14 May 2019
Apartment Development and Rentals: 5 Tips to Help You Navigate Better
Whether you’re looking to develop an apartment block to sell on to end buyers or as rentals that you’ll have managed, these are potentially choppy waters to navigate for first timers.
While investing in a pre-existing apartment building might seem easier than funding a new development – it’s certainly less costly in most cases – it’s not without its challenges either. However, like most business-related activity, businesses earn money by dealing with difficulties and overcoming them.
Here are five tips on apartment development and owning multifamily rentals.
1. Make Use of a Broker
When you’re looking for apartment building financing, a regular bank is not going to fully understand what you’re trying to achieve. They’re used to approving auto loans and personal loans or a mortgage for a single-family home.
Unfortunately, they really won’t know where to start with a multifamily apartment development or existing multifamily building. At best, they’ll consider it, take forever to look the details over, and then eventually reject the loan application. This will waste your valuable time and hold up your project unnecessarily.
By using a broker, they are able to locate suitable lenders who are familiar with multifamily apartment lending. These lenders have existing loans on their books for extensive properties – perhaps a 50-unit real estate development – where they’re happy with the deal they’ve done. As such, they welcome new real estate deals that are well thought out and clearly come from an apartment investor who is serious about what they’re doing. They might not be in the calibre of Grant Cardone with his broad portfolio of multifamily properties, but they have a vision in mind just the same.
2. Know the Likely Income Yield
When buying or developing a multifamily property, it provides the benefits of economies of scale. There’s diversification across many units, most of which are rented out. Maintenance can be organized for the whole property and not on a per unit basis. A maintenance crew can attend to multiple issues in a variety of apartments on a single visit which is very efficient.
It’s important that all these kinds of things are considered while deciding between apartment properties to purchase or develop. The gross yield from the rent roll of the building must be calculated. However, a sensible vacancy rate must also be applied as no property is rented 100% of the time constantly.
If you’re buying into a property with renters already present, they may have below market rents that cannot be raised for a period of time. If there’s long overdue maintenance required throughout the property including renovations and improvements needed inside each apartment which can only be completed when each one is vacated, then this will drag the process out and add to costs. Such costs must all be considered because they reduce the net operating income (gross yield minus expenses). The biggest mistakes most real estate investors make is either forgetting some of the likely costs or badly underestimating them.
3. Don’t Rely on Government Loans
If your plan is to secure government-backed lending to get your real estate dreams off the ground, you may require either a lot of patience or to try a different tact. While yes, these types of loans do exist and can be used to invest in real estate, they are slower to arrange and get the funding through than other loans that are available. While you’re waiting, the property you’ve found for purchase may go under contract with another buyer because their funding was in place sooner.
There’s far more paperwork needed to complete to even apply for these types of loans which require extra approvals. The forms go into minute detail in places which can get tedious and send investors chasing their own tails. All documentation is required to be less than 90 days old – other than the appraisal -- and should it age out, then need documentation will be required.
It can easily require six months to get funding through. This is a long time to have a property that you’re looking to buy and hope you can get the loan approved before someone else makes a decent offer on it. Motivated investors don’t find waiting half a year as acceptable. There are also significant loan amount limitations on these types of loans too.
4. Rehab and Flip? Use Short-term Lending
When you’re planning on purchasing an apartment building to rehab it and then flip it just a few months later, take out a short-term loan instead of one on a longer duration.
A hard money loan, or one that’s over a shorter term, provides finance for short rehab projects as interest only because they are secured against the residual property value. With a short-term loan, by only paying the interest and origination fees, not repayment principal, available cash can go into the refurb process and not be used to repay the lender.
Using a broker to source an interest-only loan for a ‘rehab and flip’ project is probably the best idea. It’s far too specialized of a deal to go through a regular bank.
5. Get a Better Sense of Why Apartment Complexes Work Well
Walking around a development, talking to the renters, and getting a better sense of the place is a good idea. You don’t have to own the property yet. Just by talking with people about their impressions of the place, how it’s run and whether they have any problems with their rental provides useful insights into owning and operating a multifamily investment.
Keeping the tenants happy is just as important as lower maintenance costs. By doing more to make their home and surrounding area a pleasant one to live in, it’s appreciated by the tenants, many of whom have lived there for years or decades already.
Investing and operating an apartment complex is different than owning a prime office building in a downtown location. There are different requirements, expectations and challenges to overcome. While flipping a piece of real estate is possible, most investors buy in to own a complex for many years.