What are some important considerations to make before investing in an apartment building?
A first time apartment investor looking for entry level product should ask three critical questions before taking the plunge.
1. Am I a people person?
Owning an apartment building is obviously about cash flow but it is also about people. In most instances, an investor will be solely responsible for managing its first few buildings. A first time investor will need to deal with existing tenants, new tenants, tradespeople and superintendents, among others. Being able to deal effectively and fairly with all these people will make the investment run smoother. A first time investor will also need to be able to stomach the eviction process and negotiate hard with tradespeople to get the best possible prices. If good with people and, more importantly, tenants, rent will get paid on time, there will be fewer calls over small issues and tenants will refer the building to future tenants. All this goes to creating a stable cash flow for the building. This is critical in smaller buildings since two or three empty or non-paying units out of, say, 10 will be a problem.
2. Am I teachable?
An apartment investor cannot be a ‘know it all’ but must me willing to learn new things. Charged with looking after a building, a first time investor must learn about and be well versed in, for example, leases, current rental protection legislation, the eviction process, the lending financing process, valuation and market rental analysis. An investor also needs to look at what its competitors are doing in surrounding buildings. If they are doing something better and smarter, then copy it.
3. Am I properly capitalized?
Before purchasing an apartment building, an investor should speak to lenders and realtors specifically active in the apartment market. They will know how much money is needed to not only buy the building but to move forward as well. Too many investors just look at the down payment and closing costs. However, successful investors always set aside more monies, either for unexpected expenses or building upgrades in the short-term.
It’s also important to find a realtor who specializes in this field before making an investment. A good realtor will not only be able to assist with finding the right product but will have the experience to guide the investor through the entire purchasing process.
Lorenzo Di Gianfelice is the apartment group broker of record at Commercial Focus Realty Inc.
