Many people may find the idea of purchasing an apartment complex to be overwhelming. Beginner investors in particular should bear this in mind. Apartment building purchases have allowed real estate investors of all levels to exponentially increase their wealth, and you can too.
To purchase an apartment complex, you don’t need to be a significant investor. Even the most seasoned investors once wanted to purchase their first multi-family property because everyone has to start somewhere. Surprisingly, purchasing an apartment building isn’t all that different from purchasing a smaller piece of real estate. Of course, investing in a bigger rental property, like an apartment, has its advantages.
The size is the main advantage of apartment ownership. Investors can double their portfolio with a single purchase. Due to a large number of tenants, they can also reduce the risk of vacant units without affecting their cash flow. Buying may seem like a risky proposition at first, but the long view is quite different.
Table of Contents
Is Buying An Apartment Complex A Smart Investment?
The risk-adjusted return, or the amount of money you can expect to make despite the risk you assume, is the most crucial factor to take into account when making any investment. Apartment buildings have excellent risk-adjusted returns overall, but this varies for each individual property, typically depending on the purchase price that you are able to buy the apartment for.
In short: apartment buildings in general are good investments, but not every individual apartment building is a good investment. When evaluating a property, prospective investors should exercise caution and consider a variety of aspects, including the property’s condition, price in relation to other comparable properties, regional real estate trends, and rental vs. ownership demand in the area. The easiest way to do this is with a rental property calculator that lets you forecast the returns you can expect from purchasing a particular apartment complex
Nevertheless, a place to live is always needed, and renting an apartment is frequently the most cost-effective choice. The current lack of affordable housing is good news for owners of apartment buildings that provide affordable to mid-range housing. On the other hand, a lot of brand-new, luxurious apartments are currently being constructed, and those will be the first to reduce rent or become vacant if the economy falters.
What Is The Average Cost To Buy An Apartment Building?
Depending on what you consider to be an apartment building, the average cost of purchasing one varies greatly. The average cost drastically decreases if you think about purchasing a duplex, triplex, or fourplex along with an apartment building. In my area, I could put only 3.5% down on a fourplex that generates around $100,000 in cash flow and uses an FHA loan if I was willing to live there.
Cons Of Investing In An Apartment Building
- less straightforward to diversify your market exposure It’s difficult for new investors to purchase a large number of apartment buildings because they can be expensive. This means that diversifying your portfolio across various market classes is difficult.
- Higher turnover rate: Longer-term tenants are typically found in single-family homes. Apartment complex owners must spend more time finding new tenants and making their units move-in ready because there is a higher resident turnover rate.
- Large down payment: Purchasing an apartment building is typically expensive and frequently necessitates a sizable down payment. A multi-family property typically requires a larger down payment than a single-family rental property.
Pros Of Investing In An Apartment Building
- High potential for income Purchasing one large apartment will enable you to expand your portfolio more quickly than renting out individual homes.
- Appreciating asset: Apartment complexes are an asset that will increase in value, like all real estate. After a few years, you can profitably sell your complex if you decide you no longer want to manage it.
- Dependable cash flow: Apartment complexes offer a steady source of income. You still have other units that are paying, so even if some of them are empty or the tenants aren’t paying, your expenses will still be covered.
12 Steps To Buy An Apartment Building
- Set Your Goals – Without a plan, it is impossible to arrive at your destination. Work backward from your goals for owning an apartment building to determine how much income you will need.
- Set Your Budget – Decide on a price range for the apartment building you want to purchase. Maintain a diverse portfolio and make sure you have enough cash on hand for repairs. Over 50% of your investment portfolio should not be concentrated in a single asset.
- Learn how to forecast cash flow – The renal property calculator that we previously mentioned can be useful in this situation. So that you can direct your time and effort appropriately, you should be able to model potential deals.
- Choose a market – Before you start looking outside of the state, I advise you to look in your local market first and model a few deals to see if they are feasible. The management of a location that is accessible by car is much simpler, and you can feel more assured that you are familiar with the neighborhood’s dynamics.
- Get Pre Approved For Financing – Speaking with three or more different lenders will help you compare their various offerings and rates. It’s a good idea to get pre-approved with at least 2, so you can compare specific quotes once you find your property.
- Start looking for properties – You can use well-known real estate apps to locate deals, such as DealMachine, which assists investors in locating and researching distressed properties and connecting with motivated owners quickly via batch skip tracing and direct mail campaigns. Along with networking with brokers who have off-market properties, you can also search on websites like the MLS, Loopnet, and other commercial real estate portals.
- Start making Offers – Keep your emotions in check! These are investments, so even if your offer is significantly below the list price, you should still make it.
- Inspections– Ensure that your apartment building is in the same condition as it was when it was advertised. Considering that they can be the most expensive to repair, the roof, HVAC, plumbing, and electrical systems should all be examined.
- Choose a property management company – Your investment will succeed or fail depending on the management company you select, so be sure to interview at least three firms and get the opinions of some of the current owners they manage property for.
- Locking in your financing – Return to the same lenders who preapproved you and bring the actual deal you found so they can compare rates. Choose a lender, and they will review your personal financial statement to determine whether you are fully approved.
