Apartment Appeal

As we head into the second quarter of 2008, investors are turning their interest to the apartment sector. Even though home prices have dropped, the affordability of single-family housing is still out of reach for many people.

According to the National Multi Housing Council's (NMHC) latest Market Trends report, the number of renters in professionally managed apartments in 2007 increased by the largest amount since 2000. In fact, the increase was as large as that for the previous five years combined.

The number of renters nationwide is projected to increase by almost four million households over the next 10 years, with half of those households likely to rent apartments. To meet that demand, the nation needs to produce at least 250,000 new apartment residences each year. However, the supply of new apartment buildings has averaged just two-thirds of that in recent years. Last year, both starts and completions of all multifamily units (both condos and rental apartments) fell to their lowest levels since 1996 and 1997, respectively.

Rents for professionally managed apartments rose by 3.5 percent in the fourth quarter of 2007, and apartment vacancy rates have remained stable. For investors 'Real' returns (returns over and above the rate of inflation) to privately held apartments have averaged almost 11 percent over the last five years.

How do I find apartment complexes for sale?
Contact a Realtor that specializes in investments and commercial sales and ask to be put on their first alert list. There are many online sites for apartment listings but some of the best deals are marketed from Realtor to Realtor through nationwide investment and commercial networks. Since potential tenants may be cautious about renting an apartment in a complex that is also listed for sale - apartment owners usually opt to market their properties through less visible resources. You probably won't find a big for sale sign out front and the property may not even be listed on the Multiple Listing Service.

What do I need to know about the apartment complex?
As with any investment, you will need to understand fully both the physical and financial condition of your potential purchase. The income and expense reports from the current owner are crucial information. You will need to analyze gross rents, expenses, net operating income, and any other related items to project future income. Other factors to consider include the potential for raising rents, strategies for filling vacancies, and improvements that will make the community more profitable for you as well as more enjoyable for your tenants.

You will also want to evaluate the current climate of the market in the area you are considering an apartment complex purchase. Is it in an up and coming area of the town or city where it is located? Is there a high demand for housing in the area?

Here is a check list of some important questions to ask:

Why is the Owner Selling?
How long has the owner owned the building?
What is the effective age of major expense items such as the roof, electrical system, air/ heating, and pool?
Can the owner provide a current rent roll and income and expense statements?
Can the owner provide two years Schedule E's (annual tax declaration of rental income)?
Is there a copy of the last inspection report?
Does the complex meet minimum code requirements such as handicap access?
When was the last rent increase and how much was it for?
How old are the units?
What's the unit mix (how many one bedroom, two bedroom, etc..)
What's the vacancy rate in the area?
What is the vacancy of the complex?
What are market rents in the area?
What type of leases are in place?
What is the average security deposit held?
Are expenses such as water, electric or cable included in the rent?
Are there any other complexes in the area also for sale? If so at what price?
What are the going Cap rates in the area on multiple units?
What are the recent comparable sales?
Have there been any lawsuits filed by tenants?
Have there been any insurance claims?
How much does the seller owe on the units?
If there is a loan, is it assumable?
Will the seller consider offering financing?

Useful Websites

National Apartment Association: www.naahq.org
National Multi Housing Council: www.nmhc.org
Multi-Housing News: www.multi-housingnews.com