Maybe you’ve reached the point in your real estate investing career where you’re ready to buy an apartment building. If done right, with careful planning and due diligence, it can be a lucrative investment move. You just need to be aware that buying an apartment building is a much more complex undertaking than investing in a single-family home or even buying a small multi-unit property. It requires more financing, greater cash reserves, and a deeper understanding of real estate investing’s financial and management aspects. So to give you a leg up, here’s how to buy an apartment building in Chicago.
Decide Whether It’s Right for Your
The first part of preparing to buy an apartment building in Chicago is deciding whether investing in an apartment building is right for you and your business model. And that means having a pretty firm grasp on the pros and cons.
- Recurring income from tenants in multiple units
- Less risk owing to the diversity of having the investment spread across many units
- Relatively low per-unit maintenance costs
- Financing based on the property’s income potential
- Potential to increase value by increasing rents
- The potential for extra sources of income like vending machines and coin-operated laundry
- More intensive and time-consuming management duties than with single-family properties
- High tenant turnover and costly vacancies
- Lack of tenant concern about treating the unit properly (lack of care)
- Higher overall maintenance (both tasks and expense) than with single-family properties
Determine the Best Kind of Apartment Building for You
The next step involves determining the kind of apartment that best fits your investment needs and business model. The three most important considerations for buying an apartment building in Chicago are your financial criteria, number of units, and class of apartments. The first two are fairly self-explanatory, so let’s look at the class of apartments:
These are generally newer luxury units less than 10 years old, but if they are older, they have been substantially renovated. With amenities like pools, clubhouses, and tennis courts, Class A apartments are most often mid-rise or high-rise buildings.
Up to 20 years old, Class B apartments are well built and have been well maintained. They may or may not have amenities, but if they do, they are more dated than those of Class A apartments.
These can be up to 30 years old and usually have no or few amenities. Class C apartments also usually need some repair and renovation.
Generally, more than 30 years old, Class D apartments are often found in the lower socio-economic areas where subsidized housing is common. With no amenities, they often need extensive repair and renovation.
So how do you know which class is right for you? It all depends on the return on investment and potential rental income. For example, would you be better off buying Class C or D apartments at a lower purchase price and then making renovations as you can afford them? Or would you generate more income by spending more initially for Class A apartments that need no repairs and command higher rents?
Gather Information and Do the Math
The next thing you have to do before you buy an apartment building in Chicago is to gather information and do the math to see if it really would be a wise investment. At the least, you should get current month’s and previous six months’ income and expense statements, rent rolls, and service contracts. Also, take a close look at the immediate area’s vacancy rates, and talk to tenants to get a genuine opinion of the property’s condition and any potential problems. Finally, be sure to see some proof of rental payments and ask to see copies of lease agreements.
In addition, you must do the math before you buy an apartment building in Chicago to make sure it will yield a sufficient return on investment. For the most part, this means how much you’ll have left over after subtracting property expenses – mortgage payments, maintenance/repairs, taxes, insurance, and so on – from rental income.’This amount will be your net operating income.
Lean on the Experts
Buying a multi-family property can be an overwhelming experience involving a huge amount of money and with a lot of variables that have to be factored in. A qualified real estate professional can help you navigate through the whole complicated process and help you avoid costly mistakes. And we can provide the expert real estate investing assistance you may need.