Welcome back to 1 Vision Capital’s series on buying an apartment building for first-time investors. In our previous blogs, we reviewed if multifamily investing is the next best step for your financial freedom and how to budget for your first purchase. By step three, we’re ready to start researching apartment buildings and make sure we do our due diligence.
Let’s begin with an overview of the three highest priority factors when considering a purchase: location, construction details, and units.
Location is king when you start searching for available apartment buildings for purchase. As a quick reminder, we talked about the four different classes of apartments in our first blog. Building class selection is equally as important. However, the location will significantly impact your bottom line no matter which category you decide on.
For apartment complexes, a good location means that it’s close to local amenities and attractions, has access to public transportation, highly rated school districts, and is surrounded by growing or thriving businesses. These factors tend to provide a stronger tenant base who will take better care of your property, pay higher rents, and help appreciate the value of the building. Many of these statistics can be found with diligent research, especially when looking at employment and economic data, population and population growth trends, and crime and safety data.
The construction details of an apartment complex can tell you a lot about the property’s potential problems. Since repairs and renovations influence the upfront costs and revenue, looking into a complex’s construction, maintenance history, and insurance claims is paramount. Here are a four problem areas that apartment buildings face:
- Flat Roofs: This roofing type is more prone to problems than sloped or slanted roofs, leading to leaking, overexposure, and deterioration. Roofing repairs are costly, and reviewing all previous inspection documents may save you a hefty amount in the long run.
- Wood Frames: Residential buildings crafted of wood framing are generally more prone to rotting than brick houses and can increase insurance rates. Additionally, wood frames are typically covered with siding, which requires regular painting and maintenance.
- Older Buildings: While older apartment complex buildings may have a charm to their construction, they can also present expensive problems. Many residential structures built before 1978 used asbestos in the insulation, HVAC systems, or exterior siding. Be sure to research the remedies and costs of repair before making an offer.
- Inspections: Personally inspect every unit and arrange for a professional inspector to do the same. Look for leaks and signs of mold, carpet and flooring integrity, and check all installed furniture, such as kitchen cabinets and doors.
Number and Size of Units
As we’ve discussed before, the number of units should be considered when purchasing your first apartment complex. Taking this a step further, the size of the units can present different challenges and benefits for particular properties. It sets a precedent for different demographics within your apartment’s location.
For example, studios or efficiency units can be challenging to rent outside of college campuses and high-population areas. One-bedroom units are easier to rent than studios, but two-bedroom units are the sweet spot for apartment buildings. A second bedroom opens the door for couples with a family or individuals who work from home, which rose from 9 million to 27.6 million people during the pandemic.
After evaluating the framework, if you decide to take the next step in buying the complex, it’s time to do our due diligence. This should include (but not be limited to):
- Why are they selling? It’s imperative to understand the reason and circumstances behind the sale of the complex. A seller looking to retire and move has vastly different motivations and costs than a seller faced with a property that needs significant repairs.
- Tax Returns: Request the property accounting records and investigate discrepancies. For example, if the seller shows $13,000 in net operating income in their records but counts $8,500 on their tax return.
- View Current Leases: Leases report rent amounts, terms, pet policies, security deposits, and who pays for utilities. If your tenants transfer from the seller to your ownership, you’ve agreed to everything outlined in their leases. Know what you’re agreeing to.
- Due Diligence Checklist: Make a checklist of everything you need. From paperwork to inspections, do not leave any stone unturned. We’ve put together a list for your convenience!
Another Step Toward Financial Freedom
Congratulations! You’ve taken another giant step in achieving financial freedom! Moving away from single-family rentals and partnering with a real estate syndication like 1 Vision Capital ensures that you’re working with experts in the field whom you can trust to make your money work for you. Visit our website for more information, or give us a call at (830) 326-9181.