Owning an Apartment Building: A Day in the Life
April 02, 2019
There are two basic lifestyles for apartment building owners, depending on how they view their ownership:
- Owning a Business: Do you view your apartment building holdings as a business? That is, do you earn a profit and work at it systematically, regularly and continuously? If so, it’s your business, even with the help of a hired property manager. Owning an apartment building as a business can be a busy lifestyle. To the point, it’s the focus of this article.
- Owning an Investment: Perhaps you take a more passive role and consider your holdings an investment. That is, you don’t work at it systematically, regularly and continuously. In fact, your involvement is writing checks to the property management firm, receiving rental income and keeping some records. Occasionally, you might perform some minimal repairs to the property. We won’t be discussing this investment lifestyle in any more detail, but it certainly is extremely attractive when profitable.
In this article, we’ll explore a “day in the life” for hands-on owning an apartment building. Then, we’ll review your responsibilities and the pros and cons of the business. Finally, we’ll end with a discussion on apartment building financing.
A Day in the Life of an Apartment Building Owner
Every day is unique. This could be one unique day in your life owning an apartment building. But really, it’s a composite of what occurs over many days.
You work in an office located in the basement of your apartment building. It might be a modern apartment building, but let’s say it’s an old apartment building. So, you start your day with a short commute to work. When you arrive, you flip on your computer and check your email in-box and your calendar.
First, you collect maintenance order emails from tenants and assign them to your maintenance team. Next, you place an order for one tenant’s replacement refrigerator and another tenant’s dishwasher. You occasionally receive tenant phone calls or emails with new questions or complaints. Several things occupy your mind. For example, you’ll be meeting a new tenant applicant this afternoon. Also, you want to check on the repainting of the garage and the roof inspection. At about 10:30 AM, a tenant reports a water leak, and you dispatch your plumber. Happily, it’s a minor problem, easily fixed. You spend the rest of the morning on your inspection rounds.
Your new applicant shows up half an hour late, but likes the apartment and signs a lease. You are grateful that you have finally reached 95% occupancy. You consider the building stabilized and ponder whether to refinance it or sell it. Your reveries stop when the delivery truck shows up with the ordered appliances. Carefully, you supervise their installation and the removal of older units. Later, a tenant stops by with a rent check in hand. However, she also lodges a complaint about a neighbor’s dog barking. Immediately, you leave a message with the dog owner about scheduling an appointment to discuss the problem. Quietly, you work through the remaining issues of the day.
You decide that you’d like to trade in your old apartment building for a new apartment building. Accordingly, you contact your old friends at Assets America® and discuss your commercial financing goals. Expectantly, you schedule a meeting for next week to lay out the preliminary steps. Specifically, you plan the sale of your old building and the purchase of a new one for $10 million. Later, the dealership calls informing you that your new Porsche has arrived at the lot. You think back to your initial decision to buy an apartment building, you feel quite content, so you smile.
Apartment Building Owner Responsibilities
As an apartment building owner, you have certain responsibilities. You can choose to discharge these duties personally or delegate varying amounts to one or more agents. But ultimately, the buck stops with you.
Responsibilities Toward Tenants
When you and a tenant agree on a rental, you provide an implied warranty of habitability for a clean and safe space. Your responsibilities include:
- Providing adequate hot water and heat.
- Providing structurally sound facilities with safe common areas, window guards when requested, and removal of garbage and snow.
- Following required codes, such as those involving mold remediation, lead paint, adequate space, and discrimination.
- Providing and testing carbon monoxide and smoke detectors.
Responsibilities Toward the Property
You are a business owner and the apartment building is your asset. You are responsible for protecting the asset’s value by:
- Keeping the property properly maintained according to legal and market standards. This means you don’t let trash accumulate, don’t permit illegal parking, provide adequate lawn care and maintain outdoor furniture.
- Performing repairs, fixing faulty devices and structures, unclogging drains and gutters, and preventing water accumulation.
- Paying the mortgage, the utilities and all the other bills on time. Avoiding late charges and any actions that would hurt your credit rating. Setting up landlord utility accounts.
- Maintaining your insurance for the property and demanding proof of renter’s insurance from tenants. Obtaining an umbrella liability policy through your LLC or partnership.
- Setting and adjusting rents.
- Finding and screening tenants. Handling leases, including setting language.
- Handling move-outs and evictions.
- Managing the property’s budget and properly maintaining records. Importantly, you must keep a list of all inspections, maintenance requests, signed leases, complaints, repair and maintenance costs, and insurance premiums.
- Paying all applicable taxes.
Responsibilities Toward the Law
You must be familiar with the Fair Credit Reporting Act (FCRA) the Fair Housing Act (FHA), and other applicable laws. Your actions must include:
- Complying with the FCRA when handling sensitive applicant data. Keeping the data secure and confidential. You need consent to run a background check, so ensure your rental application form authorizes do so.
