How to Buy an Apartment Building: A Beginner's Guide
Jun 18, 2021
Buying an apartment building is likely to seem like a daunting task for many. This is especially true for beginner investors. Real estate investors of all experience levels have grown their wealth exponentially by buying apartment buildings, and you can too.
You don’t have to be a huge investor to buy an apartment building. Everyone has to start somewhere and even the most successful investors were once newbies eager to buy their first multi-family unit. Surprisingly enough, the buying process for an apartment building isn’t all that different from the process for buying a smaller property. Of course, purchasing a larger rental property like an apartment comes with its added benefits.
The biggest benefit of buying an apartment is its scale. With a single purchase, investors are able to double their portfolio. With so many tenants, they are also able mitigate the risk of vacant units without interrupting their cash flow. While the risk of buying might seem big initially, it is quite the opposite longterm.
What are the costs?
Buying an apartment building doesn’t have to be expensive. The average cost of buying an apartment building really depends on what the investor considers to be an apartment. If you consider a duplex, triplex, or fourplex to be an apartment building, then the average cost will likely be significantly less than a larger multi-unit building.
When it comes to finances, banks will finance any building with four units or less as a “small apartment” and require a residential mortgage. Anything above that size is considered a “large apartment” and will require a commercial loan.
The more units the building has, the more expensive it will be. For example, a huge high-rise with 100 plus units will cost tens of millions of dollars or more. Luckily, there is a nice middle ground of apartment buildings that are smaller than a high-rise but larger than a fourplex. These apartments will likely cost between $500,000 and $1 million.
How much money can you make from owning an apartment building or complex?
Buying an apartment complex is an investment that gives back. In general, there are four main ways to make money from owning an apartment building.
- Rental Income- After all building and maintenance expenses are fully covered, the money that is left over is the owners cash flow to spend, save, or invest however they please.
- Property Appreciation- While the rent is the most obvious source of income, property appreciation. Because apartment buildings are not based on comps like single-family rentals, appreciation is greatly accelerated. This has led many investors to purchase buildings that break even on cash flow and rent because of the high return they will make with appreciation alone.
- Leverage- Depending on the interest rate of your bank loan and the return on investment of the apartment building, you can easily profit off of the difference between the two.
- Tax Benefits- All investors know that real estate is by far one of the most tax advantaged investments. When owning an apartment building, you will be able to depreciate your investments and write off your mortgage interest.
- Supplementary Income- In addition to rent, apartment owners can also produce supplementary income from laundry machines, vending machines, additional parking spaces, and pet fees.
Of course, the actual amount of money you make from investing in an apartment building will depend heavily on the size of the investment you make. In most circumstances, apartment owners can expect to make about 4-10% return on investments.
Pros and Cons of Buying an Apartment Building
Buying an apartment building is a big investment and expense. As with any big expense, there are pros and cons to consider before taking the plunge.
Pros of Buying an Apartment Building
- The earning potential is high: One large multi-unit space like an apartment building will help build your portfolio faster than if you were to purchase a single-family rental. More units equals more money coming in.
- It’s an appreciating asset: All real estate appreciates over time, apartment buildings included. If you decide to sell the building in the future, you are sure to profit.
- The cashflow is reliable: Investors can confidently depend on their apartment to bring in a stream of income. Even if the units are vacant or tenants are not paying, there are usually still other paying units to help cover expenses.
Cons of Buying an Apartment Building
- Down payments can be expensive: Apartment buildings are a large purchase that comes with a large price tag. As you can expect, the down payment for a multi-unit property is significantly more expensive than a single-family one.
- Difficult to diversify market exposure: Because apartment buildings are such a big expense, it often doesn't leave new investors the opportunity to purchase a lot of them. Apartment building will definitely help investors build their portfolio, but it will be difficult for them to diversify it in different market classes.
- The turnover is high: Apartment buildings tend to have higher tenant turnover than single-family rental units. This means owners will likely need to spend time (and often money) finding new tenants and preparing units for move-in.
The Apartment Buying Process
The apartment buying process isn't anything to stress about. Just follow the following steps.
- Come up with goals: What are you looking to achieve from buying an apartment building? Once you have a set goal in mind, calculate the income you need to generate from your investment to make a profit.
- Set your building budget: Setting your budget for how much you would like to spend is key to buying an apartment building. Investors will want to make sure they leave themselves enough money to pay for repairs, as well as to invest into other properties to continue diversifying their portfolio.
- Understand cash flow: Assuming that you would like to make an income from your apartment building, you will want to have an understanding of cash flow. Use a rental calculator to model prospective deals so that you know what to expect.
- Select a market: For convenience and confidence sake, always look into your local market before you start looking out of state. Model a few deals in a variety of markets to see what is feasible. It is easier to manage a building in an area that is nearby and that you are more knowledgeable about.
- Get pre-approved for financing: Once a market is selected, investors will want to get pre-approved for financing. Try and get approved by at least two different lenders so that you can compare quotes once you find a property.
- Research properties and make offers: Now it’s time to find your apartment building. Research properties through the MLS, commercial real estate websites, or through working with a broker like SimpleShowing. Visit multiple properties and once you find one you like, go ahead and put in your offer.
- Get the building inspected: Nobody wants to purchase a property that isn’t in the condition it was advertised. Make sure to get the building inspected. Some specific things to look at include the HVAC system, plumbing, and electrical systems.
- Hire a management company: Take the work out of your investment and hire a property management company. Be warned that the property management company you choose could make or break the success of your investment. Do your research, read your reviews, and interview several companies before making your decision.
- Secure financing and close: Provide the lenders you were pre-approved with the deal you have so that you can compare quotes. Pick a lender and they will help you get fully approved and ready to close.
- Continue growing your portfolio: Don’t stop there! Once you have stabilized your investment and are generating steady cash flow, continue growing your portfolio by looking for your next investment opportunity. Perhaps another apartment building?
One of the top tips for any beginner investor looking to buy an apartment building is to partner with an experienced agent. When it comes to apartment buildings, the best properties rarely ever hit the market and are instead sold by agents through private connections.
At SimpleShowing, our team of experienced agents have insight into the local real estate market and potential investment opportunities. Not only will you be able to receive helpful real estate guidance, but you will also receive an impressive buyer refund check when you close.
Considering apartment buildings are an expensive venture, why not save money if you have the opportunity? If a $400,000 single-family home can reward a buyer with a $6,000 refund, just imagine how much you could get back with a large, multi-unit property. Contact us today to start your apartment buying journey.