When considering investing in anything, according to Steven Taylor of Taylor Equities , the question you should always ask is: Why is this a good deal? A good deal isn’t just about numbers – a good deal has a compelling story and makes sense. Is the property mismanaged? Stressed? Under foreclosure? The facts should tell a story that explains why the property has value. Developing the instinct to recognize a good deal takes time, but with research, study, and experience you can learn to find the right investments.
Here are four factors to keep in mind when investing in apartment complexes.
1. Cash Flow
The probability of cash flow is a crucial factor to consider. It is important to evaluate how the property will generate cash flow in comparison to other potential properties. To start, ask yourself these questions:
- What is the strength of the rental market in the area?
- What type of market you are buying into (For example, C class buildings often have higher rates of tenant turnover. They can also call for more maintenance and repairs.)
- Financing (How much money are you putting down? What is the interest rate? What type of loan?)
2. Equity
The next thing to consider is if the apartment complex you are purchasing holds equity. If the property doesn’t have equity, can you create it? Equity in a property can take many forms. A few to look for are:
- Discounted listing price
- Foreclosure
- Upside potential (Fixer-upper)
- Poor management
- Opportunity for rezoning
While there are ways to create equity, you are better off buying into it. Be on the lookout for motivated sellers who want out of their property – they are often willing to give up the building’s equity for less.
3. Appreciation
Purchasing in the right location and during the right time will result in profit and appreciation. But, evaluating timing can be tricky. The real estate cycle is often very uncertain. Therefore, if you purchase an apartment complex without the certainty of cash flow or equity, with the goal of short-term appreciation, you will be taking on a risky investment.
Often, aiming for moderate or long-term appreciation will be a safer bet. Study neighborhood and city trends over the long term to choose areas that hold their value and grow at a steady rate.
4. Risk
Those investing in apartment complexes often neglect to consider risk. Regardless of the amount of research you do, risk will always be a factor. Even if you have considered all the factors, you presumptions can be incorrect.
Have a backup plan for risk. If you are buying a building for appreciation, and the apartment complex does not appreciate, can you instead gain positive cash flow through renting units? If you have vacancies in some of your units, will you be able to balance the negative cash flow? When investing in apartment complexes, you should expect a positive outcome, but always be prepared for your plan to take a turn. Real estate investment in a risky business, and if you want to play the game, you have to be ready to pivot when things go wrong. But, when things go right, investing in apartment complexes can be an exciting and rewarding endeavor. Steven Taylor Taylor Equities