Have The End In Mind Before You Buy An Apartment Complex

It seems to be human nature that when you are looking to buy an apartment complex (or any other business) that 99% of your focus is on the acquisition.

Is the price right? How will I finance it? What’s the condition of the property? What is the upside, ie. can I add value to the apartment building? The list of acquisition questions goes on and on. So much so that there hardly seems time to consider what will happen months or years down the road when it’s time to cash out.

However, now (ie. before you buy an apartment complex) is the best time to plan your exit strategy. In fact you should have at least 2 or 3 different exit strategies clearly defined during your due diligence period. Here are some considerations.

Exit Strategies When Buying An Apartment Building

• Condo Conversion — convert the units to condominiums and sell to homeowners or investors. This was an exit strategy that I had considered on my very first commercial property. It was a 45 unit apartment over top of 15,000 square feet of commercial space. In the end however, I decided to.
• Sell To A REIT (real estate investment trust) — It’s likely that your apartment building will have to contain a fair number of units to employ this exit strategy. However, it is a great strategy for getting top dollar for your commercial property when it’s time to sell.
• 1031 Exchange — In the United States, instead of selling your real asset and paying capital gains tax, you can exchange it tax free.
• Sell To Another Real Estate Investor
• Never Sell — Pay down the mortgage and retire on the cash flow!
• Refinance The Property — Pull out your original equity (plus more sometimes), keep the building for cash flow and move on to the next deal.
• There Are Others — Use your imagination, but make sure you outline your exit strategies before you buy the property, not after.

You may be saying to yourself that some of the examples above are not really exit strategies per se. For example, refinancing the property to pull out equity still leaves you with the property. You haven’t exited anything. True. But think of this as an exit strategy for your equity, both your original equity and a portion of your increased equity. You can now take this money and buy an apartment complex in another city for example, spreading out your risk.

One thing I always tell people that are interested in buying their first apartment complex is that you will never be in as much control as you are before you close on the deal. That is the time to make sure that all your ducks are in a row so to speak, not after you buy an apartment complex.

Don’t rush the process!

And it is a process, so be patient.

(On that note, before you buy an apartment complex you need to get a solid foundation of the ins and outs of the process. Much of what I know now I had to learn myself, sometimes the hard way. You, on the other hand, are lucky in that there is a lot more information available these days when it comes to this subject. Here is a good course/book that will help you immensely in this process. )

The last thing you want is to end up purchasing the wrong property at the wrong price. If this does happen to you, at least your exit strategy will be straight forward.

Sell it as fast as you can to try and cut your losses.

Believe me, that is not the exit strategy you want to rely on.

Purchasing a multi unit property can be a life changing experience. Unfortunately for some folks, the change is not a positive one. And although in some cases commercial real estate investments turn sour through no fault of the investor, in many cases the investor has set themselves up for failure before they even closed on the deal.

Before I even began looking to acquire my first commercial property, I made sure that I knew as much as I could about investing in real estate. I already had a solid grasp of the numbers (I have an MBA in finance) and to complement that knowledge I learned everything I could about investing in apartment buildings and/or commercial property.

Sidebar: When I was starting out 15 years ago, there simply was not the access to information about investing in apartment buildings as there is today. Most of what I learned before I purchased my first commercial property I learned by talking with other successful real estate investors (which I encourage you to do as well) and by teaching myself. Fortunately for you, nowadays there are several good courses and books available now that can jump start your education. A colleague of mine has prepared a course on buying your first apartment complex that will serve as a great foundation for you to build upon.