How To Buy an Apartment Complex: A Beginner’s Guide

IN THIS GUIDE

If you’re looking to invest in real estate, consider purchasing an apartment complex. Not only can owning an apartment complex provide a steady stream of rental income, an apartment building can be a relatively low-maintenance investment compared to other types of properties—especially if you hire a management company. Still, it’s important to understand how to buy an apartment complex before you begin the process, including how to finance the purchase and what to look for in a property.

Here’s a step-by-step guide to how to buy an apartment building:


1. Explore Apartment Complex Deals

Before shopping for an apartment complex to invest in, research some available deals on your own. Compare different types and sizes of apartment buildings, and consider the financial ramifications of investing in a multifamily complex. This may involve exploring multiple markets, building spreadsheets to compare cap rates for various properties, and creating pro formas to forecast the financial performance of various deals. 

Get started by searching for properties online to get an idea of the current inventory. These are a few top websites that can provide information on available apartment buildings and other commercial properties:


2. Determine How You Will Finance the Purchase

Once you have an idea of the types of properties available, consider how you plan to pay for an apartment complex. If you aren’t paying cash, you will need to secure a loan. Luckily, there are many different loan types to choose from. Work with a lender to determine which type of loan is best for you.


Types of Loans Available for Apartment Buildings

  • Conventional financing. For commercial real estate (defined as multifamily investment properties with five units or more) a conventional loan requires borrowers to make a down payment of at least 20% of the total purchase price. Loan terms vary, but they can be as long as 30 years and include either a variable or fixed interest rate.
  • Bank balance sheet loans. A bank balance sheet loan is a loan that is funded by the bank’s own capital. These loans are typically used for larger purchases, such as apartment buildings.
  • Short-term financing. Short-term financing is a type of loan that has a shorter repayment period than traditional loans. These loans are typically used for properties that are being flipped or sold within a few years.
  • Bridge loans. A bridge loan is a type of short-term loan that can be used to purchase an apartment building—referred to as a multifamily bridge loan. These loans are typically used when the borrower does not have the full amount of the purchase price and needs to “bridge” the gap.
  • Hard money loans. A hard money loan is a type of short-term loan that is backed by collateral, such as real estate. These loans are typically used by investors who are flipping properties or those who have bad credit.
  • Government-backed loans. Depending on your finances and business structure, you may be eligible for a loan from the U.S. Small Business Administration (SBA). SBA loans can last up to 25 years and require a down payment equal to or greater than 10% of the sales price.  
  • Seller financing. In some cases, an apartment building’s current owner may be willing to serve as the bank. In this case, the seller sets the financing terms and the buyer makes a down payment and then pays for the property over time. Seller financing terms are usually less favorable than loans from traditional financial institutions. However, there are no minimum qualification requirements, so the seller/creditor can be more lenient.


3. Decide If You Are Ready to Own an Apartment Building

Buying and owning an apartment building can be a rewarding experience, but it’s not necessarily for everyone. If you still intend to invest in a complex after reviewing the market and researching financing, ask yourself a few questions to decide if you’re really ready.

  • Are you financially ready to incur the cost of acquiring this type of property? Owning an apartment building requires a large financial commitment to both purchase, maintain, and manage the property. 
  • What are your long-term financial goals? Creating monthly cash flow is great, but consider whether you want to tie up capital for an extended period of time by purchasing an apartment building.
  • Are you ready to become a landlord? Managing tenants and buildings can be a lot of work. Does your current work/life balance afford room for that type of added responsibility? Alternatively, are you willing to pay a management company to handle the property for you?


4. Choose What Type of Apartment Building You Want to Buy

There are several different types of apartment buildings, each with its own set of benefits and drawbacks. For instance, a high-rise apartment building may provide more rental income than a smaller complex, but it will also require more maintenance and have higher operating costs. If you’re ready to invest in multifamily real estate, take a deeper dive into available properties and determine the type of apartment building you want—and can afford. 

Here are a few of the most common types of apartment buildings:

  • High-rise apartments. Buildings that have at least eight stories are called high-rise apartments. In addition to their height, these usually contain a mix of one- and two-bedroom units.
  • Low-rise apartments. Low-rise apartments generally have no more than three stories with mostly two-bedroom units.
  • Garden apartments. These are lower-density apartment complexes that often have green space and landscaping.
  • Condominiums. Condominiums are privately owned units within a larger complex. Owners usually have the option to rent out their units.

