562: Investing in Small Apartment Buildings

SHOW NOTES FOR EPISODE 562: INVESTING IN SMALL APARTMENT BUILDINGS

Investing in apartment buildings is a sure way to multiply your capital, earn passive income and secure your retirement.  While it’s a lucrative investment, it’s not always easy.  In today’s podcast, Bill examines the advantages of small apartment investing as well as some of the challenges.

Tip of the Week – Leverage

With leverage, you can buy a $100,000 property by only putting $20,000 down. The rest, you can borrow from a bank (mortgage) or a hard money lender.

So, instead of buying one property for $100,000 upfront, you’re able to buy 5 $100,000 properties for just $20,000 down on each.

Investing in Small Apartment Buildings

Investing in apartment buildings is a sure way to multiply your capital, earn passive income and secure your retirement. While it’s a lucrative investment, it’s not easy. Far from it. It requires a big commitment since you need to treat it like a career and not just an investment strategy.

On the other hand, it gives you a lot of unique benefits and potentials that you might not get in other investment options. Think of housing as a basic need. Everyone needs housing, so you’re assured of a low-risk investment and consistent income.

Many real estate investment professionals and experts will advise that investing in a large number of family-size apartments is your best bet. However, as a private investor, you want to earn the most rent per unit.

Enter small apartment buildings. As the name depicts, they usually consist of a few one-story units, mostly up to four. Because they’re not many, it’s common to find small apartment buildings with one entrance and a doorbell for each unit.

So, is buying an apartment complex a good investment? Yes. Today, we discuss why.

Stable Income and Cash Flow

Small apartment buildings’ demand is always high. Many families prefer living in smaller buildings with less and more relaxed rules where they can have a “homely” feel. Because of this demand, you have the potential to build a more robust income stream.

First, you’re assured of a cash flow each month. Cash flow in investing refers to the net income after paying all expenses, including maintenance, management, and mortgage. Apartment building investing will always offer you cash flow because they’re a necessity.

Secondly, the average rental period for a small apartment unit is about 12 months. As an investor, you can depend on your units to provide you income that you can save or plow back into another investment and build your wealth in the long term.

More Control Over Your Investment

When investing in multi-million apartment buildings, investors often have to join hands and form investment groups or syndications. In such a consortium, your level of ownership is diluted and your voice may count for nothing.

You can invest in a small apartment building as a private investor by yourself or two to three partners at most. This increases your control over the investment, as you don’t have to consult a lot of partners before making business decisions.

If you’re going into it solely, you can decide to handle all the property management tasks by yourself. You may actually end up paying less for property management fees and maintenance expenses since there’s no salary for an onsite manager.

It’s important to note that small apartment buildings may fail to generate enough income for you to hire a third-party property management firm. It may become an issue if you have multiple small apartment investments because you’ll have to drive to multiple locations to oversee the repairs, maintenance, and administrative tasks.

It’s still a win-win situation because small apartment occupancy rates stay high. As the economy improves, you have a better chance of increasing your rent.

Small Apartment Buildings are Affordable

It’s common to find new real estate investors buying small apartment buildings since they are more affordable compared to larger complex buildings in most markets.

If you’re not getting the capital from your own pocket, lenders will mostly require you to place at least 20% of the selling price as the down payment. For example, if the building is going for $500,000, you have to raise at least $100,000. For a large apartment building going for $1,000,000, you have to raise $200,000.

Lenders are more likely to approve a smaller loan with lower risk than larger loans. You’ll also notice that most lenders have more small loan products than larger loans. There are more sources of capital, such as conventional banks, online lenders, credit unions, and savings banks.

The lower upfront costs make smaller apartment buildings more approachable for smaller private investors.

Scale and Diversify Your Portfolio

Small apartment buildings have no time limit for you to follow. You can build your apartment at your own pace. If you’re buying, you can buy one new building each year, biannually, or even once a decade.

It’s also much easier to purchase and own multiple small apartment buildings in multiple locations because they’re affordable.

Diversifying your real estate portfolio allows you to build a high cash flow. It also provides a hedge against risks or negative changes in the market, such as job losses, vacancies, or other factors that would affect your income stream.

Note that simply owning many small apartment buildings doesn’t automatically translate to diversification. You also have to spread your properties’ location.

How to Invest in Apartments

Diving into real estate investment, especially as a beginner, is not an easy endeavor. However, with the following tips, you can make the process much more achievable:

Find the Best Investment For You

Whether you’re new to real estate investment or expanding your portfolio, you need to ensure the investment is right for you. You don’t want to make an investment that won’t give you the kind of return you’re looking for.

To find the best investment for you, you have to make a few considerations. Ask yourself the following questions:

• How much initial capital do you need?
• What’s the estimated cash flow, minus all expenses?
• Are you going to hire a property management agency?
• If you’re going to manage the property yourself, do you have the time?
• Are you ready to deal with tenancy paperwork and handle all maintenance issues?

Before you dive into such an investment, make sure you’re ready to invest the time and money required to run it successfully

Do Your Due Diligence

You’ve looked at a few 4 unit apartment buildings for sale and found an irresistible listing. Don’t be too quick to make an offer. Always ensure you do your due diligence. Carry out a comprehensive analysis of the building so that you’re sure of what you’re getting yourself into.

Consider the following factors:

• Location
• Amenities
• Building’s condition

These factors are crucial when determining rental rates. The building’s condition will help you know how many repairs it’ll need since it will affect your cash flow. The location also affects occupancy rates and resale value.

Hire a property inspector who might point out issues that you might not notice.

In Conclusion

Buying a small apartment building is a great investment option for real estate investors. Small apartments provide you with a solid and consistent cash flow that allows you to re-invest and grow your wealth.

Small apartment buildings also give you more control over your investment since you can do improvements to boost rents and increase property value, plus you might end up doing the property management yourself.  It’s also easier to access funding for small apartment buildings.

While investing in small apartment buildings, it’s important to carefully carry out your due diligence to know your potential cash flow, the market and property extensively.

References:

https://www.mashvisor.com/blog/investing-small-apartment-buildings/

215: How to Make Big Money in Small Apartments

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