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Buy an Apartment Complex – Investment Idea for Physicians (Why & How)


August 5, 2020

Harsha Moole, M.D., MBBS


“Don’t wait to buy real estate. Buy real estate and wait.” –Will Rogers

 

Introduction 

Buy an Apartment Complex – Investment Idea for Physicians (Why & How). If you’re not in on it yet, it seems that the best-kept secret that goes around town is that real estate is the perfect type of investment for physicians because it supports and, ironically, emancipates us from our hyper-busy, incredibly demanding professions. At best, real estate investments are considered passive or semi-passive income because it allows us to earn money without having to do much from our end. This is a golden opportunity for us physicians because it implies two very important things: one, it allows us to make twice as much money even on days when our physician jobs require our full attention, and two, it lets us take a breather from our physician jobs, if need be, without having to cost us a portion of what we earn. If you want in on the world of real estate investment but are not sure where to begin, then you’ve come to the right place. Investing in an apartment complex is something seasoned physician investors swear by because it brings a myriad of unique benefits to the table and is a highly versatile investment to get into.

 

Why You Should Invest in and Buy an Apartment Complex

  • It consistently generates steady monthly rental income.
    • Because apartments are split into units, this means that the potential for income is much higher and is a lot more steady compared to, say, a single-family unit. For example, if a family moves out from your single-family property, you are faced with a 100% vacancy rate whereas if one tenant moves out of your five-unit complex, you only have to deal with a 10% vacancy rate. In addition, as long as you get the fundamentals right (i.e. the right location, complete and correct amenities at a reasonable price – don’t fret, we’ll hash this out better in a while), vacancy rates in apartments are fewer and far between by nature. Sure, turnovers are more frequent, which means it will require more thorough management and maintenance, but the bright side is that there’s always a new tenant out there who’s willing to occupy a recently vacated unit.
    • Moreover, what’s great about apartment complexes is that there are so many ways to bolster the property’s potential for income. In other words, by adding valuable amenities to your property such as laundry, parking spaces, or vending machines, you create more compelling reasons to justify a higher rent.
  • Maintenance costs are split into units.
    • As we have already touched on in the previous point, the down side to investing in an apartment complex is that it requires more frequent, intensive management, but on the bright side, maintenance costs are much lower because they are split between all units. Case in point, if you need work done on the roof, the cost shall be split between all units since that repair serves all tenants in that building.
  • It’s considered a low-risk investment (if done right).
    • This ties our first two points together perfectly. The fact that apartments are not characterized by drastic vacancy rates, can easily generate additional income, and have lower maintenance costs per unit, it definitely makes for a low-risk, worthwhile investment. Furthermore, what’s even greater about investing in an apartment is that it’s much easier to secure a loan for it. A lender’s approval is based on the property’s potential in addition to the borrower’s financial standing. This means that as long as you set up some very convincing points about the property you’re planning to borrow money for, the rest is history. This is why buying apartment building is a sensible real estate investment, especially for beginners.
  • Full-time physicians qualify as accredited investors, thus increasing your opportunities to buy multiple apartment complexes.
    • As we have previously discussed in a separate blog, full-time physicians qualify as accredited investors based on the requirements set by the Securities and Exchange Commission (SEC). Being an accredited investor is a valuable thing to have in real estate investment because you are eligible for multiple streams of passive income. An accredited investor is able to invest in Real Estate Syndications, and private equity. If more apartment complexes mean more passive income, then why not, right?

Buy an Apartment Complex

Tax Benefits of Investing in an Apartment Complex

Another major benefit worth highlighting is the real estate tax benefits that come with buying apartment building. In another blog, we discuss at length all the real estate investment-related expenses that qualify for tax deductions, resulting to a lot more money left in your bottom line. Some tax deductions that can apply to your total rental income are property taxes, depreciation, interest on mortgage, maintenance, repair and other business-related expenses, and so much more. Majority of the tax benefits apply only to the gains you make on the real estate investments. Passive losses cannot usually be carried on to your W-2 income to shelter the W-2 income from being taxed – EXCEPT in one situation. This is called Real Estate Professional status. Read this blog post to understand the details of REP status, to check if you qualify for it in order to shelter your W-2 income from being taxed.

 

How to Buy an Apartment Complex – Where Do I Begin?

If you are finally convinced of the lucrative investment that is to buy an apartment complex, here’s a fool-proof guide to getting started. It is important to note that there are many different ways to go about buying apartment building, such as investing in a syndication or taking part in a Real Estate Fund, but for the purpose of this blog and the eligibility of the tax benefits we have just discussed, we shall hash out the process of investing in an apartment with regard to buying it yourself or, at most, with one or two other partners who share the same business values and vision as you do.

