Over a third of all renters live in apartment buildings. Another 41% of renters live in single-family residences. Investing in real estate can lead to some big opportunities for generating passive income.
The big difference between investing in an apartment complex vs a house is that you’ll end up dealing with many more people. The trade-off is that you’ll get much more consistent income since residents will continually rotate in and out.
Here are nine things to consider before you become a new apartment owner.
1. Whether It’s the Right Choice for You
First of all, you should make absolutely sure that buying an apartment complex is the right choice. It’s one of the many types of real estate that requires a lot of upkeep, unlike something like a house.
While a single-family property does still need regular maintenance, you won’t have to deal with upwards of 20 separate units. It’s more work, but you’ll have less overall risk and a higher return on your investment.
Where your apartment complex is located will affect things like rental prices, property taxes, and how easily you can acquire new tenants.
For example, an ideal apartment in a big city will have a grocery store and a park within walking distance. It becomes an even more attractive property if you also have things like a laundromat, gym, or public transportation options close by.
Things change if you own a particularly large apartment complex with many amenities. A laundromat isn’t necessary if you have a laundry room in your complex or if each apartment has its own machinery. The same goes if you have a dog park as part of your property.
3. Current State of the Apartment Complex
It’s important to understand the overall state of any property you’re interested in. As a real estate investor, you have to consider how much it’ll cost to get a property into a good enough condition. Ideally, your new investment will be ready to generate passive income without too much work.
Pay for multiple inspections before you fully invest in real estate. See if there are any structural issues or if everything is surface-level. A pest inspection is also worthwhile if you want to avoid things rodents and roaches.
4. Rental Prices in Your Area
One of the main reasons to buy an apartment complex is the ability to rent out the different units inside of it. However, apartment rental prices can vary wildly depending on things like location, amenities, and the size of each unit.
It’s essential that you do as much research as possible to figure out the average rental prices in your area. You need to price your units competitively if you hope to fill them. You may decide against purchasing a specific apartment complex if it’s in a bad area and doesn’t look like it’ll make much of a profit.
5. The Net Operating Income (NOI)
Net operating income refers to the overall cost of purchasing and maintaining an apartment complex. Even if you get a great deal on a property, you still have to consider things like insurance, maintenance, utilities, and security. Most of these extra costs are permanent fixtures you’ll need to include in your budget.
If you want to calculate your NOI, subtract the complete operating expenses from your potential revenue. Do not include income tax, interest on debt, or depreciation.
Keep in mind that your potential NOI will fluctuate based on vacancies and market conditions.
6. Property Taxes
Even though people live inside of your apartments, these properties are considered part of a business. It’s expected that however much you charge includes the taxes you need to pay every year. As such, you need to take this amount into account when calculating your NOI.
7. Whether You’ll Allow Pets
An important decision when you’re renting out a real estate investment is whether or not you’ll allow pets on the property.
Pets are great for a person’s mental and emotional health. In some cases, owning a pet encourages the owner to become more active and get out more. However, these animals are often messy and can create issues if they’re not well-trained.
If you do decide to allow pets, you need to take it into account when pricing your units. Most landlords have an extra pet fee that helps to cover any potential damages.
8. How You’ll Manage the Property
It’s important that a real estate investor keeps their property clean and well-maintained for their tenants. However, things get much more complicated as they purchase more properties. There’s a lot to juggle between maintenance, managing your tenants, and handling potential evictions.
A property management company has all the experience and resources available to manage your investment. Before you hire one, ask them some basic questions to assess if they’re a good fit for you.
How many properties do they currently manage, and how do they handle repairs? Do they have a preferred list of vendors? And how do they screen potential tenants?
9. Complex Amenities
Amenities can make or break an apartment complex for some people. These are things that come with an apartment complex, such as a swimming pool or dedicated parking.
Some of what renters look for include appliances, a communal area, and security features.
However, more features also mean more work on the owner’s part. If a laundry machine breaks down, then you’ll need to replace it. You’ll also need to pay to have your swimming pool regularly cleaned and security measures put in place to limit access.
Care for Your Real Estate Investment
An apartment complex provides a great opportunity to generate some passive income. However, you want to be sure that you’re buying the right kind of property in the best location possible. On top of that, you’ll need to figure out how you’re going to manage it.
Reedy & Company provides property management services in the Memphis, TN area. We currently manage over 3,500 properties with our team of 100. Contact us to learn how we can help you with your investment.