Does anyone have experience buying out of state apartment buildings? I’ve been looking at properties that are in a different region of the country, but with much better cap rates. I’m looking at 30+ unit buildings so that a property management firm would handle day to day operations. I’m wondering about things I should be aware of or look out for.
Great question. You are entering into difficult waters–not impossible or even dangerous, but certainly not ideal. Location with a smaller complex like you are talking about is one of the most important factors, and you simply will not know another market like the one you live in. Cap rates are a very poor way of comparing the future value of income properties, despite what textbooks say (take it from me I have been doing this for over fifteen years now). I can make an income statement look like you will want to buy a property if I can position the timing properly, and you may or may not even know if you are focused on the cap rate.
So… I would suggest that you focus on the properties in your area where you can create value, and leave the cap rates up to people that like to shop for assets in the 6-8% IRR range. Those are sucker investments–if you have that kind of money put it into a CD, they are paying over 6% now.
If you are still bent on investing money in a “foreign market” (out of your area of immediate expertise), you need to vet the candidates and get a competent broker, check his/her credentials, and make them pull together a list of prospect properties and analyze all of them on paper. Then go visit the ones that look promising. I did this for three REIT’s for about six years on office, hotel, Sr. Housing, and industrial properties, and there is a very predictable system for analysis and diligence that works.
I also am interested in buying an out of state apartment building (actually 3…each with around 20 units). I am a fairly new investor and have not dealt with multi-unit buildings. I am not very sure of the questions that absoultely need answering. Can anyone give the basic questions that I need answered to make an informed decision regarding these properties?
I agree with Thomas. Stay close to home if at all possible. All the normal due diligance comes into play no matter where the property is. You visit the property, check our comps/ rents for the area, etc. What will make or break a deal out of state is the Property Management. If you are buying a property for say, $1,000,000, or are trusting this Property Management company to manage your investment. So do a lot of homework on the Management Company. Get lot’s of references.
Thomas and Les know what they are talking about! I has also looked at investing in out-of-state apartment buildings, but found the old advice of “stay close to home” to make the most sense. I have not ruled out buying out-of-state, but know it is important to keep a close eye on the management company. It will only work if you have a good PM company. Let me know how your search goes for a good PM company (I don’t work for one, but will also be looking again for long-distance investments). There are some good books that will give you advice on what questions to ask. Cap Rates are too broad to use primarily. Good luck!
If you are a fairly new investor, I definitively echo the words of “stay close to home”. I mean, being a new investor and taking the leap into out-of-state apartment buildings, you should have the risk tolerance of a skydiver or a bungee jumper, ha ha ;D.
Seriously, however, if your area does not fit your criteria, then you should definitively look into branching out. A good real estate agent or your financial advisor or CPA can help you analyze whether it’s a good deals based on the numbers. But, like climbermike said above, the Property Management company will have a huge impact on how your buildings perform!
And as an agent myself, I will never suggest buying sight-unseen. You should go out and look at the property(ies), look at the neighborhoods. Feel it, Smell it, Taste it… you should check this all out during your due-diligence period.
And as to the questions, Johnny Q gave you a good starting point. I would add maintenance, HOA or property management fees, taxes, cash flow and cash-on-cash return. You can say you want the financials and rent-rolls (totals of rents being collected) for the last two years. This can give you a good idea of how profitable the building is.
I will be glad to answer any more questions you may have. Good Investing!