Like all commercial real estate, apartment complexes are also classified based on their condition, finishes, and amenities. Also, consider these different levels of real estate when deciding what kind of property to buy:

  • Class A buildings. These are newer, luxury apartment buildings that often have high-end finishes and amenities, such as a swimming pool, fitness center, and concierge service. Class A buildings are typically the most expensive to purchase and operate.
  • Class B buildings. The Class B building qualification applies to mid-range apartment complexes. They usually have decent finishes and amenities, but may not be as luxurious as Class A buildings. Class B buildings are typically less expensive to purchase and operate than Class A buildings.
  • Class C buildings. These types of investments are older, budget-friendly apartment complexes. They often have fewer amenities and may not be in the best condition. Class C buildings are typically the least expensive to purchase and operate.
  • Class D buildings. Class D buildings are in poor condition and may be located in high-crime areas. They are typically the least desirable type of apartment complex to own.


5. Find a Good Real Estate Agent & Look for Properties

While it’s certainly possible to find properties on your own, enlisting the services of a real estate agent is often a good idea. A good agent will have an understanding of the local real estate market, the current demand for apartments, and the best way to present offers.

With the help of your agent, research the current real estate market and identify a few target properties. When analyzing potential purchases, focus on location. Busy, heavily populated cities usually have more potential renters than rural areas. Where demand is high, rental rates are as well. Plus, having a large pool of potential tenants means you are less likely to have vacancies in your building. 

Also consider areas with rising home prices. When the home purchasing market becomes unaffordable to a large number of people, they often turn to renting. Wherever you are looking and whatever type of apartment building you are considering, always remember that there is no such thing as too much research.


6. Look Into Local Property Management Resources

If you’re not planning to live in the apartment complex yourself—or if you simply lack the time or inclination to manage a multifamily property—you will need to hire a property management company. A good property management company can screen tenants, collect rent, and handle maintenance and repairs. They will also be familiar with applicable laws and regulations in your area.

While it may seem counterintuitive, start researching local property management companies before making an offer on a property. By doing so, you will be able to incorporate actual management costs when calculating a building’s cap rate and deciding how much you can afford to pay. 

When interviewing property management companies, determine what fees they will charge, whether they charge an additional maintenance surcharge, and what kind of discount they offer for multiple units. Also ask about their experience with managing similar properties, and obtain references from past clients.


7. Make an Offer and Conduct Due Diligence

Once you find an apartment complex you’re interested in buying, make an offer with the help of your real estate agent. Then, sign a sales contract and pay the agreed upon deposit—usually 10% of the purchase price. The contract will spell out the terms of the sale, such as the purchase price, closing date, and any contingencies.

The two major contingencies that need to be met before you close are the inspection and final loan approval. Hire a reputable inspector who will review every inch of the apartment building to identify any major repairs that need to be completed. Also work with your lender to ensure the loan approval is finalized in time to close—and when they request a document, don’t delay. 

Some of the things you should look into during this period include:

  • The financial history of the property. Carefully review the property’s income statements, tax returns, and expenses to confirm current and future revenue potential.
  • The physical condition of the property. Hire a licensed inspector to evaluate the condition of the property to ensure you won’t face substantial maintenance and repair costs after closing. This includes inspecting the units, common areas, and any amenities.
  • The legal history of the property. Work with a real estate attorney to research and evaluate applicable zoning changes, code violations, or lawsuits that have been filed against the property.


8. Close on the Deal 

Once the inspection is complete and the loan is approved, you are ready to close on your new apartment building. Closing usually occurs at a real estate office or title company. There will be quite a few documents to sign, so review them carefully before sealing the deal.

Always consult with a lawyer to review the sales contract and make sure that you understand all of the terms and conditions.


9. Start Generating Income & Grow Your Investment

The goal of buying an apartment complex is to generate income, and there are a few different ways to do this. The most common way is to collect rent from tenants. You can also generate income by charging for parking, laundry services, and other amenities. Keep in mind, however, that charging more for rent or amenities may result in a higher vacancy rate that cuts into your overall revenue.

Another way to generate income from an apartment complex is to sell it for a profit. If you’re able to make improvements to the property and increase its value, you may be able to sell it for more than you paid. You can also grow your investment—and portfolio—by purchasing additional properties to generate more income and achieve your financial goals.


How Much Does It Cost to Buy an Apartment Complex?

