Robert Palley is a Chicago-based real estate professional and co-founder of Granite Realty Partners, LLC, where he has overseen property acquisition, development, and capital structuring since 1998. With a career spanning decades, he has contributed to more than $1 billion in real estate transactions, including roles at Jupiter Realty Corporation, The Levy Organization, and Oliver T. Carr Company. Robert Palley holds a master of business administration in finance and a bachelor of arts in biology from Northwestern University. His extensive experience in multifamily and commercial real estate provides valuable perspective on apartment investing, particularly in evaluating opportunities, managing risk, and navigating the financial and operational complexities of the market.
A Guide to Apartment Investing
Apartment investing involves purchasing residential properties with multiple units, typically classified as multifamily real estate, and renting them out to tenants. There are several reasons why investors choose multifamily properties, including the stable cash flow they provide.
With multiple tenants under one roof, vacancy risk is spread out. For example, if one tenant leaves a 20-unit building, the owner is still collecting 95 percent of the income. This is different from single-family home rentals, where if the tenant leaves, vacancy stands at 100 percent. Other reasons to invest in apartment buildings are the high demand in urban areas, easier management at scale as compared to single-family homes, and tax benefits.
However, apartment investing is a complex process involving multiple steps. An investor looking to purchase an apartment must start by analyzing their financial position. How much money do they have to invest? Is it enough to cover the cost of an apartment in their desired area?
Even if the investor will use a loan, as is often the case, lenders require a down payment of around 20 percent. The investor’s cash on hand should, at the very least, suffice to cover this and any repairs and renovations they will have to do post-purchase.
For investors who cannot afford a 20 percent down payment, there are options like FHA loans, which require a 3.5 percent down payment. Investors can also opt to purchase Class B or C properties over Class A properties. Class A properties are usually new apartments in prime locations, Class B properties are well-maintained properties in okay neighborhoods, and Class C properties are older apartments in areas with lower desirability. It’s worth noting that cheaper properties may require extensive repairs that will raise the overall cost.
When selecting a property to invest in, location is crucial. The best apartments are in areas with strong job growth, good infrastructure and security, and proximity to amenities like hospitals, schools, parks, and shopping centers. Once investors have narrowed it down to a few locations, they can compare those areas based on trends in rent prices, vacancy rates, and supply of apartments under construction. Local real estate records have this data.
The purchase price should represent a fair value for the building considering its location, value of adjacent properties, and net operating income (NOI). NOI is derived by taking a property’s gross rental income and subtracting expenses like insurance and management fees.
Prior to purchase, investors should have a professional inspector check the property. The inspector will analyze the condition of the apartment block, pointing out structural issues and areas in need of repair. They will also confirm that the property has a good title with no liens and complies with zoning laws. If an apartment will require significant repair work or has encumbrances in its title, it is better not to go ahead with the purchase.
In addition, investors should hire an accountant to review the apartment block’s financials to ensure accuracy with regard to rents, expenses, and tax records. An accountant will further advise on the profitability of the investment, specifically whether NOI is sufficient to cover recurrent expenses and debt service costs, leaving investors with profit. A lawyer should be responsible for drafting and reviewing the purchase contract.
Once the purchase is complete, the investor will have to consider management. First-time apartment investors should have professional managers manage their property as they build experience in the industry.
About Robert Palley
Robert Palley is a co-founder and partner at Granite Realty Partners, LLC, in Chicago, Illinois. He has supported the acquisition and development of hundreds of millions of dollars in real estate and manages capital structuring and investment opportunities for the firm. His prior roles include leadership positions at Jupiter Realty Corporation and The Levy Organization. Robert Palley holds an MBA in finance and a bachelor’s degree in biology from Northwestern University.
