This guide contains everything you need to know to buy an apartment building, and decide if it’s a good investment for you.
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, and realized that the whole process isn’t that 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 risk of a few vacant units hurting my cash flow.
While the barrier to entry may seem high, as some apartment complexes do require down payments of $100,000 or more, not all apartments are that expensive. There are also some creative financing options that we’ll discuss that let you purchase an apartment with a down payment that’s far less than you might have thought was possible. In some cases you can actually buy with no money down.
JUMP TO SECTION
The important thing to consider when making any investment is the risk-adjusted return — the amount of money you can hope to make in the face of the risk you take on. Overall, apartment buildings have a great risk-adjusted return, but this varies for each individual property, usually based on the purchase price that you’re 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. 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, rental vs. ownership demand in the area. The easiest way to do this is with a rental property calculatorthat 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 offer affordable to mid level housing. On the other hand, there is currently a large amount of new luxury apartments being built, and those will be the first to reduce rent or go vacant if the economy dips.
The average cost of buying an apartment building really depends on what you define as an apartment building. If you consider buying a duplex, triplex, or fourplex and apartment building, than 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.
Banks will finance anything that’s four units or less with a residential mortgage, and anything over 4 units you will need a commercial loan. Personally, I draw the line in a similar fashion to the banks, and consider anything 4 units an under a “small apartment building”, and anything larger more of an “apartment complex.”
Apartment complexes can be tens of millions of dollars or more if you’re buying huge high rises with 100s of units. However, there is a middle of ground of smaller apartment complexes that are bigger than a 4plex, but still affordable enough for most investors.
The table below shows the average cost you can expect to pay for an apartment building. Note that well over 50% of all apartment buildings sold for less than $1,000,000 in the last 12 months.
|Values and sold prices (last 24 months)||United States|
|Average sold price||$1,598,091|
|Median sold price||$238,400|
|Number of sales||329,305|
|Number of sales over $250k||160,131|
|Number of sales over $1m||46,669|
|Number of sales over $10m||7,659|
|Average total tax amount||$31,708|
|Average assessed value||$758,959|
|Average market value||$1,205,696|
Data from Reonomy
There are 4 primary ways to make money owning an apartment complex:
- Rental Income- After you cover all of your expenses - what you have left over is cash flow that you can spend as you please
- Property Appreciation - This is often where the majority of the money is made, as apartment buildings have been growing in value rapidly in the last 10 years. Some investors are even willing to buy a building that just breaks even on cashflow with rent, because they are confident they will make a great return on their investment with appreciation.
- Leverage - If you borrow a million dollars from the bank 4%, and use it to buy an apartment complex with an 8% cap rate (return on investment) - you can profit off the difference. If you do this with millions of dollars, you can generate a tremendous return.
- Tax Benefits - Real estate is one of the most tax advantaged investments, as you’re able to depreciate your investments, and write off the interest you pay in your mortgage.
You can learn more about the 4 ways to generate income from real estate in our real estate investing guide
When it comes to how much money you can make from investing in apartment buildings, it depends on how big on an investment you make. Generally speaking, you can expect between a 4-10% cap ratewhen you purchase an apartment.
- High earning potential: You can grow your portfolio faster by buying one large apartment than you can with single family rentals.
- Dependable cash flow: Apartment buildings provide a reliable income stream. If some of your units are vacant or tenants aren’t paying, you still have other units that are paying that cover your expenses.
- Appreciating asset: Like all real estate, apartment buildings are an appreciating asset. If you no longer want to run your complex, you can sell it for a profit after a few years.
- Harder to diversify your market exposure: Apartment buildings can be expensive, and it's hard for new investors to buy a lot of them. This means that it's hard to diversify your portfolio in different market classes.
- Higher turnover rate: Single-family properties usually have longer-term renters. Since apartment buildings have to deal with more resident turnover, owners need to spend more time finding new renters, and doing make-readys to get their units ready for new residents.
- Large down payment: Buying an apartment building usually isn’t cheap and often requires a hefty down payment. The required down payment for a multi-family property is usually higher than the down payment for single family rental properties.
12 Steps To Buy An Apartment building
If you’re looking to buy an apartment complex - you can follow this 12 step guide:
- Set Your Goals - If you don't know where you’re going, you will never get there. Ask yourself what you want to achieve from owning an apartment complex, and then work backwards to figure out how much income you need to generate.
- Set Your Budget - Establish an amount that you’re willing to spend buying an apartment complex. Make sure you leave enough cash on hand for repairs, and keep your portfolio diverse. It’s not a great idea to put over 50% of your investment portfolio in one property.
- Learn how to forecast cash flow - This is where the renal property calculator we mentioned above comes in handy. You should be able to model prospective deals so you know where to focus your time and energy.
- Choose a market - I recommend that you start by looking in your local market and modeling a few deals to see if it’s feasible, before you start looking out of state. Its much easier to manage something you can drive to, and you can be more confident that you understand the dynamics of the neighborhood.
- Get Pre Approved For Financing - Talk to 3+ different lenders and compare their different products and rates. It's a good idea to get pre approved with at least 2, so you can get detailed quotes to compare once you find your property.
