Over the last century, countless real estate investors have grown their wealth exponentially by buying apartment buildings. But, before they became successful investors, they all started as beginners, eager to purchase their first multifamily property.
Most people purchasing a single-family home will do so through a real estate agent; and, similarly, most investors buying an apartment building will want to work with a commercial real estate broker. A good commercial broker can help you identify quality apartment properties in your area, will have a good understanding of real estate investment fundamentals, and may even be able to help you negotiate on the sale price.
While it can be even harder to qualify for than an agency loan, the HUD 223(f) loan is the creme-de-la-creme of apartment purchase loans. While HUD does prefer more experienced borrowers, they offer LTVs up to 85% and DSCRs as low as 1.18x for market-rate properties, with higher LTVs and lower DSCRs for affordable properties. In addition, HUD offers its 221(d)(4) program for apartment construction and substantial rehabilitation, but these types of projects may not be ideal for a first-time apartment investor, and can be significantly more risky. All HUD multifamily loans are non-recourse, fixed-rate, and fully amortizing over 35+ years, making them a fantastic option for buy and hold investors.
Utility Billing: Many buildings, especially older ones, have shared utilities. This can be an issue, especially as tenants may overuse utilities if they are not paying the bill themselves, greatly increasing your expenses. However, this issue is commonly addressed by implementing a ratio utility billing system (RUBS), which divides all monthly utility expenses by the number of units in a building, with unit bills being prorated based on the size of a unit, the number of bedrooms/bathrooms, and other factors.
Contaminants/Health Risks: In addition to having shared utilities, older apartment complexes may contain contaminants such as asbestos or lead paint. These issues typically will need to be remediated by a new owner, which can be very expensive. Ordering an inspection early on in the decision-making process can help you determine whether a building has these issues, and, if so, how serious they are.
Plumbing Issues: Plumbing can be yet another issue faced by the owners of older apartment buildings. Repairs can be expensive, and additional contamination issues may arise if the building has lead pipes.
For most new investors, buying an apartment building might seem like a daunting task that's too difficult or expensive to achieve. I used to think that myself, until I closed on my first 12-unit apartment building. I realized that the whole processisn't much different than the process I'd already learned to buy a smaller rental property. The biggest benefit is the scale. With one purchase I was able to double my portfolio, while buying an asset with many tenants to mitigate the riskof a few vacant units hurting my cash flow.
The average cost of buying an apartment building depends on what you define as an apartment building. If you consider buying a duplex, triplex, or fourplex an apartment building, then the average cost goes down drastically. In my market I can buy a fourplex that cash flows for around $100,000. And if I was willing to live in the property, I could use an FHA loan and house hack by living in one of the units for only 3.5% down.
Apartment complexes can be tens of millions of dollars or more if you're buying huge high rises with hundreds of units. However, there is a middle ground of smaller apartment complexes that are bigger than a fourplex but still affordable enough for most investors.
In short: Apartment buildings in general are good investments, but not every individual apartment building is a good investment. Would-be investors must exercise caution when evaluating a property and take into account many factors, including the condition of the property, price relative to other similar properties, local 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.
However, people always need a place to live, and renting an apartment is often the most affordable housing option. There is currently a shortage of affordable housing in most American cities, which bodes well for owners of apartment complexes that offeraffordable to mid-level housing. On the other hand, there is currently a large number of new luxury apartments being built, and those will be the first to reduce rent or go vacant if the economy dips.
Get real estate software: You can sign up for real estate investment software that focuses on helping investors buy off-market properties. Apps like DealMachine are useful tools for investors looking to find apartment buildings to flip, BRRRR, or wholesale.
There are quite a few types of apartment buildings: high-rises, mid-rises, garden-style, and walk-ups, among others. Make sure to evaluate the current real estate trends in your area before deciding which type to buy, since popularity varies by region. Your real estate agent can make recommendations based on what they see in their day-to-day work.
The ratio of renters to owners in a region can be a good indicator of your investment's success probabilities. Cities with more renters than owners have more demand for apartments, so be sure to look into these statistics before making a purchase.
Upkeep expenses can take a big bite out of your bottom line. Prior to buying a complex, look up the local going rate for some of the most common renovations, like repainting the exterior of the building and the interior of the apartments for when tenantsmove out.
Working with a real estate agent is the best way to find apartment buildings for sale. They can use their professional network and the MLS to monitor new listings and alert you of suitable properties for sale. Besides a real estate agent, you can find listings in the local paper and online.
To determine an apartment's value using the income approach, start by finding the NOI. Multiply the monthly rent per unit by the number of units in the building, and subtract all operating expenses. Next, divide the NOI by the cap rate that's common in the properties location. You can find the cap rate by speaking with real estate agents in your area.
To finance an apartment building, you need to find a lender that offers government-backed loans, bank balance sheet loans, or short-term financing options. The rates and maximum loan amounts vary depending on the type of loan. Compared to residentialproperty lenders, commercial real estate lenders are more likely to base lending decisions on an applicant's real estate investment experience.
The first step in buying an apartment complex is to learn about the different types of apartment buildings so that you can decide which is right for you. You'll need to consider your goals and what you want to achieve to ensure the apartment building you buy can meet them.
Once you've settled on the building type, you'll need to pick a market. Choosing a market is one of the most critical factors for success with your investment. A negatively trending market can be disastrous, whereas getting into the right market at the right time can make the apartment building one of your best investments ever.
Once you have a budget, a target market, and a cash flow forecast in mind, you will want to start getting pre-approved for financing. Securing financing is one of the most important aspects of buying an apartment complex, so be sure to take it seriously, and prepare all the paperwork your lender will ask for, including detailed financials.
Once you know that you have financing options available, you can start to find buildings that would work for you. You should start by looking online - find a few buildings you would be interested in and start making offers. Even if your offers come in below the listed price, it is best to test the market and find a deal.
Start conducting your inspections. Apartment buildings are large investments, so be thorough with your inspection. Ask questions, and check out each unit. Pay particular attention to the roof, plumbing, HVAC, and electric system.
Once you have found the perfect building, return to those lenders with your actual deal and finalize the financing. With multiple pre-approvals, you will be able to compare rates and other aspects of the financing more accurately. Your lender will likely require an appraisal before finishing.
Be ready to spend a few months or years stabilizing your investment and getting all the finances in order. Once you start to get tenants on auto-pilot, you might even consider expanding with a new apartment building.
The first thing to consider is whether buying a specific apartment complex is a good investment and if you have time to manage the property. Owning a few small rental properties are easier to manage, and tenants are easier to work with on a 1-to-1 basis. With an apartment complex, there are more potential vacancies and large scale problems you might face.
Generally speaking, most apartment buildings are a good investment. However, not every building is automatically a good investment. Each should be evaluated separately. You should consider things such as age, condition of the property, price per square foot (compared to the rest of the market), and the local real estate market. Knowing how to calculate price per square foot, cap rates, and how to search for comps is critical.
The downside is that apartment buildings tend to require a hefty down payment. Buildings are usually much more expensive than the average house. This makes a 20% down payment significantly more expensive as well. You should expect to make a down payment of over $100,000 as even the most affordable buildings with just a few units will cost over $500,000. 781b155fdc