Commercial Real Estate Investing
If you have an interest in investing in commercial real estate, there are many potential market segments worthy of consideration. These segments include apartment buildings, retail developments, office complexes, industrial warehouses, mini-warehouses, raw land, and mobile home parks. Each of these segments vary greatly based upon location, pricing, risk, rental market conditions, investor demand, quality of income stream, plus the availability and terms of financing.
The following is a simplistic overview of investing in apartment buildings, but not an attempt to explain the tax ramifications, potential gains and/or losses, or other consequences of investing in apartment buildings. Our hope is to give you a general understanding of what an average investor looking for a typical apartment building investment considers prior to making an investment. The format is based on frequently asked questions with answers. To fully understand a particular investment opportunity it is important to discuss your objectives clearly with your agent, tax advisor, and probably your attorney, prior to making any investment.
Why apartment buildings?
Apartment investments offer relatively low risk combined with the ability to keep pace with or lead inflation through short-term leases. This allows for the potential for increasing income as the market rises. Apartment investing may produce both cash flow and equity appreciation returns. Investment returns are generally commensurate with risk level. Higher returns may be generated by higher risk property types or by accepting lesser locations. Paragon Real Estate Advisors focuses on apartment buildings with lower risk, and strong investor demand. In the Northwest single-family home prices are often beyond affordability for a majority of the population, which make apartments a permanent necessity.
How much cash/equity is required to get started?
The average down payment required for investing in apartment buildings is approximately 30% of the purchase price of the building. The amount of equity invested in an apartment can change the risk associated with an investment, and affect investment returns. A larger down payment is generally considered safer.
How do I qualify for a loan for the balance of the purchase price?
The building qualifies for the loan and you provide additional security to the lender. Most lenders for apartment buildings require you to personally guarantee the loan; however, they won't issue the loan unless the building generates sufficient cash flow and provides a margin for error. Lenders have a lot to say about how much cash is invested in an apartment offering.
How do you manage the investment?
There are many ways to approach this issue. Some people prefer to manage their properties themselves while others feel their time is more productive elsewhere and turn the management of the property over to a professional. A basic rule of thumb is that any building with 20 or more units will support the cost of professional management and a live-in manager. A 10 to 20 unit building will usually support a live-in manager only who will perform routine maintenance tasks, leasing, and banking. Buildings smaller than 10 units usually require the investor to be the manager. So, the larger the building the more management you can afford. Professional management companies are plentiful in the Puget Sound region and you can have many to chose from.
How do you analyze a possible investment?
Do not buy a building unless you are given the opportunity to fully review the past two years operating history of income and expenses and are able to fully inspect the entire building, including the inside of every apartment. Some investors even insist on reviewing the individual tenant files prior to completing their analysis of a building. The detailed data of operations and an interior inspection are usually not performed until after agreement has been reached for the price and terms of a sale. A brief analysis of a possible investment is usually performed prior to making an offer to purchase. The brief analysis should include a review of some representation of the financial operations of the property and the investor usually views the building from the exterior. The detailed analysis, commonly referred to as the "due diligence", should consider at least the following: gross rental income, vacancy loss, operating expenses, debt service, and cash flow. The object of the detailed analysis is to develop an understanding of the likely performance of the investment and to identify areas of concern. Other relevant factors are the price per foot, the price per unit, the location, and the overall condition of the building - measures generally used to quickly compare investments. A typical apartment investment provides some cash return after debt service, with much or all of the cash flow sheltered by depreciation.
How do you get started?
McQuaid Commercial agents have significant expertise and knowledge of apartment investments. As an alternative, you can do a significant amount of research on your own. In the Sunday edition of the Seattle Times newspaper, following the homes for sale section, you will find apartment buildings for sale. You can begin by looking at those ads and obtaining information directly from the advertisers and then going to the properties and viewing them yourself. Additional information that is useful (and may be provided by the advertiser) is a summary of sales comparable to the property offered for sale. While you are at the property for sale, it is a good idea to check out rents at other buildings in the immediate area. To view a list of properties for sale by McQuaid Commercial, click here and get started.
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