A brief overview
Flipping an apartment is quite a different ball game to flipping a house. The goal is to improve the property so that the rental rate can be increased. Finding the right apartment begins with looking for universal appeal and making sure that the potential for profit is high.
Key Points
Flipping houses and flipping apartments may seem like the same concept, but there are a few key differences. If you’re in the business of house flipping and you’re thinking about branching into flipping apartments, you’ll need to make sure that you have a separate strategy. There are different elements that you’ll need to pay attention to because when it comes to flipping apartments, you’ll need to cater to either tenants or real estate investors as opposed to home buyers.
The goal of flipping apartments revolves around improving the apartment so that the rental rate can be higher, which makes the apartment more attractive either to tenants, or to investors who will pay more for it. Here’s our quick guide on how to flip apartments, along with some tips and tricks to help you along the way.
1. A different ball game
When we talk about apartment flipping, we are referring to the act of buying a condo in an apartment building, or even an entire apartment building itself, and renovating it. The goal is to sell the apartment and make a profit from it by attracting tenants who will pay a higher rental rate.
This may sound similar to house flipping but there are a few fundamental differences, with the main difference being how the property is valued. House flipping relies heavily on comparable properties to indicate the value of the house. Even after renovations, a house’s value still won’t go much higher than the upper end of the comparable properties price range.
On the other hand, apartments that have been renovated are going to be rented out to tenants, so their value is calculated by investors according to the capitalization (cap) rate, and not comparable properties. The cap rate is calculated by taking the property’s net operating income (NOI) and dividing it by the purchase price.
Basically, house flipping focuses on making improvements that will increase the home’s overall value, apartment flipping focuses on renovations that will lead to tenants paying a higher rent each month.
2. Getting to know the market
As with most types of real estate investing, knowledge is power, so getting to know the local real estate market is your first step. Once you understand the market, you’ll be able to identify a good deal.
Do some research with real estate agents in the area and get to know the prices of similar apartments that are listed in the same neighborhood. You can ask an agent about what types of returns people are getting on apartments, which types of people are buying apartments, and what the market supply and demand is like. These answers should help you get a good foundation as to what the apartment market is like in the area.
3. Finding the right deal
When you’re looking for a good apartment flipping deal, there are a few things to keep in mind.
- Distressed properties: Homeowners who are forced to sell their home due to foreclosure or other dire circumstances are what we call motivated sellers. Which means that they need to sell their property fast, and they aren’t necessarily looking to get the best price for it. As such, property auctions can be one of the best places to find good deals for real estate investors looking for an apartment to flip.
- Off-market properties: Many apartments are sold off-market because this allows for a certain amount of anonymity and there doesn’t need to be a signboard up in front of the building or complex. Finding off-market apartments is another avenue that you can use to find a good deal.
- The right property: Picking an apartment that needs work is part of the process. However, make sure that the apartment doesn’t need too much work, or it could end up being a tear down. The right apartment should be a fixer-upper that you can renovate relatively easily and get the most bang for your buck. Things like water damage may be costly to fix and result in an investor losing more than they should on a property, so watch out for repairs like these.
4. Calculating your potential profit
One of the most important steps is being able to work out the profit you could make on a deal.
You can start by getting a “rent roll” for the property, which is a detailed list of the tenants in the building, along with the rental amounts that they’re paying, and information about each unit such as the size and features. This is your starting point for working out what the rental price could be, once the unit is renovated.
To work out what sort of profit you can make on an apartment flip, you’ll need to factor in the expenses, purchase price, net operating income and the cap rate. Once you’ve worked out the higher rental rate that the apartment could get once the improvements are done, you can calculate roughly what your potential profit would be.
Your expenses include property management, taxes, insurance, renovation expenses, bad debt and additional vacancy. You’ll need to account for the possibility of defaulting tenants, and any months where the apartment may sit vacant while new tenants are being found.
For example, if you found an apartment that was listed at $150,000 and the rental currently being paid was $700 per month and your expenses were estimated at 40% of the total rent, the property’s cap rate and NOI would be worked out from this. Which you could then use to determine the potential NOI after the renovation.
This calculation is an extremely important part of making sure that you are entering a good investment deal before you purchase a property, so make sure that you crunch the numbers ahead of time.
5. The importance of universal appeal
Buyers have unique needs and the features that they’re looking for in an apartment can differ drastically between each buyer, based on their lifestyle. The trick to finding an apartment to flip is to get a property that has universal appeal. What attracts one buyer might dissuade another buyer, so the more universal appeal the apartment has, the better.
For example, an apartment that is near a grocery store or shopping mall will have a more universal appeal than an apartment that is near a school. People without kids may not find the thought of nearby schools appealing, but everyone needs stores. You can figure out how to prioritise the features of the apartment, according to the types of buyers in the area.
6. Sealing the deal
Once you’ve found an apartment that you’re interested in, it’s time to make an offer. After that, give yourself enough time to do due diligence which involves getting an inspection done and allowing time for this, as well as the escrow period. This can take anywhere from 30 to 90 days, depending on the apartment price. Once you’re happy with the condition of the home and your loan or funding is taken care of, you can close on the deal.
7. Good property management
One of the most important aspects of your apartment flipping journey is property management. Your property manager needs to understand your plan, and what is expected of them, so that they can be aligned with your investment goals. Bad property management can be a deal breaker, and a costly experience, so make sure that your property manager is on the same page.
8. Maximising the profits
In order to successfully flip an apartment, you’ll need to find one that has a higher cap rate than most of the other apartments in the area. This will give you some leeway on your project and allow you to sell at a better price once you’ve upgraded it.
The renovation projects that you spend money on are a vital factor to the deal being profitable. Looking at other apartments in the area that have a higher rent is a good idea, so that you can see what sort of improvements to make on the apartment to match that level.
Be smart about which projects you take on, sometimes they can be an unnecessary expense that won’t push the rental price up a lot. So, make sure that the projects you decide on have the biggest return on investment.
Final thoughts
The three main reasons that apartment flipping investments fail are: it was a bad deal, the property manager didn’t take care of the property effectively, or the investor didn’t keep tabs on their investment. If you decide that apartment flipping is the path for you, make sure that you get a good deal, the property manager is on the same page as you, and that you can maximize your profit by improving the apartment’s value immensely, without spending too much on renovations.