- Start looking for properties - You can look on the MLS, Loopnet and other commercial real estate websites, as well as networking with brokers that have off market properties. You can learn 5 tips to find great deals here.
- Start making Offers - Remember not to get emotional! These are investments, and you should only offer a number that makes sense for you, even if it's drastically lower than the list price.
- Inspections- Make sure your apartment complex is in the same condition it was advertised in. Be sure to check the roof, HVAC, plumbing, and electrical systems, as those can be the most expensive if they need repairs.
- Choose a property management company - The management company you choose will make or break your investment, so be sure to interview at least 3 companies, and hear real reviews from some of the current owners they manage property for.
- Locking in your financing - Go back to the same lenders that got you pre approved, and bring the actual deal you found so you can compare rates. Pick a lender, and they will take your personal financial statement, and get you fully approved.
- Closing day - Congratulations! Get ready to sign a ton of paperwork, then take a moment to celebrate your accomplishments.
- Growing your portfolio - Once you’ve stabilized your investment and are generating cash flow, it’s time to repeat this process, and start looking for your next investment!
For a more detailed explanation, you can read our detailed guide on how to purchase investment property.
Case Study - Buying a 12 unit apartment building
The picture above isn’t pretty - but it’s probably the best investment my partner and I have made to date. This is a 12 unit apartment complex that my partner and I bought a few years ago in rough shape, and brought it back to life.
We purchased the building from an investor that had recently saved the building from being boarded up, but didn’t do much more than that. The units were in rough shape and had structural issues, leaking roofs, sewer issues, and damaged interiors.
We bought the entire complex for around $270,000, or $22,500 per door. The moment we closed we had our crew come in and put on new roofs, fixed the sewers, redid the tuckpointing, and started renovating the apartments as they became vacant (3 units were vacant, and 2 tenants weren’t paying). Over the next year we completed the renovations, and raised the average rent from $550 to $650. By our calculations, we’ve increased the value of this apartment complex by over 100%, as we currently value this property at $600,000, and it only cost about $130,000 in renovations to get there.
This property now generates over $2,000 in cash flow for us after covering all our expenses.
Convinced that an apartment complex is the right investment for you? Here’s five pro tips to help make the buying process move along smoothly.
1. Partner with an experienced real estate agent
When it comes to buying apartment complexes, a lot of the best properties never hit the market, and are sold by agents with connections to their clients that they know can close.
If you’re serious about buying an apartment building, you need to get an agent that’s focused on investors, and has access to a lot of sellers that want to sell, but don’t want to list their properties on the market. If you’re not sure where to find one of these agents, Clever can help.
Connect With An Experienced Agent To Buy an Apartment
Clever can match you with top agents that focus on apartments!
2. Choose your property type
There are quite a few different 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 as popularity will vary by region. You real estate agent can make recommendations based on what they see in their day-to-day work.
You also need to decide if you want a new apartment complex or one that will require some fixing up. Fixer-uppers can generally be found for a better bargain, but require a greater time investment and a keen eye for undervalued properties.
3. Visit multiple properties and do your homework
Don’t buy the first property you see. Look into local demand, perform an inspection to get an idea of the condition of the house, and visit as many properties as possible.
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 will have more demand for apartments, so be sure to look into these statistics before making a purchase.
4. Understand the financial process and run the numbers
To buy an investment property, you’ll have to make a 20% down payment, and you’ll also need to pay for insurance, mortgage payments, maintenance and management costs, and marketing expenses.
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 tenants move out.
Make sure that after all these expenses, you’ll still be in the black. There’s no worse situation to be in than owning a multi-million dollar apartment complex that loses you money every month.
5. Choose the right lender
There are three common types of loans for apartment buildings (not counting residential loans for buildings smaller than 4 units:
- Government-backed Apartment Loans: These loans offer high LTV (loan-to-value) ratios and have a range of $750,000 to $6 million. Fannie Mae, Freddie Mac, and the FHA offer this type of loan. Typical rates are 3.5-6%.
- Bank Balance Sheet Apartment Loans: Many local lenders love making loans to investors to buy apartments. You can expect loan terms of 20-25 years, with balloon payments ranging from 3-15 years, and interest rates between 3-6%
- Short-Term Apartment Financing Options: These loans are meant to help investors compete with cash buyers by offering mortgages on short notice. Minimum loan amounts are $100,000, with LTVs up to 90%. Rates are high at 7.5-12%.
Once you’ve decided what type of loan is right for you, begin researching each individual lender’s offerings. Each bank and lender is different, so be sure to pore over all your options. A small rate increase can eat into your profits.
Working with a real estate agent is the best way to find apartment buildings for sale. They can utilize 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.
There are three ways to value an apartment building: the sales approach, the replacement approach, and the income approach. Of these, the income approach is the most common.
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.
As an example: if the NOI on the property is $30,000 and the cap rate is 0.12, the value of the property is $250,000.
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 residential property lenders, commercial real estate lenders are more likely to base lending decisions on an applicant’s real estate investment experience.
In some cases, sellers are willing to offer seller financing for the entire purchase, or enough to cover the down payment with a commercial lender. Personally, I’ve had several sellers be willing to owner finance our down payment for 3-5 years so we can refinance, but have yet to have a seller agree to owner finance the entire property.