How to Buy an Apartment Building: A 12-Step Guide

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By Erin Cogswell Updated July 10, 2024
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Edited by Steve Nicastro

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Most first-time real estate investors initially consider purchasing a single-family home to rent out. However, investing in an apartment building can offer more diversified income streams and provide a stable cash flow.

With multiple rental units under one roof, you reduce the risk of total vacancy, as it's unlikely that all units will be vacant simultaneously. Additionally, managing several units in a single location is more cost-effective, potentially increasing profit margins. Investors often target capitalization (cap) rates of around 5-6% for apartment complexes.[1]

In today's market, multi-family complexes are particularly appealing, with 39% of individuals and 47% of households residing in large residential complexes.[2]

Of course, as with any real estate investment, there’s a learning curve involved with selecting and purchasing your first apartment building. This guide takes you through the process step-by-step, providing the information you need to make an informed investment.

Buying an apartment complex in 12 steps

Apartment complexes can be a good way for beginners to build a robust real estate portfolio. Consistent rental income and property appreciation can kickstart a lucrative investment journey.

“The key is to start with a property that matches your financial capacity and risk tolerance,” said Brett Johnson, owner of New Era Home Buyers.

1. Set your goals

Before searching for a property, identify your investment goals. Do you aim for a specific monthly income or a set occupancy rate?

Your goals will guide your property purchase decisions. Outline your financial objectives and work backward to determine how much income you'll need to meet them. Decide whether you'll invest for cash flow, which provides consistent passive income, or for appreciation, which can yield long-term gains.

2. Determine your budget

Assess what return on investment (ROI) and total budget you'll need to stay profitable. Compare this to your available funds for a down payment, upkeep, repairs, insurance, and property management.

The down payment could be as much as 25-30% of the purchase price.[3] Evaluate your liquid assets, such as savings and money market funds, and consider any non-liquid assets you could convert to cash.

3. Forecast your cash flow

Cash flow is the total money you bring in minus the money that flows out.

"Cash flow is the lifeblood of apartment complex investments, ensuring you can cover expenses and debts while providing a steady income," Johnson explains.

Use a rental property calculator to model deals and estimate your cash flow. This will ensure you can meet debt service requirements, cover expenses, and maintain the property. Keeping your property in good shape will reduce tenant turnover and stabilize your investment.

4. Choose a market

The location of the apartment complex significantly impacts its profitability. Check your local market to see if there are any viable options. Seamus Nally, CEO of TurboTenant, recommends paying attention to the future of the location.

“You don’t want large gaps between tenants. Otherwise, your profits will plummet,” he says. “Look for a property in an area that's growing and is projected to continue being popular for residents.”

Consider other cities or states if your local market is oversaturated or slow-growing. Connect with local investment real estate agents, property managers, or lenders to research the area, considering factors like job growth, wages, population growth, and supply and demand.

5. Get pre-approved

A mortgage pre-approval is an offer — not a commitment — to lend you a certain amount of money. It typically requires an application and credit check. You’ll also need to provide recent pay stubs, bank statements, W-2 statements, tax returns for the last two years, and your down payment amount.

Talk to a few lenders to compare their products, rates, and terms. It’s wise to get pre-approved by at least two. This will give you detailed quotes you can compare once you find your property.

» See how long it takes to get pre-approved for a mortgage

6. Search for apartment complexes

Networking with local brokers and real estate agents is your best bet for finding an apartment complex. They can help you find both on-market and off-market properties.

An on-market property is listed publicly and advertised widely online. Off-market properties are confidential and often require exclusive access.

An agent can help you find properties on the multiple listing service (MLS) and through their vast network of property owners. LoopNet and other commercial real estate websites can also be helpful. Apps like DealMachine list distressed properties and motivated sellers.

7. Make offers

Once you find a complex, it’s time to determine your offer price. Work with your agent to use a comparative market analysis (CMA) report to see how much similar properties have sold for.

