I have bought and sold thousands of apartments over the years. It’s one of my favorite deals to do because they are a great passive income generator. If you’re interested in buying apartments, it’s a great way to build long term wealth but it’s obviously a big decision that requires you take many factors into consideration. Here are 5 major red flags that to me are almost deal breakers:
You Can’t Make The Numbers Work
When you buy an apartment building the goal is to make a lot of money. If you can’t get the numbers to work, the sellers won’t budge on price or you’re unable to negotiate better terms – move on to the next deal.
Incomplete Financial Information
If the seller can’t give you at least 2 years worth of profit and loss statements, plus the actual numbers from current year this is a major red flag. It either signals mis-management or something shady might be going on. Either way, I’d suggest you walk away.
Don’t get swayed by reviewing what’s known as “Pro forma numbers”. Pro forma numbers are not actual figures – they’re based on guesswork. While the proforma numbers might be educated guesses, they’re still speculative. Lenders completely disregard these numbers when giving loans and so should you.
Don’t try and push water uphill on this one. If you have a good apartment building in a bad area, it doesn’t make sense investing your money trying to reverse a trend. If the neighborhood is heading downward, then you can bet the tenants and anyone wanting to live in the building will be too. The good tenants will pack their bags and move on. I’d say pass on these deals.
A Long Time on the Market
Good apartment buildings often sell at the speed of light just like cash for homes programs. Bad properties can take months and months to sell, and sometimes years. linger in the listings for month after month. When you come across a stale listing, it’s time to do some digging and find out what the problems are. Speak with the tenants and the neighboring properties. You’d be amazed at what people will tell you. Yes sometimes these kinds of deals can be a gold mine because it’s a great opportunity that others have overlooked. Be discerning though and pick your battles. There are plenty of apartment buildings out there. Your time may be spent pursuing properties that are less problematic.