Where the Real Estate Deals Are: Apartments

ADVERTISEMENT

Sure, the real estate market is in the tank. Mortgage brokers are going back to school to become nurses, and realtors are pounding the pavement selling Avon. Believe it.

Meanwhile, in little dark corners at Starbucks around the U.S., it's not hard to find two, three or more people flipping through Web pages of apartment buildings for sale and speaking discreetly into their phones.

"For people who can buy, there are some real bargains out there in multifamily buildings," says Dean Wegner, a realtor and chairman of the Independent Rental Owner's Council of Phoenix, Ariz. "It's a once-in-a-lifetime opportunity. We're seeing people come together in partnerships to buy apartment buildings that never would have a few years ago."

Becoming the owner of a multifamily building is not a small step. Most investors buying rental property start small with a home or condo. If that goes well, they move on to the bigger fish. But some recommend that starting off big is the way to go.

"Let's say you buy a house to rent and, after research, you figure that you'll be making $250 per month after mortgage and expenses," says David Smith, a Chicago-area real estate agent. "What if you bought a four-unit property up the street instead? They'd each rent for less and your mortgage would be higher, but your expenses per unit would likely drop and your overall monthly net profit is likely to be higher."

So is owning an apartment building for you? Here are some guidelines to look at before jumping in.

Pay attention to the market. In many areas of the country, rents are flat or even dropping slightly. This makes apartment properties such a good deal now, but it's also a concern if you're going to operate your building with a tight margin. Even if unemployment is reasonable in the particular city you're looking to buy in, if the building is close to a major employer that's having difficulty during the recession, you're going to have to expect more than a few vacancies to come your way.

Get money. Before you even look at a building on the Internet, figure out if you can get financing. In most cases, a building with four units or fewer qualifies for conventional financing, while anything above four is handled by the higher rates of commercial financing. If you're going into the investment with a group of people, form a legal entity (an LLC or trust) to ensure everyone's rights are protected.

Make sure about the insurance. If you're accustomed to buying policies for your own home, make sure you take time to understand the policies you'd be buying as a landlord. Besides protecting the property, there are policies that protect you with money to replace the rent lost while a damaged unit is repaired. Also, be sure to let your agent know when a unit becomes vacant. Under some policies, you may be covered only for property damage when the apartment is rented out.

Call the manager. You could go with a live-in manager, who occupies one of the units and for a healthy reduction in rent handles various duties for you such as rent collection, maintenance checks and clearing new tenants. Or, a property management firm can be hired for the job for about 10% of your gross rental receipts. In a pinch? Laid off from your own job? It's time-consuming but you can save money managing property yourself.

Dig it. Some due diligence will take away those sleepless nights before you close on the property. Call the local building department to see if there are any zoning or permit problems. The fire department will have records of the last inspection, and the building's insurer should also have a report regarding property and injury threats at the site that should be taken care of.

Show Comments

Back to Top