First Time Buyers: What You Should Know Before You Purchase An Apartment Building
Frequently Asked Questions
Q: What are the benefits of investing in apartment buildings?
A: Investing in multifamily or apartment buildings provides a potential buyer with the opportunity to generate passive and recurring income and simple renovations can increase monthly income. As an advantage to potential buyers, lenders look to the actual finances of the apartment building in question rather than a buyer’s personal financial situation to assess financing needs. An investment in an apartment building is also one of the most tax-advantaged investments, as you may be able to depreciate your investment.
Q: Which areas should I consider investing in?
A: Location is the primary indicator of an investment property’s success. A good location is one that is close to local amenities including dining establishments, schools, other developments, growing businesses, and tourist attractions. Start by researching the local housing market in your area. Make sure to consider the following factors: population, job market, schools, median income, the neighborhood, rent control laws, and safety.
Q: What are rent control laws in California and how may they affect your decision to invest in a certain building?
A: Rental property in the City of Los Angeles may be subject to the city’s Rent Stabilization Ordinance (RSO) if the property was built on or before October 1, 1978. The RSO limits the rent landlords could charge and typically specifies the maximum percentage by which landlords can increase rent. Check with the guidelines of each city prior to investing in a particular property to find out if the property you are interested in is subject to rent control.
Q: What are the various factors you should consider before investing in a particular apartment building?
A: Below are just a few important metrics to consider when evaluating an apartment building:
Rent roll – This is the current amount of gross rent collected for every unit in the building. The gross annual income of the building is determined by adding up all of the rents collected on an annual basis.
Operating expenses – These are the monthly expenses paid for by the landlord in connection with operating the building. These include repairs/maintenance costs, property taxes, utilities (if paid by landlord), insurance, management costs, and other incidentals.
Net operating income (NOI) – The net operating income of the building is determined by subtracting the annual operating expenses from the annual gross income (or rents) of the building. The NOI measures a property’s ability to generate a positive cash flow from operations and demonstrates the value of a given property.
Vacancy rates – The occupancy and vacancy rates of the building will help you determine if there are opportunities to fill vacant tenancies, increase rent, and make renovations.
Cost per unit – The cost per unit is determined by dividing the purchase price of the building by the total number of units in the building. It is an important factor to consider when evaluating the pricing of a building compared to others in a particular area.
Gross Rent Multiplier (GRM) – The gross rent multiplier is the purchase price of the property divided by the property’s gross annual rent. The GRM is a highly important factor, as the total represents the years it will take to pay off the investment using only the rental property’s income. A low GRM indicates that the investment will take less time to pay off than an investment with a higher GRM.
Capitalization rate (Cap rate) – The capitalization rate of a property is the net operating income divided by the purchase price of the property. The cap rate reflects the rate of return on the investment and it allows you to compare various investment properties. Generally, the higher the cap rate, the more return you will expect receive to receive from your investment.
Q: What do you need to do to be as qualified as possible to purchase an apartment building?
A: Most buyers will likely need to secure a loan to finance the purchase of an apartment building. Research loan companies in your area to compare interest rates. After determining the best lender for your needs, speak to a loan agent to prepare a preapproval letter for you so you are in the best position possible to proceed when you find a building that you would like to submit an offer on. In addition to securing a lender, review and gather your funds to ensure you are ready to pay the downpayment and other acquisition costs.
Q: How can you find listings?
A: Speak to an experienced multifamily agent at the Mayelian Group. Contact Anie Mayelian at anie@mayeliangroup.com or 818-915-9118 to learn more about how to take the first step on acquiring an apartment building.