“I base my analysis on key factors, including the property’s net operating income (NOI), cap rate, and potential for value-add improvements,” says Johnson.

Consider comparable sales data, rent roll analysis, market trends, and a thorough physical inspection. Have your budget set so you can negotiate without compromising your ROI. Be persistent and develop a rapport with the seller to understand their motivations.

8. Conduct inspections

A property inspection will reveal any maintenance issues or damage that could otherwise lead to unexpected expenses. You can then use the report to negotiate repairs or price adjustments with the seller.

An inspector will typically set a base price and a price per unit that depends on the size of the building. For instance, a building with five to eight units might cost $125 each, while one with 25-plus units might cost $75 per unit.

They check essential features like heating, air systems, plumbing, and electrical but not conditions like mold, radon, or asbestos. You may need specialists for a detailed inspection.

9. Choose a property manager

For a large apartment complex, it’s almost impossible to handle all the management-related tasks alone. An experienced property manager knows the technical and legal regulations you and your building must comply with.

“Look for a property manager with a great track record — someone who has proven to be exactly what other investors need,” says Nally. “It’s worth spending a little more on a property manager you can fully trust, especially if your real estate knowledge is limited.”

Review their references, experience, reviews, and fees as you interview candidates. Tour other properties they manage and speak to their tenants.

10. Lock in financing

Secure your financing with one of the lenders who issued your pre-approval. Compare rates, terms, and conditions of your final loan offers. You may need to provide additional credit and financial details.

The loan underwriter will check your identity, credit history, income, investments, and debts. You may also need a building appraisal, which, on average, costs around $2,250.[4]

11. Close the deal

The only thing left is to review and sign all the paperwork, including the purchase agreement and loan documents. Before finalizing the purchase, consult experts to address any remaining legal and financial needs.

Once you get the green light, it’s time to celebrate!

12. Grow your real estate investing portfolio

Use your first investment property to launch your portfolio. Monitor your investment and consider improvements to increase the building’s value.

The equity from your investment can enable you to secure financing for your next property. Continue growing your network of investors and agents for leads on future properties.

You could also use a 1031 exchange to “trade” your current property for one of equal or greater value. Any capital gain you incur will pass on to the next property, so you won’t have to pay taxes until you sell the replacement property.

Is buying an apartment complex a good investment? Pros and cons

Pros

  • High earning potential
  • Reliable income stream
  • Appreciating asset

Cons

  • Big upfront investment
  • Higher turnover rate

Investing in an apartment complex offers high earning potential and a reliable income stream. Renting to multiple families can boost your income and cover expenses, while the property tends to appreciate over time, often resulting in a profitable sale after a few years.

However, it also requires a significant initial investment, making portfolio diversification more challenging. Apartments tend to have higher tenant turnover rates than single-family homes, and the down payment for an apartment complex is typically much higher, which can be a substantial financial commitment.

“If the initial investment feels too daunting, starting with smaller multi-family units or even single-family rentals can be a strategic stepping stone,” Johnson said.

How do you make money owning an apartment complex?

Owning an apartment complex provides returns in several ways. In the short term, rental income offers a dependable cash flow. In the long term, property appreciation can lead to substantial profits if you decide to sell.

Apartments also offer significant financial leverage. For example, borrowing $2 million at 4% and achieving a 6% cap rate allows you to profit from the interest rate difference.

Additionally, tax incentives such as deductions for mortgage interest and depreciation can increase your savings. You may also be able to deduct expenses like travel, utilities, and other operational costs.

According to Johnson, apartment building cap rates typically range from 4% to 7%. A cap rate calculator can help you estimate your potential returns more accurately.

Related reading

Article Sources

[1] National Multifamily Housing Council – "Quick Facts: Investment Returns on Apartments". Updated June, 2024.
[3] Janover Multifamily Loans – "Buying Your First Apartment Complex: An Investor Guide". Updated April 18, 2024.
[4] Angi – "How Much Does a Home Appraisal Cost? [2024 Data]". Updated November 8, 2023.

Authors & Editorial History

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