- Closing day – Prepare to sign a ton of paperwork, then take a moment to acknowledge your accomplishments.
- Growing your portfolio – It’s time to repeat this process and start looking for your next investment once your investment has stabilized and is producing cash flow.
5 Tips For Buying An Apartment Building
You’ve decided that purchasing an apartment building is the best investment for you, right? The buying process can be streamlined by following these five expert tips.
1. Find Off-market Properties
Find a good deal if you’re serious about purchasing an apartment complex. Here are two ways.
Download real estate software: You can register for real estate investment software that is designed to assist buyers of off-market properties. For investors looking to find apartment buildings to flip, BRRR, or wholesale, apps like DealMachine are helpful resources.
How it works: While driving around town, you may notice a house that appears to be a great fixer-upper. You pull up the house on your DealMachine app to get more information about it as well as the owner’s contact information.
From there, you can either call the owner to see if they’re interested in selling or immediately send them direct mail through the app.
Batch skip tracing services are another service that DealMachine and other apps provide to help investors locate and get in touch with the owners of off-market properties.
Hire a broker who values investors: Another option is to work with a realtor who specializes in assisting investors and has connections to a lot of sellers who want to sell but don’t want to put their homes on the market.
2. Choose Your Property Type
There are numerous types of apartment buildings, including high-rises, mid-rises, garden-style, and walk-ups, among others. Before choosing which type of property to buy, be sure to assess the local real estate market trends since preferences will vary by location. Based on what they observe while working on your behalf, real estate agents can offer advice.
Additionally, you must choose whether you want a brand-new apartment building or one that needs some renovations. Fixer-uppers can typically be found at better prices, but they demand a bigger time commitment and an acute eye for undervalued properties.
3. Visit Multiple Properties And Do Your Homework
Don’t buy the first house you come across. Investigate the market in your area, have the property inspected to determine its condition, and tour as many homes as you can.
A good predictor of your investment’s likelihood of success is the ratio of renters to owners in a given area. Consider these statistics before buying an apartment in a city where there are more renters than owners.
4. Understand The Financial Process
A 20% down payment is required to purchase an investment property. Additional costs include insurance, mortgage payments, maintenance and management fees, and marketing expenses.
Your bottom line may suffer greatly from maintenance costs. Look up the going price for some of the most common renovations, such as repainting the building’s exterior and the apartments’ interiors for when tenants move out, of the area before purchasing an apartment complex.
Make sure you’ll still be in the black after all of these costs. There is no worse situation than having a multi-million dollar apartment building that is losing money every month.
5. Choose The Right Lender
- Apartment loans with government backing: These loans range in size from $750,000 to $6 million and have high LTV (loan-to-value) ratios. This loan type is offered by the FHA, Freddie Mac, and Fannie Mae. The usual rates range from 3.5 to 6%.
- Bank Balance Sheet Apartment Loans: Many local lenders enjoy lending money to investors to purchase apartments. You can expect loan terms of 20-25 years, with balloon payments ranging from 3-15 years, and interest rates between 3-6%
- Options for Quick Apartment Financing By providing mortgages quickly, these loans are designed to help investors compete with cash buyers. With LTVs up to 90%, the minimum loan amount is $100,000. Rates are high at 7.5–12%.
How Much Money Can I Make From An Apartment Building?
There are numerous ways to make money in real estate, especially in apartment buildings. The most obvious is renting out the space to generate money. Apartment buildings continue to be popular investments, so you can profit from their value growth as well. Over time, their worth tends to rise significantly. Even if the income from rentals only allows you to break even, the property’s appreciation may offer impressive returns.
Other choices include borrowing money against the asset and using the tax advantages of the asset. You might be interested in knowing how much rental income these more subtle techniques generate. Any apartment complex should have a cap rate between 4% and 10%.
What Types Of Loans Can Apartment Buildings Get?
Residential loans are available to the buyers for structures with 4 units or fewer. There are three commercial possibilities if an apartment building has more than four units:
- Government-backed loans: The loan-to-value ratio for these loans, which range from $750,000 to $6 million, is frequently high. Rates typically range from 3.5% to 6%.
- Loans on a bank’s balance sheet These 20–25 year loans are from regional lenders. On rare occasions, they also have balloon payments that last between three and fifteen years. Similar rates range from 3% to 6%.
- Options for short-term financing: A minimum of $100,000 is required for these, and they are readily available. At 7% versus 12%, rates are higher than other options.
Can I Buy an Apartment Complex With No Money?
On rare occasions, sellers will provide seller financing that covers either the entire purchase price or just the down payment. However, do not anticipate this to be the case in your circumstance. Instead, ask your seller if he or she is willing to make that offer.
How Long Does It Take To Run A Complex Of Apartments?
An apartment complex with numerous separate units is too big for one person to manage alone. To take over the daily operations, you will need to hire a property management company. You can cooperate with the property management company to be a part of important decisions and emerging problems.
However, the property management company can essentially act in your place. You can therefore participate to the extent that you choose. Because of this, choosing the right business to work with is even more crucial to the success of your project.
