Apartment Building Investments
As the residential real estate market continues to decline many real estate investors have been attracted to what might be the next great financial market to boom: apartment buildings. An ancient Chinese blessing says “may you live in interesting times”. Well, if interesting times are to be seen as a blessing then the real estate market must be full of opportunity. We probably haven’t seen a real estate market this “interesting” since the 1950’s.
When it comes to apartment building investments versus single family home investments I have found that it is easier to make a sound financial judgment about apartment building investments over single family homes. The reason is simply because when you purchase an apartment building you have the ability to view the historical financial statements. These financial statements are called the income and operating expenses and the purchaser of the apartment building can usually obtain these financial statements going back three years. The great thing about viewing the financial statement is that you get to see exactly what the gross income and expenses have been over the past three years. This allows you, the investor, to determine approximately what the property is worth as well as what the expected rate of return will be.
The income and operating expenses or financial statement of the multi-family investment that you are considering are a tool that is the equivalent of an x-ray to a doctor examining his patient. If you analyze the income and expenses of your multi-family property you should be able to determine a number of things that will affect the overall “health” and monetary returns on your investment.
The first task to perform when analyzing the income and expenses is to look closely at all of the expenses for each year and find out which expenses have increased or decreased from year to year. For example, you might find that the expenses listed for landscaping increased from $4000.00 in year 3 to $7000.00 in the most current year. This could be because the owner made significant improvements in the landscaping of the property, which could add value or it could be because he hired a new landscaper who charges more for the same service. The new apartment investor should examine every listed expense for every year and make comparisons for all years to make sure that there are no discrepancies. Where there are differences the investor must act like a detective to find out the reasons. Sometimes the discrepancies can actually represent hidden value. Using the example above, you might know of a landscape company that you currently use who will maintain the landscaping at a lower cost. Just this one difference could completely change your financial analysis of the property. This concept is known as forced appreciation. I discuss forced appreciation in much more detail in my “Buy Your First Apartment Building E-Course” found in the link at the end of this article.
In contrast, when you purchase a single family home for investment purposes you have no historical record of what rents you can expect to receive in the future. If the house was not formally a rental home then you must rely on a market estimate given to you by your realtor. This estimated rent may or may not be accurate. You also have no way of knowing what your expenses will be for that particular property. Most homeowners don’t keep a separate balance sheet for their home expenses.