Investor tips: buying your first apartment building

Logan Nagel
January 19, 2022
Real Estate

Congratulations, you’re making the jump into multifamily investment by buying your first apartment property! Moving into the multifamily space is potentially hugely rewarding. It provides an excellent way to rapidly boost total portfolio revenue as well as streamline operations and maintenance compared to investing in single-family homes (SFH) properties. But buying a multifamily property, even a small one with 4-12 units, raises the stakes higher than SFH. In addition to the higher dollar value of these properties, buying an apartment building rapidly exposes the novice landlord to elements of the commercial real estate world which can be much more sophisticated and competitive than the more familiar single family waters. This shouldn’t be discouraging, but it should be a reminder that it doesn’t hurt to be extra-prepared for that first apartment acquisition.

By now in your property journey you’ve probably already spent a lot of time developing your knowledge of real estate due diligence, apartment analysis and multifamily fundamentals beyond the experience you may have brought from the SFH landlording world. Here are three on-the-ground tips for first-time apartment buyers that might be a little less obvious.

Go in with a clear apartment purchase red and green line

So you found a property you’re interested in and it pencils. You’ve done your property due diligence and are confident that the investment is worthwhile. You’re almost ready to put an offer in but before you do, carefully consider the logic behind your pricing. How does your investment shift as the price goes up or down? What impact does a $100,000 difference have on your returns, up or down? For more on that, check out this great resource, which helps walk you through how to build a real estate sensitivity analysis in Excel.

These are critical considerations to make before putting pen to paper (or finger to keyboard) on an offer. A good place to arrive at before submitting your offer is a clear understanding of your pricing and terms red line and green line. The red line scenario is the least satisfactory one you’d still say yes to, with perhaps the worst pricing or the least ideal inspection period. The green line scenario is the one you most want, in other words, your negotiating target. There will likely be a back and forth over the course of negotiations, and having both of these figures and terms established ahead of time will give you a big step up as you make your first multifamily property investment.

you should be able to weave your understanding of these factors into a timeline for your local market.

Be intimately aware of the multifamily investment market

It is impossible to overstate how important it is that you have a comprehensive understanding of the market. If you’re considering shelling out the money for an apartment, you need to understand the drivers of rent rates, new construction, and property values both nationally and within your focus market. You should be able to explain why the competing property half a mile away rents for what it does (is it the finishes, the submarket, or both?) and have a good sense of what the renters in your area tend to respond to (luxury interiors, amenities, or something else?).

Additionally, you should be able to weave your understanding of these factors into a timeline for your local market. Perhaps things were sleepy until a couple years ago, when people started moving in from out of state and a lot of redevelopment activity picked up, pushing prices sky high.

Having these factors in mind before you sign paper will help you ensure that you are paying a fair amount for your target property, and not buying into an overpriced market. Conversely, it will also help you know how to identify a good deal when you see one. One useful resource is Deloitte's annual Commercial Real Estate Outlook, which prominently includes multifamily properties.

Cultivate local property management connections ahead of time

Your apartment property will inevitably need all sorts of support services. Unless you choose to self-manage, you may not have to worry about everything yourself, but you will still benefit from the services of a property lawyer in the state. You’ll also want that all-in-one property management firm identified well ahead of time in order to avoid pricing surprises and limit friction for tenants. If you do choose to self-manage, you’ll need to have everything lined up right away. Not just a landscaper but also a plumber, electrician, handyman, and beyond.

Downtime during the transition from one owner to another could lead your tenants to hold a negative opinion of your operation, and be very challenging to deal with particularly if you are remote to the location of the property.

These are just a few tips to consider when preparing for your first apartment acquisition. You’re about to embark on an exciting and likely very profitable journey! To see other small multifamily properties for sale now, click here.

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