An apartment building can be a lucrative investment if done right. A good investor seeks out the best advice, gathers all the information he or she can and then chooses the right building.
You’ll want to know what your goals are before you embark on this venture. If it is to make a bunch of easy cash in the short term, then you are likely in for a disappointment. The ROI for a first-time multifamily property investment is not going to be immediate, so don’t expect much in the way of big profits for the first couple of years.
Also, you should keep in mind the time frame that it will require in order to get your multifamily property purchased and running at full capacity. The acquisition and financing may only take six months or so; however, it may be a year or even 18 months before you are able to stabilize the investment, make any necessary repairs, and hire a licensed property manager to assist you with the day-to-day operations of the building.
Potential investors get to know local property management companies, speak with other investors and find a mentor. Savvy investors won’t allow emotions to govern any final decisions; they’ll do the math and ensure they can afford any loans.
Here’s how to make a great investment in an apartment building:
- Learning as much as you can about investment properties will help ensure you make the right choices.
- Read everything you can. Attend legitimate seminars in person and online. Your local city or provincial agencies may have seminars, too.
- Seek out experienced investors, and ideally, see if one of them will mentor you. Talk to property management companies and take steps towards joining an investment club.
- Nothing compares with learning from the practical experience of other investors to make smart investment decisions—and watch your portfolio grow.
How to qualify
Before an apartment loan is approved the lender might consider more qualitative information to try to understand the borrower’s experience as a rental property owner or manager.
The borrower’s credit score, income and personal and business tax returns will likely be considered along with two years’ operating statements and a current rent roll for the property.
The most important property metrics are:
- Net operating income: The annual income, minus expenses that a property generates from its operations.
- Debt service coverage: Measure of cash flow relative to debt payment obligations.
- Loan-to-value (LTV) ratio: A measure of the loan amount relative to the value of the property.
The property has to service its debt at a comfortable margin. Borrowers who need more flexibility might want to turn to a small bank. They typically look for a 30 percent down payment and credit score is important, but it’s not a deal-breaker.
Loan terms and types
Apartment loans can be long term (25 or 30 years) or short term (five, seven or 10 years). Interest rates can be fixed, variable or hybrid, which start out fixed and then reset or become variable after a specified time period. Shorter-term loans can be renewed or refinanced at the end of the initial term, though the interest rate likely will adjust and some fees could be involved.
Borrowers typically pay a loan origination fee and customary closing costs, including appraisal, title and escrow costs, plus expenses for any inspection, environmental or other due diligence reports. Property insurance is a must. Flood insurance may be required if the property is located in a government-designated flood zone.
Looking to hire a licensed property management company?
Braden Equities Inc. has been successfully managing condominium buildings in Edmonton since the 1970s. A lot has changed since then, but our commitment to the residents living in each building we manage has not. Contact us today.