financing Pre-Approval

At its most basic level, buying an apartment building is much like buying a home. After identifying what you are in the market for, determine your financing and engage any professionals needed to make the transaction happen. 

Mortgage brokers can make this step much easier by doing the legwork for you. They can research and present loan products to you based on your specific circumstances. Then, they will facilitate the paperwork to ensure that you jump through all the needed hoops. 

Meet Lender Requirements to Finalize the Loan

Finally, closing the loan usually involves several reports to satisfy the lender’s need to evaluate the risk of the loan and the creditworthiness of the purchaser. In addition to an appraisal, an apartment building purchase will likely require a title report, a Phase I Environmental Assessment, and a physical condition report.

Lenders may also require additional reports specific to the property or community, including surveys to determine boundaries and encroachments, seismic reports to analyze earthquake risk, and zoning reports to clarify any zoning issues or disputes. 

Establish Management of the Building

After purchasing an apartment building, the real work is just beginning. If inexperienced, it’s important to hire a professional, experienced property manager that has both the ability and knowledge to coordinate all the needs of the building, the tenants, and the owner. Alternatively, if the owner will be doing their own property management, they need to be aware of the legal requirements regarding safety and financial management to avoid incurring major penalties or legal liabilities.

Classes of Apartment Buildings

Regardless of whether you want to dive into apartment building investment through a syndication, REITs, or by purchasing your own building, you will want to be familiar with the different classes of apartment buildings. Apartment buildings come in all shapes and sizes, and they are filtered into four classes, A through D:

  • Class A buildings are newer, usually less than 10 years old, and have the amenities usually attributed to luxury apartments like pools, gyms, and tennis courts. Older buildings that are renovated to current finishes and amenities can also be Class A.  
  • Class B buildings are older than Class A buildings but less than 20 years old. These buildings are still in good condition, but are not as modern as Class A buildings.  The new has worn off Class B buildings.
  • Class C buildings are up to 30 years old, obviously and significantly dated, and lacking in the amenities that a modern tenant may expect. The need for repairs may be obvious.
  • Class D buildings are often low-income or subsidized housing, over 30 years old, and in poor repair. These buildings lack amenities.

Investors often gravitate toward Class B and C buildings, because they do not need intensive repair, but there is more opportunity to increase rents and equity thanks to lower-cost renovations and upgrades.  

Structural Types of Apartment Buildings

In addition to identifying apartment buildings by their condition or class as described above, we can also separate apartment buildings based on structural type:

  • Low-rise apartment buildings are four or fewer levels high. These are most commonly found in suburban areas or in smaller cities without significant population density. They require less expense and are easier to build, but they do offer less ability to make large profits.
  • Medium-rise apartment buildings will be five to nine levels high. They are in both urban and suburban areas, and can be a good compromise size to balance risk and benefit. They may also provide supplementary income from parking, vending, laundry, and other amenities.
  • High-rise apartment buildings have 10 or more floors. These buildings are expensive to build and are subject to many regulations. The increased number of tenants provide greater income possibilities. These buildings offer the best return of investment in areas where land is in short supply and is very expensive. 

Conclusion

Apartment buildings remain a popular investment thanks to the revenue provided by tenants’ monthly payments. As many markets experience record-low single-family housing inventory, apartment buildings continue to hold their own in the housing industry.

Keep in mind that syndications and REITs give investors many options for taking advantage of the benefits of apartment building investment without the major time and financial commitment of owning a building outright. Ultimately, there are many paths for investing in apartment buildings to fit each investor’s goals and resources.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Related Posts