The cost of buying an apartment complex can vary depending on the size, location, and condition of the property. Generally, you can expect to pay from $2 million for a small building to $50 million or more for a large complex.

Note that real estate investors usually consider the cost of acquiring an apartment complex on a per door basis. This is accomplished by dividing the total cost of the property by the number of rentable spaces, and allows investors to determine the projected net revenue of each individual unit. Average per door costs typically vary by region, apartment type, and building classification.


Is Buying an Apartment Building a Good Investment?

Yes, buying an apartment building can be a good investment. It can provide you with a steady stream of income and the potential for long-term capital appreciation. However, it is important to do your due diligence before making a purchase. Inspect the property, review the financial history, and consult with a lawyer to make sure that you understand all of the terms and conditions.


What are the Benefits of Buying an Apartment Complex?

Buying an apartment building is not a good investment for everyone, but there are a number of advantages. Here are some benefits of buying an apartment complex:

  • When done correctly, investing in real estate can be very profitable
  • Rent from tenants can provide a consistent source of income—especially with high-occupancy apartment buildings
  • You can add value to your property by making improvements or adding amenities
  • Over time, your property is likely to increase in value


What are the Risks of Buying an Apartment Complex?

Before buying an apartment complex, make sure you understand the risks of this type of investment. These are some of the major disadvantages of investing in an apartment building:

  • You won’t generate any income while units are vacant
  • It may be necessary to cover the cost of repairs and renovations—especially for older buildings
  • Tenants may default on their rent, which can lead to reduced revenue, legal issues, and financial difficulties


How Much Money Can I Make From an Apartment Building?

The amount of money you can make from an apartment building depends on a number of factors, including the location, size, and condition of the property. Generally speaking, you can expect to generate a return of 5% to 10% on your investment.


Why Invest in Apartment Buildings?

Apartment buildings can provide investors increased monthly cash flow, tax benefits, and property value appreciation. And, after purchasing the first apartment building, the savings and income can grow exponentially with each new property an investor acquires. 

These are some of the top reasons to invest in apartment buildings:


Increased Cash Flow

Cash flow is one of the main benefits of buying an apartment building. The money you receive each month from the tenants in your apartment building is called gross rental income. Net rental income is calculated by deducting all of your monthly expenses like maintenance, property management fees, monthly debt service and other carrying costs from the gross income. Cash flow is what’s left over after you subtract cash reserves from your net income.

For example, if you have 10 apartments in your building that each rent for $1,000 per month, your monthly gross rental income is $10,000. If your monthly expenses across all 10 units add up to $3,000, you’ll get $7,000 each month. Set aside $2,000 for cash reserves and you’re left with $5,000 in monthly cash flow.


Tax Benefits

When you buy a whole complex, you’re responsible for maintaining all of the common areas. While this translates into higher monthly costs than for individual units, it lets you control how the complex looks. What’s more, you can capture tax write-offs for total maintenance costs.

There are also a number of other business expenses you can deduct from your taxes when you own an apartment building. Office supplies, advertising costs, attorney fees, and employee payments are just a few of the many deductible expenses. 

Apartment building owners and investors also can take advantage of a variety of tax laws to decrease their annual tax liability without spending cash, similar to other real estate investments. For example, you can use depreciation to write off some of the value of your apartment each year until it’s fully-depreciated. This reduces your tax liability without you having to spend any money. 


Appreciation

As time passes, real estate almost always increases in value. In recent years, the appreciation of both residential and commercial real estate has skyrocketed—even for apartments and condos, which typically appreciate at a slower rate. This allows apartment building investors to enjoy large profits when they decide to sell or cash-out refinance.


Property Management Economies of Scale

When you own a single unit investment property or duple, some of the operating costs can seem prohibitive and hiring a management company with a percentage-based fee may not make financial sense. 

When you own individual units, you end up paying a manager a percentage of rent income. However, when you own a complex, you can hire a dedicated staff on a part-time or full-time basis to manage it, so costs are fixed. Most management companies also often reduce fees for owners with more rental units. For example, a property management company that charges 10% of gross monthly rental income to manage a duplex may reduce that rate to 5% to manage an apartment building with 20 units.

Likewise, fixed costs like landscaping, parking, and exterior maintenance might be similar for a duplex and an apartment building, depending on the size of the buildings. Paying for those costs is much easier when you have 20 income-producing rental units as opposed to two.

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