Flipping apartment buildings
Flipping properties can often be a very lucrative proposition. However, buying a house and fixing it up before another sale is one thing; flipping an entire apartment building is another. In many ways, the latter is a more complicated process. Don’t worry, though; we’ll explain everything you need to know in order for an investment into flipping apartment buildings to be a success!
The Basics
Obviously, a single-family home would be much simpler to flip than an apartment building. However, the latter could bring you greater profits, if you play your cards right. But the question is - what is the difference between the properties, besides the obvious physical one? Primarily, the biggest disparity appears in the ways that the different properties are valued. Not taking this into account is a common mistake.
When it comes to houses, as in single-family homes, most of them are valued using the so-called comp, or comparable method. That entails taking a look at similar homes that were recently on the market and using these to set a value on the basis of their similarity. To put it in simpler terms - if the house that’s right next to yours was sold for a hundred bucks, and it’s identical to your home, your house would also be worth $100 in the same market, in theory.
Investing in flipping apartment buildings is lucrative, but also requires significant starting capital.
Conversely, apartment complexes are priced differently. Their selling price is generally viewed on a ‘cap rate’ basis. So, what is this? The capitalization rate is a figure we reach by dividing the net operating income (NOI) of the property by its buying price. In other words, a cap rate would be the yearly return on the property, but before debt servicing. So, while you’re flipping apartment buildings - you should focus on the property’s NOI.
Other Factors
Naturally, the location and the aesthetics of the property are pretty important as well; they can definitely make a huge difference. After all, a property with minimalist apartment design that’s currently trending could go for a lot more than a badly furnished place. Let’s say that you’ve got two properties that can produce an identical NOI. But, with one being rundown and in a bad neighborhood, and the other being in good shape and in a fine area where people live better. In that case, you’d be able to sell the better-looking apartment building for a much lower cap rate compared to the one found in the war zone. Keep this in mind - the cap rate of a property can also be a risk indicator, with a higher cap rate meaning more risk.
Risk-Reward
Seeing as the decrepit property in the terrible neighborhood would have to give you a bigger yield to pay off all of that risk, when it comes to flipping apartment buildings, you want to purchase at the highest cap rates you can and sell for the lowest. Just as you wouldn’t want to keep storing unwanted belongings long term, you also wouldn’t want to hold onto a building that you can’t make money off of.
"An apartment building in a bad neighborhood means higher risk!"
Naturally, flipping apartment buildings means finding a good deal first. And it doesn’t really matter whether we’re talking about an entire apartment building, a condo, or a single-family home - finding the best possible deal still isn’t easy. But as with all other purchases, the key to success here is fully understanding the conditions in the market - that’s the only way you can differentiate between a bad deal and a good one. So, at this stage of your investment, you need to find a professional real estate agent. And even once you do, they may not be able to hook you up with a great deal at once.
While you’re browsing for deals, remember to look for three crucial factors:
- Low Rents - with the potential to increase them
- Rundown Look - which you can improve with a moderate investment
- Value-increasing External Factors - like a new hospital being constructed across the street.
Most of all, you need to be sure that you can raise rents before flipping the property. Luckily, even a minuscule rent bump can actually increase the value of the entire property by quite a lot.
Underwriting The Deal
Now it’s time to make all of the calculations needed to see if this deal will pay off for you; unlike with houses, flipping apartment buildings entails careful deliberation and planning beforehand. For example, let’s say that you want to buy an apartment building with 20 units, and a $500 rent for each unit. If you find out that the market gives you leeway to raise the rent for 50 bucks, you’ll actually significantly increase its value.
Extensive facade renovations on a rundown apartment building will allow you to raise the rent by quite a lot!
Once you realize that the property has flipping potential - in other words, once you’re sure you’ll be able to raise the rent, the next thing you need to think about is how big of an investment you’ll need to make. This depends on what kind of condition the property is in, but if you want to raise the rent, you’ll have to justify it with at least partial renovations. Obviously, renters want to live better before paying more. So, get a contractor to take a look at the property, and make an estimate. And remember - this is something you need to do before you close the deal on the property. It’s essential that you’ve got the entire finances figured out before you make the trade.
Conclusion
As you can see, flipping apartment buildings isn’t as simple as flipping a house, that much is obvious right from the get-go. However, if you manage to plan out your investment correctly, you also stand to make quite a sizable profit in the process. All it takes is the initial capital and careful deliberation!
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