Buy an Apartment Building — With Warnings

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Finding the right apartment building to buy for an investment can seem like an overwhelming and daunting task for the first time apartment building buyer. However, if you know a few things to look for when purchasing an apartment building everything becomes a lot easier. There are good things to watch out for and some very bad things as well. The good things allow you to locate apartment buildings that have a strong chance of making you money over the long run and the bad things mean that you will have problems making profits.

Here are some warning signs to watch out for when locating apartment buildings to buy. If you see that your potential apartment building investment has any of these attributes, run the other way.

1) Rent controls that limit the amount of rent you charge or limit the amount you can increase rent. It makes no sense to invest your hard work and energy into any enterprise that will not reward you for your labor. With apartment building investing, the reward comes in profits and positive net cash flow. If rent controls do not allow you to charge a fair market rent then you will always be struggling to pay your bills and make a profit. There are thousands of apartment buildings out there with no rent controls.

2) Structural flaws and deficiencies in load bearing walls or in the apartment building foundation. The key word here is “structural”. As an investor you don’t want to purchase a building that has serious structural flaws because the repairs on these problems cost a lot more money then you might think. Even if the building is apparently priced to reflect the cost of the repairs it is best not concern yourself with a building that is in extremely bad physical condition. There may be unseen issues that could eventually lead to the building becoming condemned. The building also may not qualify for bank financing if the problems are severe.

3) Environmental issues such as toxic mold or buried oil tanks that are leaking. Make sure you research your investment very well. Most states require sellers to disclose the presence of environmental hazards on a property; however, it is up to you to do your due diligence. Mold remediation and the removal of buried oil tanks can be very costly.

4) A large majority of the units are occupied by tenants who are receiving subsidized rents from the government. The presence of many subsidized renters can mean that the tenants are gainfully employed. This can lead to problems such as crime and drug abuse.

5) An area with a large surplus of vacant units. If an area has vacancies at 15% or above then you will have trouble renting your units. Watch out for areas that are offering huge incentives and free rent to prospective tenants.

6) A bad neighborhood. Do some research and determine if the neighborhood you are looking at is safe place to live. Ask yourself if you would feel safe living in that neighborhood with your family. Drive around the neighborhood at different times of the day and night. Are there people lingering on the street corners during the week day? Does there seem to be an unusually high level of police activity?

Photo Credit: turkeychik

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  1. Before you go to the trouble of digging down to even this level of specifics on a given apartment property … we advise you to research the market to make darn sure you know what phase of the Market Cycle your location is in.

    Market forces will determine much of your return in Commercial Property – you must be investing in a location which is in the right phase of the Market Cycle – before you even think about looking at individual properties.

    This is a classic mistake of the residential investor trying to pick up an apartment building and not understanding the fundamentals of Commercial Property.

    Learn market cycle theory first … then look for projects with upside in those favorable markets.

    And NEVER pay more than the building is worth in ROI. What other people see as Problems are only problems when they negatively affect your returns.

    My two cents,

  2. The list is a good one and might seem just logical to some, but without experience a few of these points can be easily over looked.

    >>And NEVER pay more than the building is worth in ROI. What other people see as Problems are only problems when they negatively affect your returns.

    Thats an important point! Thanks Dike.

  3. Lani Clark Morand on

    Hi Ted; I’m enjoying many of your articles on apartment investing. Your writing style is clear, concise and informative — and so a pleasure to read! I especially appreciate your use of numbered points. I’m sure accuracy is important to you, so wanted to point out the “NOT” appeasr to be missing from Paragraph 4) “A large majority of the units … many subsidized renters can mean that the tenants are NOT gainfully employed.” Cheers!

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