If you’re looking for a potentially good source of income as a real estate investor, you might consider buying an apartment building, which is usually categorized as a residential property with at least five units. Apartments buildings can offer investors more benefits than single-family residences and duplexes. But apartment buildings also present some challenges and complexities that the others don’t. Read on, then, to find out what you need to know about buying apartment buildings in Cold Spring.
Pros and Cons of Buying Apartment Buildings
First, before you jump into buying apartment buildings in Cold Spring, you should be aware of both the pros and cons so that you can make an informed decision.
Pros
- Decreased risk – “Because they have many units, owners of apartment buildings don’t need to worry as much about the risk of vacancy. Unlike a single-family rental house, when one tenant moves out, the owner still has income from the other occupied units to cover expenses.”
- Lower maintenance costs per unit owing to economies of scale – “Costs for a new roof, for instance, are spread over all the units in the building.”
- Opportunities for additional income – “Apartment owners can generate additional income by charging for extra amenities. These can include laundry facilities, vending machines, parking spaces, and upgrades. Owners of rental properties also receive certain tax deductions.”
Cons
- Tenant turnover and costs – “Compared to single-family rental properties, apartment tenants are more likely to move often. They are also less likely to take good care of the property. These differences mean higher overall costs for vacancies and maintenance.”
- Management challenges and costs – “Managing an apartment complex with many units can be challenging. The job often goes to a property management company or an on-site manager-employee.”
- Longer selling time – “Apartment buildings take longer to sell in the event an investor wants to exit. Because they are less liquid, an investor who buys an apartment building should have other liquid assets available in case of need.”
Location
One of the most important considerations in buying apartment buildings in Cold Spring or anywhere else is the location. “After all, the primary driver of value in any real estate is location.”
But what you have to keep firmly in mind with respect to location is that “for apartments, what makes a good location might be very different than other types of real estate investments, especially if your perspective is based on your personal residence. Always remember that you’re not the one living there.”
Some of the things that indicate an apartment building in a good location are . . .
- Access to transportation and easy travel routes
- Major employers in the area
- Proximity to amenities and shopping
- Few other apartment buildings in the area
Industry pros suggest that when you’re assessing a location you “[t]hink about how much the rent is and why someone willing to pay that amount would like the location. If you cannot come up with three compelling reasons, you should probably pass on the location.”
It’s also a good idea to consult a Cold Spring agent by calling (914) 407-3322. An experienced agent can help you assess locations and help you make the right decision.
Physical Condition
Before buying apartment buildings, you also have to assess the physical condition of individual buildings.
Keep in mind that in assessing the physical condition, you’re not so much concerned about the smaller things that a home inspector would look at. Rather, you’ll be looking at “the major systems of the building, such as roof, heating and cooling systems, electrical and plumbing, windows, exterior, etc. You can find local contractors who specialize in each category to look at each system and give you opinions during the due diligence period. This feedback will help you determine if a system is sufficient or needs short- or long-term attention.”
If you do find any short-term or long-term repairs that need to be taken care of, you’ll have to have the cash on hand to cover the costs. For such costs in the future, “[y]ou should estimate when you think systems will need to be replaced and their cost, and analyze their lifespan once installed. You can then estimate how much money you need to set aside for these items.
Net Operating Income
When buying apartment buildings, you will need to analyze the net operating income (NOI) in order to determine whether a particular apartment building is a good investment. “An apartment building is a good or bad investment based on how much money it makes versus how much you paid, including the cash you used.”
What you will need to do in analyzing the NOI is to “look at all the revenue and expenses for the way you plan to run the building.” And here’s what you need to take into account when making this analysis . . .
“[W]here will you set rents to maintain your occupancy threshold? Some investors like their buildings to always be 100% occupied and, in doing so, forfeit some rent, while other investors run their buildings at 90% occupancy to maximize rents. Do you plan to make improvements to the building, and if so, where will that move rents? What are other sources of revenue (anything from pet rent to move-in fees to parking)? Will you manage the building yourself or hire a third-party manager? Will you do minor repairs, or do you need a contractor to fix things? Who will paint the unit when a tenant moves out? All these items affect either the revenue or expense, meaning the NOI.”
Property Taxes
And don’t forget to factor in property taxes when assessing and buying apartment buildings. “Taxes are usually the biggest line item of expense.”
“Each city, county, and state has a different methodology for calculating property taxes, many of which are based on the purchase price. Others are based on assessed valuations, which are calculated periodically. Still, others are entirely random, as ludicrous as that sounds . . . A significant movement in property taxes can quickly erode all the upside you planned in the investment.”
To find out what you’re looking at when it comes to property taxes in Cold Spring, you can contact an experienced agent at (914) 407-3322 or consult a local tax professional.
Ensure Your Success With a Cold Spring Agent
Apartment buildings can be a lucrative purchase for investors, but they also come with a great deal of risk and expense. You can, however, mitigate the risk and minimize the expense by working closely with an experienced local agent. So if you’re an investor considering buying apartment buildings, don’t hesitate to contact us at (914) 407-3322.