Investing in multi-unit apartments can be a great way to generate passive income and wealth or a hair-pulling and poverty-inducing experience. Before you buy any multi-unit building, make sure you evaluate it properly. Here are some guidelines.
Start with some cash. While it's possible to get involved in multi-unit investing with "no money down," such deals are few and far between and difficult to negotiate. Save your pennies and bring cash to the table, even if it's only 5 percent. Keep some cash in reserve for vacancies and repairs.
Research realistic rents. Before making an offer on any building, make sure you know what the market rents are for the area. Drive around, look at comparable buildings, check newspaper ads and make some calls pretending to be a renter. You must be able to accurately estimate rents before you can make a realistic decision about purchasing a property.
Determine the net operating income (NOI) for properties that interest you.. Your NOI is the income you have left over after all expenses (including a vacancy allowance but excluding mortgage service and taxes) have been met. For instance, if your building earns $100,000 per year in rents (including vacancies) and has $30,000 per year in maintenance, utilities, etc., your NOI is $70,000.
Determine the cap rate for buildings that interest you. Apartment house investments need good cash flow to survive vacancies, maintenance and repairs. The cap rate is net (not gross) income divided by the purchase price. If you buy a building for $500,000 and have $50,000 annual net operating income before taxes, the return on investment (cap rate) is 10% percent. Given the problems of running a building, do you really want to buy a multiunit that returns less than you could get on a hassle-free CD?
Determine the Gross Rate Multiplier. Take the proposed selling price and divide it by the annual gross rental income. For instance, if the purchase price is $500,000 and the annual gross rents are $50,000, the GRM is 10. Compare this number against multiple listings in your area and you will have a rough indicator of how your property compares to other properties in the local market.
Have an exit strategy. Will you be upgrading the building and commanding higher rents? Turning it into condos? Making cosmetic repairs and flipping? Your strategy to upgrade the value of the building will play into the price you can pay.
Inspect every unit of your building. Look for stains indicating leaks under the sinks and on the ceiling. Check condition of wiring, roof and plumbing and make sure that individual units are properly metered. Create a list of needed repairs and use it as a point of negotiation.