#Is Buying an Apartment Complex a Good Investment?
Buying an apartment complex can be a great investment if you do your homework and purchase in the right location and for the right price. You’ll also want to make sure your property is well-managed and that your rentals are appropriately marketed, ensuring vacancy rates are low.
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.
What makes an apartment building a safe and stable investment is the fact that when you own a building or apartment complex, you’ll have multiple individual apartments in your portfolio. So when a few are vacant, you will likely have others filled, which means you won’t lose as much cash flow. And, when you are entirely full, you will have a much larger stream of income. An apartment building allows you to expand your portfolio with just one purchase.
Additionally, apartment buildings, like all real estate, appreciate. Even if you are breaking even, appreciation over 5 - 10 - 20 years can provide good returns.
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.
Another downside of an apartment building is the fact that you will be working with multiple tenants. With a rental property, you might find a tenant for 12 months and then check in every few weeks. With an apartment building, you might have 6-8 tenants you are checking in with regularly, and then you might have to advertise the opening of your other 6-8 apartments. It is a lot more work to keep the income coming in. Of course, you could hire a property manager and other staff, but all this eats away at your profits.
Apartment buildings also come with more liability risks and legal compliance issues. If you have a pool or fitness center, there are even more potential risks involved. These may be attractive and essential to the success of your investment, but they can be both expensive and time-consuming upfront.
Apartment buildings are more difficult investments to exit as well. They generally take longer to sell. So it is vital that as the investor, you have other income sources in case you run into problems and have to sell sooner than expected.
#How Much Does an Apartment Building Cost?
Pricing ranges for apartment buildings based on numerous factors. First is the number of apartments in the building. If you consider duplex, triplex, or fourplex apartment buildings, then the price is relatively low compared to high rises, which might possess hundreds of individual units. However, as a beginner to apartment buildings, you likely aren’t going to start with a high rise. You are probably looking for something in the middle of the road - i.e., something with 4 - 16 units.
A second factor concerns the location of the building. Apartments in smaller, rural towns tend to be cheaper than similar-sized buildings in the heart of a large or even medium-sized city. Here though, it is essential to remember that rent will also tend to be higher in these areas, so the higher price may be worth it.
Over the last 12 months, the average sales price for an apartment complex was $1,598,091. However, the median sales price was only $238,400. This means that a lot of apartment buildings are generally affordable for beginning investors. You will not have to spend millions of dollars to get started, although that option is likewise available to you.
#How Much Money Can I Make From an Apartment Building?
Real estate, and an apartment complex, in particular, can make money in a variety of ways. The most obvious is using the property for rental income. You can also make money off the property’s appreciation - apartment complexes continue to be attractive investments. Their value tends to increase tremendously over time. Even if rental income only allows you to break even, the appreciation of the property can provide impressive returns.
Other options include leveraging the property and using the property for its tax benefits. These are more nuanced strategies, and you are probably wondering what the rental income is like. You can expect a 4% - 10% cap rate with any apartment complex.
#How to Buy an Apartment Complex
Your first purchase of a large apartment complex can be both intimidating and exciting. Here are a few easy steps to follow to make sure you stay on track.
Types of Apartment Complexes
Ask yourself some questions and set some goals. What type of building do you want? What do you want to achieve with the building?
There are four types of apartment complexes:
- Class A buildings: new buildings (typically less than 10 years old) that have additional amenities such as a fitness center, pool, or office space.
- Class B buildings: Buildings between 10 and 20 years old with fewer amenities but not yet in degradation.
- Class C buildings: Buildings between 20 and 30 years old that might have no amenities and will likely require some renovations.
- Class D buildings: Older buildings that require large-scale renovations.
Where do you want to invest? 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.
This step involves setting a budget as well. Remember, many apartment buildings will require a down payment of $100,000 or more. Make sure you have that type of cash readily available. When considering your budget, try to forecast your cash flow. There are rental property calculators available online that can help you determine your monthly and annual income. Try to be conservative with these estimates. The best-case scenario isn’t always realistic.
Apartment Building Financing: Get Pre-Approved
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. It is best to talk to at least 3 lenders to ensure that you are getting the best rate possible. Try to get pre-approved by at least 2 so you have options. Once you are pre-approved, you can start to search for apartment complexes that fit that budget.
Look For Properties and Make Offers
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.
A potential strategy is to ask for reviews of the building or to search for them online. Although some of the problems in the reviews might be a result of poor management or other issues unrelated to the building itself, some reviews might highlight problems in individual units. You can ask if the issues were resolved or if those are problems that will come with the investment.
Select a Property Management Company
If the apartment complex is large enough, you likely won’t be managing the property yourself. You will be hiring a property management company to assist with your investment. This is equally important to invest in the right market. The management company will make or break your investment.
Make sure to conduct thorough reviews of several companies and get quotes. Find some of their reviews online and inspect some of the other properties they currently manage. Is there a common problem that comes up across all their properties? That might tip you off to a potential flaw in the company.
Finalize the Deal and Financing
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.
Make sure there are no issues with the title, and the appraisal report comes back in good shape. If there are any problems that you were unaware of that are revealed by the report, you might reconsider your investment. Otherwise, once everything is confirmed, you can close on your deal and get ready to rent it out!
Stabilize Your Investment
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.
#Buying an Apartment Building: FAQs
#What Types of Loans Are Available for Apartment Buildings?
For buildings with 4 or fewer units, residential loans are available to the buyers. If the apartment complex has more than 4 units, there are three commercial options:
- Government-backed loans: These loans range from $750,000 to $6 million and typically require a high loan to value ratio. Rates are usually between 3.5% to 6%.
- Bank Balance Sheet loans: These are loans from local lenders for 20 - 25 years. They occasionally have balloon payments lasting between 3 and 15 years as well. Rates similarly range from 3% to 6%.
- Short term financing options: These are available on short notice and have a minimum amount of $100,000. Rates are higher than other options at 7% 12%.
#How do I Properly Value an Apartment Complex?
The most common way to value an apartment complex is through the income approach. This approach divides the net operating income (or NOI) by the cap rate.
- NOI = (monthly rent per unit x number of units) - all operating expenses
- Cap rate = most apartment buildings can expect a cap rate between 4 - 10%. You can speak with local real estate agents or brokers to determine a more precise cap rate.
So, if your NOI is $50,000 and the cap rate is 0.10 then the value of the property is roughly $500,000.
#Can I Buy an Apartment Complex With Zero Money Down?
Occasionally, sellers will offer seller financing that covers either the full amount of the purchase or just the down payment. You may ask your seller to see if he or she is willing to make that offer, but do not expect this to be the case in your situation.
#How Much Time Does it Take to Manage an Apartment Complex?
An apartment complex with multiple individual units is too large for one person to manage by himself or herself. You will need to hire a property management company to take over the day to day operations. You can work with the property management company so that you are involved with certain decisions and any significant issues that arise.
However, the property management company can essentially stand in for you. In other words, you can be as involved as you would like to be. This makes hiring the right company all the more important to the success of your project.