How to Buy an Apartment Building for Residual Income
Many dream of using an investment vehicle to provide income without having to work a full-time job. Finding the right investment may require a large amount of money. Some investors have relied on residual income from apartment buildings to supply them with the needed money. Perform research and due diligence and seek advice from your attorney to realize a profit from your property.
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Instructions
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Determine how much money you have available for a down payment and expenses during your first year of ownership. In most cases, you need at least 20 percent of the sale price for a down payment.
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Research rental and vacancy rates in your area. Read the local paper or visit online sites to find average rents in the area where you want to buy. Visit the U.S. Census Bureau site to obtain national rental vacancy rates.
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Register with commercial property listing sites and use them to search available properties. Use the income information provided only as a guide. You will receive detailed information when a purchase contract is signed.
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Have your attorney or real estate agent write a Letter of Intent to purchase an apartment. It outlines a purchase offer, the closing date, the loan amount and other details.
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Inquire with your commercial lender about the mortgage payments on the property under review. Many commercial loans have steep points and fees associated with them, so shop around.
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Sign the purchase contract once you have agreed on a negotiated price and terms and your attorney has reviewed it. The contract details specific dates by which to complete your due diligence.
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Order a commercial inspection of each apartment unit. Review the report carefully and call a contractor to get an estimate of any needed repairs.
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Review the seller's document packet. It should include 2 years of tax statements for the property, lease agreements, a rent roll of all occupants, with rental rates and payment schedules, vendor contracts and property bank account statements.
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Calculate your expected residual income. Call the county tax assessor's office to estimate the property tax. Contact a commercial insurance agent for the cost of a policy. Use prior utility bills, property management fees and other reports to compile a total cost of monthly expenses. Add the rents received and subtract the mortgage debt, vacancy rate percentage and all expenses.
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Obtain approval for a commercial mortgage and close the purchase. Your lender will order a rental appraisal and request a title report prior to loan approval. Sign all documents to complete the transaction.
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Tips & Warnings
Buy an apartment in an area no further than you can drive. Purchasing apartments in other states makes you vulnerable to relying on property management companies for your residual income.
Do not place credence on pro forma operating statements; they may represent future projected income and expenses, not actual accounting from prior years. Do not visit an apartment property or speak with tenants without permission.
References
- HSH.com; How to Buy and Finance Apartment Buildings; Gina Pogol
- The Bigger Pockets Blog; Buy an Apartment Building -- How to Structure Your Offer; Ted Karsch; June 30, 2008
- Mortgage Match; How to Buy an Apartment Building; Cassie Daniels
- The Real Estate Blog; How to Buy Apartment Buildings; Steven Gillman; November 2, 2007
- Loans.com: Commercial Financing and Preparing Pro Forma Operating Statements on Commercial Property
