Questions To Ask When Buying an Apartment Complex

You’ve had the dream of an investment property in South Puget Sound for a long time, and you’ve finally found an apartment complex you want to purchase. This is an exciting time! Before you seek out loans or spend your savings, consider these very important questions you should ask about the property. Buying an apartment complex requires some education about insurance, how to tell if it’s a good investment, the work it will require to manage the property, and more.

How Much Will Landlord Insurance Cost in Washington for the Property and What Will It Cover?

Put simply, landlord insurance for your apartment complex will financially protect you if the rental property becomes damaged or in the case of an injury on your property. Your policy should include: 

• Dwelling Coverage for the physical rental property, other structures on the property, and your own personal items or equipment that’s on the property
• Loss of Use Coverage for any rental income you could lose due to damages
• Medical Payment Coverage for any medical bills that you may be responsible for after an injury
• Liability Coverage protects you in the case of a lawsuit due to an injury

Seek out insurance quotes from several carriers to find the best rate for the most thorough coverage. The policy will state what’s covered and what’s excluded, which is very important to understand. 

Expect landlord insurance to cost around 15-20% more than homeowners insurance. Although, the amount will depend on the size and location of your apartment complex.  

Is the Apartment Complex a Good Investment?

Of course, this is a primary concern when considering the purchase of an apartment complex. But how can you accurately and confidently determine the apartment complex you’re considering will be profitable? Follow a financial due diligence checklist. What does a financial due diligence checklist include? 

Rent Roll

A rent roll will have information on each tenant and their lease. This will include a list of rents, the amount due per tenant, and information about the lease period. 

Lease Audit

The lease audit report will be performed by a third party to investigate the apartment complex’s current leases. This will have more depth than the rent roll and will include looking at the details of the lease. 

Lease Abstraction

This will be a detailed review of the leases and their provisions to create a concise summary. It will include the terms, rents, reimbursements, covenants, and responsibilities of the landlord. 

Financial Audit Report

This will determine if the apartment complex is a healthy and viable investment. Income statements, current rent roll, bills, and other documentation will be used in the assessment and used to predict its viability in the future. The report will be analyzed by a professional to identify any issues. 

Market Report

The market report is an analysis of the target area. Population growth, employment rates, crime rates, income, and other demographics will be included. Then, it will be analyzed side-by-side to similar areas to compare rental costs, supply and demand, occupancy rate, and the like. This is important to determine the profitability of the property. 

Title Report

Previous contracts will be investigated to ensure the legal claim by the current owner of the apartment complex. Usually, the title report is necessary to also obtain a site survey. 

What is the Cap Rate of the Property?

The cap rate, or capitalization rate, is used for assessing profitability by a simple formula. To get the cap rate, you divide the net operating income (NOI) by the sale price of the apartment complex. This is to be compared to similar properties in the South Puget Sound area and to determine the market value of the property you’re considering. If the cap rate of your potential apartment complex is significantly higher or lower, this should raise some flags. Generally, in the Seattle area, cap rates should fall between 4% and 5.5%. 

Are the Maintenance Records Available?

A responsible property owner will keep a file of maintenance records. These will include maintenance and repair requests by tenants and scheduled maintenance and how they were handled. It will also include the bids, repair details, and vendor contracts. You may also receive move-out inspection paperwork that details damage, wear and tear, and regular required maintenance. 

This information will give you an idea of how well the property is being maintained, the frequency, which vendors the owner is working with and at what rates, and the level of thoroughness for repairs. For example, if a mold complaint from a tenant was handled only by hiring a painter, this is a red flag. 

Does the Apartment Complex Require any Remodeling or Updates?

In addition to the financial due diligence checklist, you will also need to adhere to a physical due diligence checklist. This will include a property condition assessment (PCA) and environmental site assessments (ESA). 

Property Condition Assessment (PCA)

This is similar to a home appraisal and ensures the building’s integrity to avoid big unexpected repair costs in the future. The PCA is also known as the capital needs assessment (CNA) and will be conducted by a third party. The report will note if something should be addressed right away or if you should expect a repair or replacement in the future. The PCA will inspect: 

• Condition of the roof and foundation
• Building envelope
• HVAC systems
• Electrical systems
• Plumbing systems
• All interior finishes

Environmental Site Assessments (ESA)

The ESA evaluate any environmental concerns on the property. There are two Phases to an ESA. Phase I tests for the presence of: 

• Petroleum products
• Toxic chemicals
• Pesticides
• Mold
• Asbestos
• Radon
• Lead paint

If the Phase I evaluation detected any of these harmful substances, then Phase II will be performed and requires soil tests and mitigation plans. 

What Does It Take to Manage the Property?

If you want to have a successful real estate investment, some of the success–or failure–will be due to how you manage your property. Much of what makes a great landlord comes down to skill, availability, organization, and reliability. 

To be a good landlord, you’ll need to be good with people–it’s a people-centered industry, after all. Interpersonal skills and communication skills will make it easier to manage problems and build trust with both tenants and vendors. Communicating with transparency should be the golden rule. Temporary inconveniences to tenants, on-site construction, a delay in repairs, scheduled maintenance, and everything else that could disrupt a tenant's life should always be communicated honestly and thoroughly.  

Being detail-oriented and organized is also a requirement of a good landlord. This will enable you to be timely with upkeep, managing leases and showings, keeping everything documented and properly filed, staying up to date on inspections, keeping up with communications, and so much more. 

Being a great landlord means being attentive, available, and reliable to both tenants and prospects. You and your manager should have channels of communication open to address needs and respond in a timely manner. 

Should I Hire a Property Management Company for My Seattle Investment?

It’s true that owning an apartment complex–or several–is a lot of work, but could be a very worthwhile investment. The great news is that you don’t have to do it all on your own! At Powell Property Management, we’ve managed our own properties and have helped landlords like you manage properties for over 100 years. Everything from maintenance and financial services to tenant acquisition and marketing–and more–is handled by our incredibly talented and attentive team. Enjoy the fruits of your Seattle area investment without the stress of management by contacting us today!