Making money by buying apartments takes time. Right off the bat, you'll need to find the right real estate investment properties, and that takes a lot more than perusing pretty pictures in classified real estate sections -- you'll need to know what you're looking for and how to find it, and be willing to invest the time to investigate the merchandise for yourself. Asking an experienced investor, lawyer or commercial real estate agent for advice and mentoring throughout the process is a good way to achieve your goal of building wealth through multi-family housing. But don't expect to get rich quickly if you are a first-time investor, and don't expect to turn it into a hands-off career even if you find the perfect properties. Even with a property manager in place, you'll need to spend time overseeing the operation to ensure it's run properly for maximum returns.
Conducting proper research before you make a purchase helps you avoid unexpected surprises that can happen with investment real estate. If you are inexperienced, find a property within driving distance so you can supervise its management. Once you perform a preliminary review of essential documents, your agent or attorney will prepare a contract, which should specify a certain period of time, such as 14 days, for you to review disclosures. Ask for the rent histories, leasing agreements, property bank account statements and income tax forms for the last two years or longer. You're looking for properties that produce solid and consistent cash flows, and this is how you will identify them.
If you want to make a monthly cash flow from owning an apartment, you must be certain the property will be profitable as soon as you buy it or within a reasonable period of time, such as the first year. If you need to make improvements and fill vacancies, you may not see a positive cash flow initially. To ensure you have all the information to calculate your income and expenses, estimate the new property tax amount by consulting with the county recorder's office and look at the costs for utilities and contract services, such as pest control. Factor in the monthly mortgage payment and determine if the actual rent collected can support the total cost to operate the property.
Apartments don't gain value in the same way single-family homes do. The economy plays a role in market value of multi-family units, but the largest impact on the worth of an investment property is how it operates as a business. An apartment that is fully occupied with paying tenants, and does not need major repairs, increases in value when more money is collected through higher rents and when expenses are under control. An apartment that is operating at its best when you buy it may not appreciate as quickly as a building you improve by filling vacancies and completing required improvements. But a fixer-upper with a poor marketing background may not give you enough cash flow to cover your expenses for a considerable amount of time.
Screen your prospective tenants before you sign a lease. They may not have a good credit history, but you can look for regular employment and income, previous evictions or other factors that help you determine if they are likely to pay the rent regularly and on time. Approach your tenants to collect rent if it's not paid on the day it's due. If tenants don't pay, or if they violate the lease agreement in other ways, start the eviction process as soon as your jurisdiction allows. Local areas can legislate their own landlord-tenant rules, so check with your apartment association or city office to stay within the law.
- JasonHartman.com: 5 Important Tips For Rental Property Investors
- eRate: Documentation for Commercial Loans
- John T. Reed: Positive Cash Flow
- CRE Online: Investing in Apartments: Cash Flow, Appreciation, and More
- Moolanomy: Top 5 Tips to Investing in Rental Property for Fun and Profit
- Illinois Legal Aid: Renting the Right Way: Part One -- Before You Rent
Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.