- Complying with the FHA and avoiding prohibited discrimination. Specifically, avoiding ads like ones stating, “no minorities” or “single female renters preferred.” Also, issuing an adverse action form to denied clients.
- Ensuring neighbors don’t disturb tenants illegally. Thoughtfully, including appropriate language in lease.
- Not abusing your right to enter. You can enter in cases of emergency, to make repairs or to show the property to prospective new renters. Importantly, you should notify the tenant in advance, according to state law.
- Handling the security deposit appropriately in a separate account. You can’t commingle the funds with others. Furthermore, you must tell the tenant where you are keeping the deposit. In addition, you must follow applicable state laws regarding security deposits. These laws might involve maximum deposits, handling of interest and deadlines for deposit returns.
- Observing state law for collecting other upfront fees. These might include first and last month’s rent, pet deposits and application fees.
- Properly notifying tenants in advance of lease renewal or intention not to renew lease. Typically, you give two-months’ notice either way.
- Following state rules for evictions, rent increases, move-out inspections, and small claims court.
Responsibilities After a Fire
It’s a terrible thought, but fires do happen in apartment buildings every year. In some cases, the fire destroys the entire structure. You need to respond should the worst occur, including taking these steps:
- Contacting your insurance agent and starting a claim process. You need to take comprehensive pictures of all damaged structures.
- Contacting a damage restoration company recommended by your insurer.
- Relaying to authorities any tenant comments, actions or confessions that cast light on the circumstances.
- Contacting the American Red Cross to help your tenants.
- Submitting to your insurer a written inventory of damaged or destroyed property, including appliances, structural elements and other items.
- Obtaining a copy of the official fire report and noting the cause of fire.
- Preparing to sue person or persons responsible for the fire. Naturally, you will need an experienced attorney to handle this. Or, your insurance company might control this on your (and its) behalf.
- Making plans to restore the property or write it off as a complete loss.
- Explaining to tenants that you are not legally responsible for their hotel bills if the fire forces them out of their apartments. You must return unearned rent and security deposits of tenants who move elsewhere.
Pros and Cons of Owning an Apartment Building
For some, owing your apartment building is a dream come true. Moreover, it can be the start of a real estate empire and the riches it brings. However, it can also be hard work, and if you don’t handle the finances properly, a potential money pit. Here are some of the most important pros and cons you should consider before owning an apartment building.
Pros of Owning an Apartment Building
Financial security and pride of accomplishment top the list of pros:
- Financial Security: A good apartment building can return decades of steady monthly income to the owner. You also might be able to sell the building for a substantial capital gain.
- Reaping Tax Benefits: The tax laws take very kindly to property owners. Owning an apartment building lets you take all the usual business expenses, plus a hefty depreciation deduction. Also, the current tax law provides a 20% qualified business deduction to properly structured real estate entities. Furthermore, you can take advantage of Section 1031 Exchanges to defer capital gains on investment property.
- Control: You call the shots. That means you can decide how much personal effort, if any, you will devote to running the building. If you like the work, there is plenty of it every day, all earning you sweat equity. Alternatively, you might rather do something else with your time. In that case, you can hire a management company and just collect income. And if you do set it up as a passive investment, you can buy the building through your IRA. Happily, this allows you to postpone taxes until age 70 ½.
- Diversification: Owning rental property is a great way to diversify your portfolio of stocks, bonds, race horses or whatever else you own. Remember, diversification decreases risk.
Cons of Owning an Apartment Building
Risk is the most important disadvantage of owning an apartment building.
- Risk: Even the best laid plans can go awry. Unfortunately, it’s possible that events will conspire against you and result in a financial loss. However, remember that economic downturns convert many homeowners into tenants. Risk mitigation includes adequate insurance, proper financing and a realistic business plan.
- Illiquidity: The market might not be ready to buy your apartment building when you’re ready to sell it. However, you do have alternatives, such as a master lease agreement.
- Changing neighborhoods: Your apartment building might suffer if a neighborhood becomes run down. On the other hand, you might benefit from gentrification.
Apartment Building Ownership Financing
Normally, you would seek an acquisition loan to purchase an apartment building. You need to know the requirements for loan-to-cost ratio and debt service coverage ratio. You’ll also require an accurate cap rate so that you can price a bid properly. If the property is new, you might seek short-term financing until the rents stabilize at, say, 95%. You can then refinance with a three-to-five-year mini-perm loan. Finally, you can refinance again with a takeout loan.
If you already own an apartment building, you might use a short-term bridge loan for a sell-buy transaction. You use some proceeds from selling your building as equity in a newer, higher-end property. Truthfully, a bridge loan works well because sometimes it’s hard to get the timing of the closings right.
Remember, Assets America® offers apartment building financing (aka multifamily loans) options starting at $5 million, with no upper limit. We are an experienced commercial loan brokerage firm with greater than three decades of experience, and a trusted network of banks, institutional lenders, private lenders and alternative funding sources. Therefore, we can find you the best deals available from our lending sources and deliver them to you. Contact us today at 206-622-3000 for more information.