Apartment Investing — Finding Value in Cosmetic Repairs

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The most important aspect of  apartment investing  is having the ability to locate an apartment building that offers the potential to show you a profitable return on your investment. It is nearly impossible to realize a profit on an apartment if you pay too much because when you pay an inordinate amount to purchase the building you will be financing a larger amount of money. The mortgage payments and maintenance expenses on your property will eat up all of your profits. The key to apartment investing profitably is to find “diamond in the rough” opportunities that other investors have passed by. You need to be looking for ugly duckling apartments that have some form of cosmetic deficiency that can be repaired inexpensively, thus adding value quickly to the apartment building.

Here is a list of characteristics you should look for when apartment investing:

  1. A very high occupancy rate. Look to invest in apartment buildings that have an occupancy rate between 98% and 100%. High occupancy rates mean that the rents being collected are probably below market which is why tenants are choosing to stay. Look for a high occupancy rate stretching back 24 to 36 months. This information can be verified on the rent rolls.
  2. Old and out of service windows that won’t open or close properly. Windows can be replaced easily and will add fast value to the apartment building by increasing energy efficiency and improving aesthetics.
  3. Light fixtures in common areas that are paid for by the landlord. Most bulbs today can be replaced with energy efficient alternatives.
  4. Low rental rates compared to similar properties in the same area. Look for an apartment building that has a high occupancy rate for three consecutive years. Tenants who don’t move away are probably staying to take advantage of the low market rents.
  5. Poor property cosmetics. Look for paint that is peeling off of the walls, staircases that need repairing, and broken furniture in the common areas, overgrown and unkempt landscaping, trash bins that are full or overflowing, outdated and broken laundry equipment. Cosmetic repairs can easily be fixed and should add instant value to your investment.
  6. Outdated and worn out kitchens or bathrooms. Look for cracked countertops and vanities, stoves that are more than ten years old, loud refrigerators, rusted light fixtures, old ceiling fans and outdated tiles. All of these issues are cosmetic also and are easily improved.
  7. A neighborhood where the other properties are well kept and are in better condition. Ideally, you should try to locate an apartment building in an area where the majority of real estate is single family homes. Home owners generally take better care of their property and the pride of ownership shows through higher real estate values.

Photo Credit: jhetzel

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