Here is how to begin the process of buying your first apartment building:
1. Determine whether you are the kind of person who should own an apartment building. Some people just aren’t cut out to own apartment buildings. Before plunging in, read this to find out whether you’re one of these people. Believe me… better to find out before you buy one!
2. Figure out how much capital you have. To buy a building, you’re going to need a downpayment of between 3.5% and 25% of the cost of the building (depending on whether you can use FHA or not). You’re also going to need to have some additional cash to cover closing costs, any repairs you’ll need to make, and some reserves in case things go wrong. To figure out whether you are ready to buy a building, you need to start by figuring out how much cash you can scrape together. If it’s less than $25k, my advice is to keep saving. If you’ve got more, you’re ready to move forward.
3. Find out if you can get a loan. No brokers or sellers will take you seriously until you show them you can get a loan to buy a building. This is done by working with either a direct lender (your bank) or a loan broker. I recommend going with a loan broker, and I specifically recommend using Justin Brown at Nu Home Financial (for smaller deals). Get in touch with a loan broker, tell them you want to buy a building, and ask them if you can get a loan. They will ask you for a bunch of personal financial information (including a credit check). Don’t be shy; they need this information to give you an honest opinion. Once they have the info, they’ll tell you whether you qualify and how large a loan you can get.
4. Choose a few areas that seem to be improving. For a beginning investor, the easiest way to make money in the apartment business is to pay a fair price for a sound building in an improving area without using too much debt. As the area improves, the rents you can charge will go up. This will have the effect of increasing your profits without you having to do too much. I generally focus on Northeast Los Angeles and Mid-City, because I know those areas are improving, but there are others. Pro tip: Ask your coolest, artsy-est, broke-est friends where they rent – that’s probably a good place to start looking.
5. Figure out who the most active, knowledgeable brokers are in those areas. Pay close attention to the following sentence: It is INSANE to work with a broker who is not an expert in apartment deals and/or does not do a lot of business in your preferred areas. You don’t pay your broker; he gets paid by the seller’s broker. There is no cost to you, whether you work with the best broker in town or a total moron. So choose someone who knows what he/she is doing, because there are plenty of ways to get hurt very badly if your broker is incompetent. Do some google searches, figure out who buys and sells a lot of apartment complexes in your chosen areas and get in touch with them.
6. Meet the brokers and choose one to work with. Remember: You don’t pay your broker. Since price isn’t the issue, you can and should choose who to work with based on who knows the most, who is the most active, and who gives you the best feeling. Sit down with the brokers you identified in Step 5 and figure out who you would like to work with. Remember, the process takes three-to-six months, so you might as well like the person you’re going to be spending so much time with.
7. Listen to the broker and be responsive. Working with buyers is a tough business for any broker, because you have to invest a lot of time without knowing if the buyer is serious about actually buying something. If you want your broker to take you seriously and do his/her best for you, you need to listen carefully to what he/she tells you. And, most importantly, be responsive. When your broker sends you a potential property to buy and explains why it’s a good deal, pay attention! Good deals only come around every so often. If you’re not responsive, your broker will just end up sending the best ones to the clients who are.
Look… this is a serious thing you’re considering doing. You’re thinking about putting down a large chunk of your cash and/or assuming a ton of debt to buy what is effectively a small business. It can easily be the best financial decision you ever make or the worst. Be serious. Think carefully. And be ready to move quickly when opportunity knocks.
If, after reading the above, you still think think buying an apartment building is the right thing for you and your family, get in touch. I’m always happy to chat, and hopefully I can help steer you in the right direction.