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As a real estate investor, one of the most reliable paths to wealth is through introducing new cash flowing properties to your portfolio. While it is possible to do this through single-family houses, condos and small multi-family properties, experienced investors can grow much faster through owning an apartment building.
Owning an apartment building is an interesting investment because on top of being a great investment for your portfolio, they are also a massive business undertaking. So, if you are considering buying and owning an apartment building to bolster your investment portfolio and reap the rewards that come with these properties, you need to make sure you are prepared for the responsibility.
In order to help you prepare for the responsibility of investing in these large multi-family properties, here is the key information you should know about buying apartment buildings in Canada.
However, before we dive into the process of owning an apartment building and what that means for your investment portfolio, let’s talk financing. Apartment buildings can be huge commercial properties that need to financed properly or else you run the risk of leaving yourself buried under the weight of hefty month-to-month mortgage payments.
That is why at LendCity, we have a dedicated commercial financing team to help you achieve the financing you need to create a successful investment. All you need to do to get started is book a free strategy call at the link below.
Apartment Buildings Can Produce Large Amounts of Cash Flow
One of the greatest appeals of owning an apartment building for any real estate investor is the massive cash flow potential associated with buying an apartment building. After all, with the high volume of units located in these buildings, you are capable of strategically structuring your rent so that after the first few units are paid for, the remaining tenants are almost purely profit at the end of each month.
For example, if you have a building with 24 two-bedroom units in Ontario and the property runs with approximately $17,000 in expenses, based on the current average rent of approximately $1450, you will begin turning a profit after 12 of your units are occupied or a 50 per cent occupancy rate.
For perspective, the occupancy rate for two-bedroom apartments for properties with six or more units in Ontario currently ranges between approximately 95 and 98 per cent depending on the city you are buying in. This means on average; you should have very little trouble finding tenants to rent your property and your property would maintain a strong cash flow.
Structuring an Apartment Building to Maximize Cash Flow
Is owning an apartment complex profitable off the bat? Usually not.
After all, the process of structuring these buildings to generate the cash flow you are looking for is typically more complicated then simply buying an apartment unit to rent and calling it a day.
More frequently, you will want to do a full analysis of both the neighborhood and the property itself to ensure the building has the potential to cash flow in the first place. This includes looking at the full demographics of the area including average incomes, ages, family sizes and more. That way you know how to market your investment.
If you are buying and owning an apartment building in a low-income neighborhood full of students and single professionals, you are not likely to find a ton of people willing to rent luxury apartments at premium prices. Instead, you might want to advertise affordable one-bedroom units, and studios.
Likewise, you probably will not get a huge return by owning an apartment building full of studios and one-bedroom apartments in an area full of large families with small children.
Owning an Apartment Building Requires Creative Property Management
While owning an apartment building is typically much more profitable due to the increased number of units available for you to rent out, they are also a more complex investment that require you to dedicate a lot more time and money to property management than you would with smaller properties.
Not only is there a more significant volume of tenants for you to worry about, but in most cases, you will also be responsible for taking care of many of the common areas such as stairwells, hallways, elevators, or laundry rooms unless you are able to find a reliable way to delegate these tasks amongst your residents. There is also a higher potential for tenant complaints due to things such as noise which means your property managers need to be much more available for tenants.
As a result, many property owners will opt to hire a team of property managers specifically for their apartment buildings and allow them to work out of a central office on-site so that everything can be handled in a more organized manner.
Some additional complications may include things such as arranging garbage and recycling collections and communicating renovations and maintenance with multiple tenants who may be impacted.
Organizing Property Management For Your Apartment Building
If you want your apartment building to become a truly successful investment, your property managers need to be organized. Depending on how you choose to do your management this can be a very simple or very complex yet customizable process for you as the owner.
If you choose to opt for a property management company to take over the operations of your building, you will not need to worry about organizing your property management beyond simply selecting the company. After all, an established organization is going to have their own systems already in place, after that is it simply executing the plan.
However, if you aim to run your own property management and hire each member of the team individually or by department, it is going to be a much more hands-on process. The final result will be much more suited to your specific wants and needs, but the process of getting there will be harder.
What makes the process even more complex is the fact that there is no single ‘right’ answer. You need to find a solution that works for you in order to make owning an apartment building a meaningful success.
Apartments Allow You to Save Money on Per-Unit Maintenance Costs
While managing multiple units can increase the complexity of managing and owning an apartment building, it does come with the advantage of allowing you to save money on per-unit maintenance costs.
These savings can show themselves in a variety of ways. For example, if you need to repaint a unit, you are able to buy the paint in bulk and use it on multiple units that may need repainting. This allows you to pay less overall painting each unit. As well, certain renovations may improve conditions for multiple residents such as roof repair or repaving the parking lot.
Discover Buying An Apartment Building With This Step By Step Guide
Tenant Turnover is Higher in Apartments
Another important consideration when investing in apartment buildings and other large multi-family investments is the fact that apartments face a higher average turnover rate than single-family homes.
While this is mostly managed by the fact that vacancy rates are typically quite low, it does mean that you need to have a detailed plan in place for ending leases and preparing units for new tenants so that you do not waste time leaving units vacant during a turnover period.
Part of the reason for this increased turnover rate is that unlike single-family houses which offer a homestyle feeling to your tenants that provides them with a sense of belonging, apartments naturally feel less personal, and tenants are less likely to become attached to them.
Owning an Apartment Building Allows You to Offer Multiple Styles of Rentals
Another strong advantage of owning an apartment building is the fact you are usually capable of offering multiple styles of rentals in a single building. This means that you can reach a wider range of potential tenants in a single property. For example, while you may have a building with predominately two or three-bedroom units, you can also offer single-bedroom or bachelor apartments in the building to increase occupancy.
Financing Your Purchase
If you are looking to finance your goal of owning an apartment building or any other large-scale commercial investments, we have the solution for you. At LendCity, we have a dedicated commercial mortgage team ready to take your call and connect you with the commercial lender with the best financing option for you and your investment goals. That means getting the best available rates on the financing you need with the least number of conditions.
If you have any questions about investing in and owning an apartment building or are ready to get started, visit us at LendCity.ca and apply online today. You can also call our office at 519-960-0370. Alternatively, you can book a free strategy call at the link below.