How to Buy an Apartment Building: A Beginner's Guide
Apr 29, 2023
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.
Luckily, you don’t have to be a veteran investor to know how to buy an apartment building.
How to Buy an Apartment Complex
Buying an apartment complex can be a lucrative investment strategy, offering a steady stream of income from multiple tenants. Apartment complexes differ from single family rental properties and residential property, as they are considered commercial properties. This unique class of investment properties can be a valuable addition to your portfolio.
One of the biggest benefit of buying an apartment building is the scalability. With a single acquisition, investors are able to double or triple the size of their portfolio in term of number of doors. With so many tenants, they are also able mitigate the risk of vacant units without interrupting their cash flow. So, how do you buy an apartment building?
The Apartment Buying Process
To buy an apartment complex, it's essential to work with experienced real estate agents, a commercial real estate broker, and a multifamily loan brokerage. These professionals can help you navigate the complexities of purchasing and managing apartment tenants. When evaluating an apartment property, consider the market value, purchase price, and net operating income. The income approach is a common method for assessing the value of multifamily real estate based on the property's rent roll.
- 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.
Cost to Buy an Apartment 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, obviously the more expensive it will be. For example, a large mid-rise complex with 100 units could cost tens of millions of dollars or more. Luckily, there is a nice middle ground of apartment buildings that are smaller than a 100 unit mid-rise but larger than a fourplex. These apartments will typically cost between $80,000 and $200,000 per door (unit).
Financing options for apartment complexes include non-recourse loans, which protect your personal assets, and recourse loans, such as bank balance sheet loans, that involve the borrower's personal property as collateral. Seller financing and partnerships with property management companies can also provide flexible financing and management solutions for apartment complex owners.
Benefits 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.
Disadvantages 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.
As an apartment complex owner, working with a property manager is crucial to ensure a smooth operation. They can help implement apartment investing strategies, such as increasing rents or renovating units, to maximize your investment. When compared to single family homes, apartment complexes offer the advantage of housing multiple tenants, making them a popular choice for real estate investing.
In summary, buying an apartment complex is a rewarding investment strategy that requires collaboration with knowledgeable real estate professionals, a thorough understanding of financing options, and effective property management. Don't miss out on the benefits of multifamily real estate – start exploring your options today!