 

  • Identify your chosen size and class.
    • First and foremost, you must determine how many units you can handle confidently. Here’s a pro tip: try to choose a building with a minimum of five units. This is because according to most brokers, it is easier to secure a loan that way. Remember, the likelihood of having a loan approved is based on the profitability of a property – more units mean more income.
    • Next, determine which class you wish to play around in. This part is important because it also identifies which neighborhood you will be part of, and what type of tenants will occupy your apartment. In the States, apartments are classified from A to D, with apartments moving up in the class scale depending on quality, size, newness, and the amenities that are available. Naturally, apartments from the higher end of the spectrum will also cost more upfront so your budget is also a major determinant.
    • Take note that all of this is tied to a crucial yet very tricky factor: Return on Investment. Every property is different and comes with its own merits and risks. Class A apartment complexes might be very stable and secure investment, less maintenance problems, might appreciate more over time, however, will tend to have low cash flow. On the other hand, Class D apartment complexes are risky, more work, however they tend to have a better cash flow.
  • Do preliminary research.
    • Once you have decided which direction you wish to pursue, the next step is familiarizing yourself with your chosen area and hunting for viable properties.  This can be done through a number of ways – join your local real estate investing association or get in touch with an experienced commercial real estate agent. Real estate agents have access to multiple listing services which can prove very helpful.
  • Visit properties of interest for assessment.
    • Once you have narrowed down your search, make sure to take the time off to visit these properties yourself. The goal of every visit is to assess the location, size, number of units, and quality of each property. Before you conclude each visit, make sure you have accomplished the following important tasks:
      • Identify amenities the property already has and can possibly offer
      • Confirm the general condition of the building
      • Estimate potential repairs
      • Obtain the current rent roll and occupancy rates, if possible
      • Estimate annual income, expenses, mortgage payments, and projected overall cash flow
  • Construct an in-depth financial analysis.
    • Perform a deeper financial analysis of your chosen property by accomplishing the following:
      • Create a list of projected monthly income and expenses
      • Calculate your net operating income
      • Estimate your cash flow – is it positive or negative?
      • Compute your capitalization rate (also known as your Return on Investment)
    • If all of this seems a bit overwhelming, do not worry. There are real estate brokers who can guide you and walk you through all of this jargon. Here at PhysicianEstate, we also have a ton of helpful blogs that discuss all the aspects that an in-depth financial analysis entails. Feel free to look through our other blogs for advice.
  • Build your confidence by minding your due diligence.
    • Ask any seasoned physician investor and they will say that due diligence is a top priority in any kind of investment. It is a very important process to ensure that a respective deal goes as planned. When you buy an apartment complex, make sure to practice due diligence in the following ways:
      • Request for tax returns and expense reports from the current owner
      • Find out why the current owner is selling the property
      • Obtain copies of current tenants’ leases and rent roll
      • Investigate about any vacant units
  • Make an offer and negotiate terms.
    • After you have done a deep financial analysis, sought expert advice, and practiced due diligence, if you are confident about acquiring the property, have the value of the building appraised and try to negotiate the terms of purchase with the owner. Make sure to include whatever contingency clauses you deem important and come to an agreement with the closing terms.
  • Conduct a final professional property inspection.
    • Hire a professional inspector or contractor to take one final look at the property on your behalf. It always helps to have a fresh pair of eyes on board. Triple check every nook and cranny, every possible maintenance or repair expense, and take note of all estimated repair costs.
  • Secure your financial resources.
    • If you have formally decided on buying the property, it’s time to prepare your resources. This could mean different things for every investor – write a check, secure the loan, or sit down with your business partner.
  • Close the deal.
    • Once everything is prepared from your end, select an escrow agent or title company to facilitate the deal. Don’t forget to arrange an insurance policy for the property. This final stage also entails the turnover of all the tenants’ security deposits to you. Sign the paperwork, seal it with a kiss, and have it delivered – congratulations, this means you officially bought your first apartment complex!

 

Summary

If you have reached the end of this rather lengthy blog, you must really be interested in investing in an apartment. Our hats off to you for exploring your options to financial freedom and we do hope that your real estate investments go smoothly.

There are two major takeaways we wish to impart before we conclude. First, we believe that the pros definitely outweigh the cons when you buy an apartment complex. The whole experience is invaluable and will surely open up a lot more investment opportunities for you. Second, if you noticed in the entire process on how to buy an apartment complex, it expresses multiple times to consult for advice or seek guidance. It simply means that you don’t have to go through the entire process alone. Most especially for first-time physician investors, it always helps to have someone else on board when it comes to important investment decisions such as this one.

If you have any questions in your journey towards buying your first apartment complex, please feel free to reach out to us, and one of our team members will be glad to assist you.

Buy an Apartment Complex

Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How. 

Stay in touch with us by signing up for our newsletter. The newsletter will keep you up to speed on the current real estate investments we are looking at, provide physicians with investment opportunities, and much more.  

Legal Disclaimer: This is not investment advice. I am not a legal and/or investment advisor. This is my personal blog, and all information found here, including any ideas, opinions, views, predictions, forecasts, commentaries, suggestions, or stock picks, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. These are my views, it is not a production of my employer, nor is it affiliated with any broker/dealer or registered investment advisor. While the information provided is believed to be accurate, it may include errors or inaccuracies. To the maximum extent permitted by law, PhysicianEstate disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. You should consult with an attorney or other professional to determine what may be best for your individual needs. Your use of the information on the website or materials linked from the Web is at your own risk. 

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Authored by Harsha Moole, M.D., MBBS

Hey there! I hope you enjoyed reading this blog. PhysicianEstate is my brain child and passion project. I run this platform to empower entrepreneurially motivated physicians to make financially educated investment decisions and discuss asset protection strategies. Lots of important but free content here and here! If you have any questions or if you are interested in partnering with me, let’s connect! hmoole@physicianestate.com

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