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Entering the real estate world will give you leverage if you know the best type of investment property. Of course, there are several options for you in this field, but perhaps the best one for starters is to invest in small apartment buildings.
Investing in a small apartment can help you generate a passive income and give you good yields for your capital. However, like any other type of investment, investing in a small apartment building takes research, strategy, and commitment.
Take note of these basic things you need to know if you’re planning to invest your money in small apartment buildings.
Ask Yourself These Important Questions
For you to succeed in real estate investment, you need to know your goals and aim at them. Asking yourself the necessary questions give you an idea of what you want to achieve. Here are some considerations to ponder over to avoid any reckless steps.
- How much money do you need for this investment?
- What type of financing do you need (hard money loan or conventional financing)?
- What’s the estimated net cash flow?
- Do you need to hire a property manager?
- Will you have the time and commitment to be a landlord if you don’t hire a property manager?
It’s crucial to consider the financial information of the property before purchasing it. Conduct your market research and determine the price-to-rent ratio in the area where you’re planning to run your rental business. This analysis gives you the pulse of whether residents in that particular location prefer to rent or buy a home.
You should also look at factors, such as population in the area, employment opportunities, economic development, and neighborhood comparables.
Buy the Right Apartment Building
When looking for the best small apartment building you can buy, there might be multiple properties for sale that will capture your interest. However, you should practice prudence in this important matter.
Run a comprehensive appraisal of the property to ensure that you’re putting your money into the right investment. Take note of these factors before buying an investment property.
Location
You should pick a safe neighborhood because prospective tenants always consider this aspect when looking for a place to live. Learn about the safety score and crime rate of the neighborhood. You should also consider if the location is near health care facilities, schools, and transport systems.
Condition of the Property
Hire a professional property inspector to inspect the apartment building you want to purchase. Check the architectural condition of the property if there are any issues. It’s common to find minor problems here and there, but you should ensure that they aren’t difficult to fix.
Knowing the architectural condition of the building helps you determine how much repair or maintenance work is needed before it’s suitable for renting. Keep in mind that the architectural quality and aesthetics of the property can determine rental rates.
Amenities
Tenants who are looking for rental properties want amenities. Although in smaller apartment buildings you can only have limited amenities, you can provide a few things for the comfort and convenience of your tenants. For example, you can have parking spaces, an internet connection, bike racks, etc.
Learn How to Evaluate the Return on Investment
Have a rent analysis when planning to invest in a small apartment. This method allows you to assess the cash flow from the apartment rent. Find out the total monthly and annual rent amount. You can look at the rent roll, which is a register indicating the total income due each month for this purpose.
Another way to estimate ROI is through a Gross Rent Multiplier. You only need to divide the purchase price by the annual gross rent. For example, if you buy the property for $300,000, and your estimated annual gross rent is $50,000, the GRM is 8.
When the number is below 10, that’s typically good. It means that you can have your return on investment in 8 years if you purchase the building with cash. Next, compute the Net Operating Income. This number is the income left after all expenses are paid. When you have a higher NOI, it means the property has a higher value.
Then, get the Capitalization Rate, which is the ratio of the property’s annual net operating income against its purchase price. If your NOI is $40,000 and your purchase price is $300,000, you have a 13.3% Capitalization Rate or annual return on investment.
Takeaway
Investing in a small apartment building can be a lucrative capital builder if you have a good investment strategy. Market research, finding the right type of property and location, and commitment to achieving your investment goals can help you succeed in this endeavor. Make sure to follow the tips we have discussed in this article for that purpose.
