An apartment complex walks a fine line between commercial and residential real estate. It’s an ideal investment when your goal is to maximize recurring income with multiple units and limit vacancy risk. For some investors, apartment complexes can diversify a growing portfolio. For others, they’re the only types of properties they’ll buy.
Apartment complexes are stable investments. There’s a reliable pool of tenants who are specifically looking for apartments, and there’s a generous economy of scale that you reach when it comes to management and maintenance fees.
If you’ve never invested in an apartment complex before, there might be a bit of a learning curve for you. It’s different from buying smaller properties or single-family homes. It’s different from buying a commercial office building or a warehouse.
Let’s talk about what you should be looking for when you buy an apartment complex in Idaho Falls or Pocatello.
Look at Your Location
When it comes to investing in an apartment complex, location is even more important. You’re going to attract residents based on where your building is located. It must be central. Ideally, it will be close to shopping, grocery stores, and entertainment. Transportation and parking will be easy to access.
A good broker will know the neighborhoods and the properties that are available. Decide which neighborhoods are most attractive to you. Your targeted location will also depend on the asset class or building type that you’re looking for. Is it important to invest in a high-end luxury building? If so, you’ll be looking in different areas than if you’re trying to buy a building that contains a diverse mix of affordable units.
Keep your search narrow. If you’re willing to consider the entire city, you may quickly become overwhelmed and lose sight of your investment goals. Decide on the building class and your ideal residents, and then the locations will make themselves known. Tour all Tour potential locations thoroughly, and re-visit the areas at different times of the day and night. Go there on weekdays and weekends. Check the traffic patterns, the foot traffic, and the noise level. How much activity is there? Are the streets quiet at night?
Start your apartment complex search with location in mind. You’ll save yourself time and frustration.
Examine Building Fundamentals
Is the apartment complex in good shape, physically? This is important because buying a building that will need a lot of work is going to be expensive. You’ll take on some time-consuming projects that may delay the income you’re able to collect. You can have trouble with financing, too, when your building cannot pass inspections or remain up to code.
Here are some of the basic standards that any good apartment complex will meet:
- Good roof condition. When was the roof replaced? Have there been any issues with it? How often has it been inspected?
- Siding. Is the siding intact? Is it clean?
- Windows. Do the windows in the building open, close, and lock? Are they well-insulated?
- Drains and plumbing; specifically hot and cold water pipes. Are there frequent leaks? What have plumbers found previously to be issues within the pipes and drains?
- Electrical systems. Are they safe?
- Condition of the common areas such as lobbies, elevators, and courtyards.
Once you’ve satisfied yourself that the building is in good shape, think about your money. Conduct an analysis of your potential cash flow. Put together consolidated cash flow estimates to understand your typical expenses.
What type of units are you looking for? There’s a demand for studio spaces, and you’ll also want to consider between one and three bedrooms and one and two bathrooms.
Occupancy Levels and Apartment Complex Purchases
Consider the occupancy level of the apartment complex you’re thinking about buying. If it’s new construction, what kind of pre-leasing numbers can you look at? If it’s an older building, do you have an idea of what the vacancy rate and turnover rate looks like?
Generally, you don’t want the occupancy rate to slip below 70 or 75 percent if you’re going to buy an apartment complex. In the current market, we’re more comfortable advising you to find a complex that’s at or near 90 percent occupied.
When you encounter an apartment building or complex for sale that’s full or nearly at capacity, you’re in a strong position right as you close the deal. There’s less marketing that’s required, and you won’t have to worry about improvements and upgrades.
Buying a property that isn’t completely full provides its own unique opportunities, but it also requires that you spend a lot of time and money leasing those units.
If there is a lot of vacancy, why? Are the rental rates not competitive? Are tenants eager to leave because maintenance isn’t responded to? You’ll want to take a look at retention numbers and all the data that shows you why the apartment building is competitive or lagging.
Come up with a plan to bring the building to the occupancy level you’re comfortable with before you buy. It might take you two or three months to get the vacant units rented, but if you have an idea of how to do that, it’s not terribly startling to have 10 or 20 percent of the rental homes empty.
Look for a Good Mix of Unit Sizes and Floor Plans
Diversity in units is a selling point. When you find a complex that can offer a number of different floor plans, layouts, and sizes, you’ll be able to attract a wider range of tenants. Some renters are seeking studio spaces or one-bedroom apartments. Others desire more space and want a two or three-bedroom model. For some residents, more than one bathroom is important. Remote work is here to stay, and some residents are looking for a dedicated work space.
You’ll want to appeal to as large a tenant pool as possible. Make sure you choose a complex that can attract a single resident as well as roommates or a family of four.
Examine the Apartment Complex’s Financials
Part of your due diligence before you buy an apartment complex will be to look closely at the financials. You’re investing to make money, and you don’t want to sink a large sum of money into a building or a community that will only drain your financial resources. Take a look at:
- Rent rolls. What are the rents residents are currently paying? When were they last increased? How much do they increase at renewal time?
- Lease agreements. Check to see what the leases include and verify that they’re legally compliant in Idaho.
- Review maintenance records. Is there any deferred maintenance lurking in the building? What is the process for responding to repair requests? Look for evidence of preventative maintenance.
- Profit and Loss statements. What is coming in? How much is being spent? Where does the cash flow shake out?
Consider any capital improvements that were made recently and consider which might be necessary in the next year or so. You’ll want to review financials from the last year or two.
You’ll need a sense of how utilities are handled, too. Are they included in the rent or are there separately metered units? If you’re interested in having a Resident Benefit Package or some system where you provide things like utilities to your tenants in exchange for a monthly fee, you’ll need to make sure the complex currently supports that. Immediate changes once you take ownership of the complex might be difficult for your residents.
Partner with a Property Manager
You know that once you buy the apartment complex, you’ll rely on a local property manager to take care of the leasing, management, and maintenance. You’ll have your management company in place to collect rent, enforce the lease, and manage the tenant relationships.
You need more than property management, however. You need asset management.
Find a partner you can trust with your investment goals and your most valuable assets. Leverage property management relationships before you invest. A good property manager can tell you what you should be earning in rent. We’ll tell you how much maintenance might be necessary to keep the building attractive and safe. We can talk about legal compliance and regulatory issues. We can discuss marketing plans if the occupancy rate is low.
Working with a property manager before you buy will deliver a lot of value and help you have a better investment experience.
We work with investors who are looking to grow their portfolios all the time. This is a unique market with some fantastic opportunities. Let’s talk about your investment goals and see what we can find in terms of apartment complexes.
If you’d like some property management help in Idaho Falls, Pocatello, or the surrounding areas, please don’t hesitate to contact us at Jacob Grant Property Management. We can help you make a wise investment.