How to Buy an Apartment Building in 2020 (+Cost)
May 04, 2020
Buying apartment buildings is a lot more complex than purchasing single-family properties. You could even say the process of purchasing and managing these complexes is more of a career than an investment strategy. However, it can also be very profitable.
WHAT WE’LL COVER:
- Chapter 1: Is Buying an Apartment a Good Investment?
- Chapter 3: How Much Does Buying an Apartment Cost?
- Chapter 3: Multifamily Building Classifications
- Chapter 4: How to Buy an Apartment Building Complex in 9 Steps
- Chapter 5: Pros of Buying an Apartment Complex
- Chapter 6: Cons of Buying an Apartment Complex
If you’re interested in pursuing this course of action it’s highly advisable that you get familiar with the basic concepts and steps required first. You also need to decide if an apartment building is the right investment for you, and learn more about managing property finances.
Buying apartment buildings can give excellent returns on investments, but there are several factors that influence these ROIs. Ultimately, the risks and income need to be weighed up against each other by determining the risk-adjusted return.
Consider the full financials of a residential block before you make an offer. These details include gross operating income (the rentals coming in), vacancy rates, and building issues that could affect the type of financing you will be able to secure. They will give you the net operating income (NOI), which is the profit that remains from the rent after all expenses have been paid.
Once you know the NOI, you can work out the capitalization rate which will show you the rate of ROI. To make the calculation, divide the NOI by the purchase price. The figure that you get is your capitalization rate. Make sure you compare the rate of all the properties you’re considering against each other to make the most favorable selection.
Net Operating Income = Gross Operating Income – Operating Expenses
You should also look at the capitalization rates of similar properties in the area – for example if you’re looking at multi-unit buildings, look at cap rates for multifamily investments in that area that are of similar age and size. If they’re considerably lower or higher than your prospect, you’ll have a good idea of whether to jump on or pass up the deal and look at other options for buying apartment buildings.
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The cost of buying apartment buildings depends on the area in which they are located, their size and number of units, whether they are FSBO (For Sale By Owner) or being sold via a real estate agent or business broker who will take commissions, and on how they are classified.
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- Class A buildings are mid- or high-rise and feature gardens and luxury amenities such as clubhouses, tennis courts and swimming pools.
- Class B apartment blocks are well-maintained but are up to 20 years old. They may have amenities, but they will be fewer and more dated than what you’d see in a Class A complex.
- Class C describes residences with limited or no amenities that can be up to 30 years old. They may also require renovations and repairs.
- Class D blocks almost always need work, are older than 30 years and may be low-income subsidized housing estates.
Generally, investors buying apartment buildings are advised to go for the mid-range Class B and C options to avoid the high price of Class A and extensive overhauls and management required by Class D.
Learn about the biggest multifamily housing trends that you need to know in 2020
1. Create a Business Plan
In your plan, consider how much time you can dedicate to buying apartment buildings and managing them thereafter. Is this your new income plan after hitting a career slump, or is it just a side project for a little extra cash? You should also outline the financial and property details that you’ll need to get, so that you can enter them in as you obtain them.
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2. Set a Budget
Given your current financial situation and the potential of the building you’re considering purchasing, determine the amount you’re willing to spend on an apartment complex.
3. Choose a Market
Think carefully about your target demographic when you’re buying apartment buildings. This will influence how much rent you can charge, and the type of property you’ll buy. For instance, if you want to cater to college students, loft apartments would be suitable. The biggest market is for two-bedroom units.
4. Get Pre-Approved for Financing
Discuss your borrowing options with your broker or advisor and apply for the loans best suited to your situation.
5. Decide What Type of Residential Building to Buy
Decide what class of building to purchase and how many units you’re interested in. You should also make a clear decision on what you want your ROI and capitalization rate to be.
6. Shortlist Potential Apartment Buildings to Buy
Look around at the options yourself, or enlist the help of a real estate agent, a commercial real estate agent or a business broker. If you’re working on your own, join a local real estate club to network and find out about other viable properties.
Agents or brokers will have access to multi listing services, which could uncover better prospects for you. However, these agents do come at a price, so think carefully before you engage them. Either way, once you’ve checked all the options, you can shortlist the ones that you’re really interested in.
7. Evaluate the Property & Surrounding Neighborhood
How many amenities does the complex and its surrounds have available? The more facilities that there are, the more desirable the units will be to prospective tenants. On-site amenities include swimming pools and extra visitor parking, while those in the surrounding area include cash machines and convenience stores.
The neighborhood will also appeal more if it’s maintained properly and safe, so don’t forget to check that along with the construction details, cost per unit, occupancy rate and current rentals. Finally, check the capitalization rate and ROI, to be sure they are in line with the goals you set in Step 5.
8. Make an Offer
The penultimate step in buying apartment buildings is making an offer to purchase. Generally you’ll work through your real estate agent to help facilitate residential and commercial property deals.
9. Close the Purchase of Your First Apartment Building
Select an experienced title company or escrow agent to close the transaction. All residents’ deposits should also be transferred to you and kept in separate escrow accounts that can be maintained using a free property management software tool.
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1. Monthly Recurring Income
If you do your due diligence to make sure that the finances and deal are sound, the monthly income that you receive from your rental should offset any expenses and still leave you with a profit that is large enough to warrant the time you spend on its management.
2. New Source of Income
You’re also spreading your risk when you’re renting out multiple apartments. If you’re the landlord to a single-unit house and your tenants leave, you’ll lose the entire income that you derive from that property. In a complex, if residents move out the loss is mitigated by the rents that your other lessees are still paying.
3. Financing is Based on Revenue of the Building
When buying apartment buildings, financing is based on the residences’ revenue, and not on your personal credit and financial situation. This can help you secure loans, even if your Fair Isaac Corporation (FICO) score is low.
4. Property Is a Good Investment
If the property is in good condition and located in a desirable area, its value should continue to grow over time. The more resources you put into maintaining and improving it, the more it will be worth. You’ll be able to charge higher rents, which in turn will drive the overall value of your investment up even more.
1. Resident Management
With more individual residences, the management of an apartment complex is by its very nature a lot more labor-intensive – and potentially stressful – than the management of a single lease. When there are more than four units involved, landlords often need to enlist the help of professional property managers. This can make operations run a lot more smoothly, but it comes at an extra financial cost.
2. Finding & Retaining Reliable Tenants
Single-unit, standalone homes typically attract families or even individuals who stay for five years or even longer. They are reliable with their rent, take care of the place where they’re living and become more invested and immersed in the community. When you’re looking at buying apartment buildings, you’ll need to budget for the administration and advertising fees that come with higher tenant turnover and finding new renters.
3. Maintenance Costs
The maintenance cost per unit is lower in a complex than in a single residence, but the overall amount will be bigger. The tenants will probably be less careful with the property, so daily wear and tear will be a lot more pronounced.
When major issues such as plumbing or heating costs arise, you’ll need to sort them out in several, if not all, units at the same time. The expenses incurred here can be exorbitant, and you might not even be aware of or able to anticipate any of them in advance.
Older buildings, for instance, often have lead paint and asbestos-wrapped pipes that will need to be dealt with. You’ll definitely need an inspector to check the property out in its entirety. If you will need to spend extra funds on this kind of repair work, you need to make sure that you can offset them with large enough profits before you put any money down.
Once you purchase your first apartment complex, you’ll be able to start generating revenue from your new investment.
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