Buying apartment buildings have been around for decades. The fundamentals have remained the same, but the business plan, and the way we structure deals has changed significantly. In today’s market, things are changing so fast that we have to continually improve our processes to keep up with the competition.

Is Apartment investing dead? No, but buying apartment complexes has definitely slowed down, whether the asset class is multifamily, retail, or office space – the market is currently at a state of rest.

Commercial multi-family has been affected by the coronavirus. Being prepared and adaptable can help the investor decrease his/her chances of losing their investment, and help the apartment owner better manage their operations. Continue reading to find out the most common questions asked about where we stand we apartment investing.

Are Apartment Investors Still Buying Apartment Buildings?

Apartment owners are still analyzing and purchasing apartment deals, that hasn’t changed. But what has changed is the way in which we conduct business. The deals that were already in escrow prior to the pandemic have closed. However, the deals going forward are slightly different, because they’re moving along at a much slower pace.

Normally it would take 60 days to close a commercial deal, in these times the deals are being extended by 90-120- days.

A large majority of deals are being placed on hold until further notice because rent collections during this time are unpredictable.

In commercial investing the property value is directly related to the net operating income. So, if rental collections aren’t accurate due to the un-stability of the economy, this could affect the value of an apartment. This is part of the reason why apartment investors have taken a step back to observe market corrections.

For example, one of the properties my wife and I own is a 42 unit apartment complex in Tuscon, Arizona; which is currently for sale. There were several buyers who were interested in the property and suddenly backed out of the deal. Were unsure of the reason they pulled out of the deal, but in my opinion, it could be related to any of the following:

• Unpredictable rent collections
• The vacancy rate does meet their standards
• Unable to walk the units due to shelter in place orders

The way in which we do business is changing day by day, it’s affecting the commercial market as well as the residential market. Adapting to the change helps apartment investors dampen the negative effects of COVID-19.

Why Are Syndication deals Becoming So Popular?

An apartment sponsor is one who signs his/her name on the deed and operates and manages an apartment building. If all goes well the passive investors will receive quarterly distributed returns. Apartment syndication gives people a wide range of benefits far exceeding those of a RIET. The benefits include quarterly distributions, the ability to write off depreciation on personal taxes, and closer insight to the operation of the deal.

This alternative way of investing in commercial real estate is why so many people are drawn to it. If you want to participate in listening in on the day to day operations, you can. But you also can take a hands-off approach and just watch the quarterly distributions come in.

With a REIT you’re disconnected from the property, and the operator, you’re also not included in the day to day operations. So, apartment syndications give the investor the ability to communicate with the CEO, and find out the status of your investment. Full communication, great tax benefits, and high returns are part of the reason why apartment syndication deals are becoming so popular.

What I Wish I knew Before Buying an Apartment

The Market is saturated with sponsors

Sponsors have been around for decades, but now the position is starting to become popular. Being an apartment sponsor is starting to become a trend. So, let’s go a little further into why the market has become saturated with new apartment operators.

The (Jobs) Act was passed in 2012 by the Obama Administration, created to stimulate the growth of small businesses. In short, the law allows for securities/investment opportunities to be issued through the use of crowdfunding. Because crowdfunding allows companies to build capital and issue securities through crowdfunding. Companies like Go Fund Me and Fundrise were created.

Since the law was passed apartment operators within a 506 b security offering are now allowed to advertise publicly. For the first time, apartment operators are allowed to publically advertise deals through multiple platforms including social media.

The ease in the ability to raise capital draws people in with interest in becoming apartment syndicators and eventually buying apartments. This creates a market where there is are a vast amount of experience levels to choose from when it comes to looking for an apartment operator.

When I was looking to purchase an apartment through a partnership, I didn’t perform any vetting on the sponsor. I chose a sponsor based on a gut feeling, and this approach could have gotten me into a lot of trouble. Fortunately, I choose a sponsor that was responsible, trustworthy, and leaned on the expertise of his peer groups.

However, there are investors who weren’t so lucky, check out this Bigger Pockets forum and the bad experiences other investors have had.

Although I went with my gut on choosing am apartment sponsor; without the proper background check “your capital could be at risk”!

Difference between value add and appretiation deals

Value-add has become a popular phrase used amongst apartment operators, to advertise a property to investors with the potential for high returns. This word is used very use-ly these days, but the true meaning is based on the valued add-opportunity a property may have. The property may have room for massive growth because of these factors:

• under-managed
• under market rents
• tenants aren’t paying for water
• no ratio utility billing in place
• units haven’t been renovated
• late fees aren’t in place

If these factors are in place this gives the operator the ability to force appreciation and increase the value of the property. With the right operator in place, this opportunity can present the investor with great returns.

Another strategy implemented by operators is the appreciation method. This method focuses on a property with a low occupancy rate, and typically properties that have been under-managed. Out of both methods, this strategy is the riskiest but has the highest returns.

My strategy has always been geared towards investing slow in steady for the long haul, I usually lean towards the value-added method.

So, choosing a long term plan and educating yourself on the different methods of apartment investing is vital to your success.

Deals are becoming more scarce

As the market becomes more competitive, deals are becoming more and more scarce. Friends of mine told me on average for “every 100 deals they analyze they may find one worth pursuing”.

Apartment investors are willing to pay more than what the property is worth for the sake of getting into a deal. This is a dangerous approach because currently, the market is doing well. If we experience any hiccups like COVID-19, the apartment operators may not be able to handle a downturn in the market.

With the shortage of inventory operators may become a bit more anxious; analyzing the deal yourself can prevent you from investing in a deal that may have been a panic buy.

Final Word

Apartment investing has definitely slowed down, but in no way is it completely on hold. Apartment operators have a responsibility to there investors to conduct business in a way that best protects there capital and the safety of the tenants.

This can be done by creating a business plan with enough reserve in place, and positive cash flow to withstand any market correction caused by a natural disaster, a mass disease in this instance, or any downturns in the future.