Investing in Real Estate 5 - Large (5+ unit) Apartment Building
This blog will discuss a type of real estate investment, large apartment buildings, in the Five Points area in Denver.
What this investment is: Still targeting tenants for 6-12 months at a time, buildings with more than five units are considered "commercial" property. The loans are more difficult to qualify for, and usually a larger down payment is needed. Uncommon for the new investor; this is usually what landlords with several years of experience "trade up" to. Cash flows on larger buildings are more stable than for smaller buildings, and the economies of scale make it practical (and desirable) to hire a property manager to take over most the work for you. This takes reduces the hassle factor of the landlord process.
Equity needed: Being able to document your income and your assets will be critical. For a commercial loan, your net worth should generally be at least as much as the loan you are seeking. The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.
Importance of credit: Essential. A 720 FICO is a must. A 740 would be better.
Importance of experience with contractors: Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.
Important of experience with property managers: Not important; the majority of our clients manage their own rentals when they get started. Ideally you will have started with some smaller investment rentals and built property management experience. Now, when you have to finally manage a property manager, it will be easy since you have done the job yourself in the past.
Next week, we'll continue to explore large apartment buildings in more detail!