6 Steps Every Investor Should Take Before Buying An Apartment Building

6 Steps Every Investor Should Take Before Buying An Apartment Building

Whether you are a first-time investor or an existing apartment owner, here are the top six things to remember before buying an apartment building, according to Carlos Azucena, founder of CFA Property Advisors of Marcus & Millichap.

Azucena, who focuses on small and mid-sized apartments, said in a release that investment in multifamily properties continues to be one of the most attractive plays in today’s real estate market. So, he provides this checklist to potential investors.

1. Understand the market you’re investing in

Before deciding to make a considerable investment in an apartment building, it is important to understand what makes the area great (or not so great), and there is some basic information that can help you do that.  Having a good understanding of market vacancy, current asking rents, and today’s interest rates will give you a good snapshot of what you are immediately facing were you to invest today.  To understand future potential, know what drives employment in the area, what inventory is in the development pipeline, and how market rents are performing. These items and others can give you clues as to how your investment will perform in the future.

2. Know what factors affect your specific location

Knowing what factors play into the desirability of your specific location will give you an idea if you will be able to easily find renters and how high you can push your asking rents.  For example, as traffic has worsened in many regions, public transit has become more important as renters look for ways to avoid long commutes.

  • Questions you can ask yourself are, “Is the property near public transportation or does it have easy access to freeways?
  • What is the tenant profile and why would renters want to live here?  Is it close to their work or school?
  • What kinds of amenities are available to them – retail, outdoor recreation, dining, and nightlife?”

3. Do your due diligence

Once your offer is accepted but before you complete your purchase, do your due diligence to understand the condition of the property and to make sure the books and records are in order.  In commercial apartment sales (5 units+) unlike residential apartments (2-4 units), the seller is not required to provide a set of detailed disclosures although they are required to disclose any material facts.  Your due diligence should at minimum include a full property and termite inspection on the physical side.  Regarding books and records, a thorough review of all the leases, income/expense statements, natural hazard disclosure report and preliminary title report are among the critical items for your review.

6 Steps Every Investor Should Take Before Buying An Apartment Building

4. Know the lending environment

Real estate is one of the few investments where you can readily secure large amounts of money from a lender to aid you in your purchase.  Having a good lender on your team can either make or break your next purchase.  It is important for you to identify the type of loan that best suits your need and what the lender’s requirements are.  What type of lender should you go to – a portfolio or agency lender? Would you prefer a residential apartment loan or a commercial apartment loan?  What are interest rates for a 5-, 7- or 10-year terms?  Does it make sense to go interest only for a few years to have extra capital for improvements or a higher cash-on-cash yield?

5. Decide what is most important to you – cash flow, appreciation, tax shelter or all the above

Each type of real estate whether it be apartments, retail, office, land, etc., have their own pros and cons.  In many instances that includes whether the property is more of a cash flow producing asset or if the value is more likely to be derived from appreciation.  Apartments in tier one markets tend to provide the lowest initial cash-on-cash returns but often offer the promise if accelerated appreciation.  If you are looking for more substantial cash flow from day one, perhaps looking at tier two and tier three markets may be a better fit.

6. Find a specialized agent

Finding an agent that specializes in apartment sales that can help educate you on all the factors above is critical to your success.  Consider them part of your real estate network.  A network that should include accountants, real estate attorneys, handymen, money lenders, professional property managers and even other real estate investors.  A good, seasoned agent can be an invaluable resource by helping you develop your network and also educating you on current market conditions and location pros and cons.

About the author:

Since 2005, Carlos Azucena has worked in commercial real estate specializing in the sale of multifamily investments throughout the San Francisco Bay Area. He joined Marcus & Millichap and participated in the successful sale of over $2 billion worth of real estate in the early part of his career. During that time, he specialized in the sale, marketing, and analysis of apartment buildings over 100 units for some of the region’s largest private and public investors including real estate investment trusts (REITs), sponsorships, private equity groups and some of the most influential developers in the area. It was his goal to take his experience from a highly competitive and sophisticated arena and share that with all apartment investors, regardless of the size of their portfolio.