If you are able to locate apartments in Antioch where the rents are below market and can be raised to the market standard, without losing tenants, you can make a big success in this business. The key of apartment building investing is being able to add value where the previous owner failed. Success comes to your way because of better management skills, making strategic value adding upgrades and/or being lucky enough to catch a changing market.
Another positive part of investing in Antioch apartments is that you may be able to get additional financial resources. Your intention from the beginning isn’t to default on any loan. Yet, non recourse financing means that the building stands as the sole collateral for the loan and makes it easier for you to walk away from the building if necessary. The alternative to non-recourse financing may involve signing a personal guarantee. This means you and your assets, personally stand behind the loan in the event of default. Given a choice, which type of financing would you prefer – non-recourse or recourse?
When it comes to finding apartments in Antioch, you may also have to find a seller willing to carry back some financing. This may or may not be combined with some underlying assumable financing. If you are dealing with seller financing, better terms will generally follow a strong down payment. In general, apartments are harder to finance for buyers. There are fewer outlets for apartment financing. This is why sellers frequently are involved in financing the new buyer of their properties. Don’t forget, someday you too will be the seller and will likely face any of the same financial constraints with your buyers of the future.
Apartments are valued off of a capitalization of the net income generated by the building. This is termed a “cap rate”. Generally speaking, the cap rate is lower for nicer properties. The cap rate is higher for less desirable properties. In this context, we did not mention about the actual cost of replacement of the building. A building’s valuation is all about the return on investment as calculated by the building’s specific and recurring cash flow. This means current net income and projected future net income. The amount of financing available is a function of the cash flow. The lender wants to have a certain DCR (debt coverage ratio). This means they want to know that the rents can carry the mortgage.
Think about the capital that you have to invest in apartment rentals in Antioch. As an investor, you expect a return on your invested capital. You have many options on where to invest. Generally speaking, capital flows to where appropriate risk and required return intersect. The resultant investment could be mutual funds, stocks, bonds or real estate. Since real estate is a “more hands on” investment which requires more work, you will generally need a hybrid rate of return between that offered on stocks, mutual funds and bonds. This hybrid rate of return is generally in the range 019-13%. If you can’t generate that type of return on the real estate, you might be better off with the alternative investments.