Is This Apartment Building a Good Deal? 3 Things to Ask Before Investing
Multi-family properties are great investments for a variety of reasons, but that doesn’t mean that every single apartment building is right for your portfolio. If you are ready to move up to investing in these easy-to-manage, more profitable residential properties, there are three things that you must ask before jumping to an investment.
1. Cash Flow
Cash flow is the most important thing to consider with a major investment like apartment buildings. The strength of the local market, the type of apartments you are considering buying into, the interest rate on the loan, and the required down payment amount are all a part of the equation that can help you understand what type of cash flow you can reasonably expect to receive from this investment.
Additionally, this question will be affected by your own personal objectives. Do you need the cash flow for living expenses, or do you intend to re-invest your profits? In one case, it may be more urgent for you to determine the reliability of the cash flow than in the other.
2. Exit Strategy
Multi-family investment properties can carry certain risks, and it’s always a good idea to ask yourself what your exit strategy is. If the property didn’t appreciate as you expected, can you raise rent for a better cash flow? If the rates on your adjustable loan increase, will you be suddenly strapped for cash? How many vacancies can you handle before your cash flow doesn’t cover your expenses?
Be on the lookout for projected numbers that don’t add up, property that is just off from the right location, or property that has spent months on the market already. These show signs that your exit may be harder than necessary.
3. Equity
Does this apartment building have equity, or are you in a position to create equity with the purchase? If you can purchase at a discounted price, revamp the management, rezone the property, fix the units or amenities up a bit, you can create a much more equitable property. The best way to ensure that you are getting high equity is to find a motivated seller willing to drop the price based on what you’ll need to invest to build equity. Always aim for a discount that is double what you need to invest – so if you need to invest $5,000, look for a deal that is $10,000 lower on the price, or even better.
Buying into equity like this, rather than hoping that your improvements will create equity, is the best way to ensure that you are purchasing a great deal.
Overall
When you sit down to consider an apartment investment, the projected cash flow, exit strategy, and equity opportunities should always be at the top of your list for determining if the property is a great deal. Be sure to carefully consider each one with the best information you can, and you’ll find that your investments are far less risky.
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