Updated July 20th, 2019
If you want to enter the big leagues of real estate investing, you likely have your sights set on purchasing an apartment building one day. The returns from such a purchase can be astronomical: with dozens of renters per building, savvy investors can expect excellent cash flow each month. Multi-family units can be aptly referred to as the gold standard of real estate investing.
The barrier to entry for commercial real estate can be high: large apartment buildings can cost upwards of $1 million, so hopeful investors will often need to stomach a down payment of $100,000 or more to get their hands on a sizable property. Buying an apartment building is no small task, so those who want to go the distance will need the expert guidance of an experienced real estate agent.
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Let’s look at what’s involved in buying an apartment building, the associated costs, expected returns, and some pros and cons. We’ll also give you some pro tips to help you make a successful purchase that goes off without a hitch.
Is buying an apartment building a good investment?
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 good risk-adjusted return, but this varies for each individual property.
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.
However, people always need a place to live, and renting an apartment is often the most affordable housing option. This means that there is high demand for apartments in the majority of cities and towns across the United States. This bodes well for rental income.
How Much Does Buying an Apartment Building Typically Cost?
Multi-family properties have an average assessed value of $764,477, according to Reonomy. The average sales price is $1,804,625, and the median sales price is $236,222. The average price per square foot is $1,154.
How Much Money Can You Make Owning an Apartment Complex?
There are two primary ways to make money owning an apartment complex: renting and selling.
The amount of money you make from rent is referred to as the NOI, or Net Operating Income. This value is calculated by subtracting the operating expenses from the total rent payments. For example: if you make $200,000 in rent each year and have yearly operating expenses of $150,000, your NOI is $50,000. If you have a mortgage, subtract the total yearly mortgage costs from your NOI.
The amount you can make depends entirely on the property itself. High-end apartment complexes in New York City can make millions each year, while medium-sized multi-family properties in small cities will make a more modest return.
Just like any property, apartment buildings are financial assets and generally appreciate over time. When you feel that you’re ready to move on to another building, you can usually sell the building for a profit. If you plan to buy another investment property, you can make use of IRS Form 1031 to save on taxes. How much you make from the sale will depend on the appreciation of the property and the final selling price.
Pros of Investing in an Apartment Building
- High earning potential: Buildings located in in-demand areas can net millions each year. While it’s difficult to reach this level, it’s something you can strive for.
- Dependable cash flow: Apartment buildings provide a reliable income stream. While people do move in and out, many residents will be there longterm and will pay the same rent every month.
- 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.
Cons of Investing in an Apartment Building
- Higher maintenance costs: Compared to single-family properties, apartment buildings often have higher maintenance costs. This can be attributed to the higher resident turnover — residents don’t view the apartment as their own and treat it with less respect. The sheer number of things that can go wrong when managing 12 units instead of one also contributes to this increased expense.
- 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.
- 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 a comparable single-family home.
How Do You Buy an Apartment Complex? 5 Pro Tips
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
Few things will have as drastic an effect on your purchase as your real estate agent. Working with the right agent can set your investment project out on the right foot or put it on course for disaster. Your real estate agent can recommend suitable properties in the area, help you negotiate your deal, and answer any questions you may have.
Working with a local real estate agent gives you a direct line to someone with specific expertise in your target market. They can tell you what features are the most in-demand and help you find a property that will meet your investment goals.
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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:
- 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 4.5-6%.
- Bank Balance Sheet Apartment Loans: Loans start at $500,000. Average rates are 5-6%. Down payments are typically 20% or more.
- 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.
Investing in an apartment building is a big decision and should be discussed with a trained professional. Clever Partner Agents are top-notch local real estate agents from major brands like Keller Williams, Century 21, and RE/MAX who are happy to answer any questions you have about real estate investing and guide you through the purchasing process.
All Clever Partner Agents have agreed to offer buyers a Home Buyer Rebate of $1,000 or up to 1% of the closing price in 40 states. with us and learn about our on-demand showings and how we can turn your real estate dreams into realities.
Top FAQs About Buying an Apartment Building
Where do I find apartment buildings for sale?
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.
How do you value an apartment complex?
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. 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.
How do you finance an apartment building?
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.
How can I buy an investment property with no money down?
Some sellers will allow buyers to pay their down payment in monthly installments, and some lenders don’t require a down payment. You can also take out a HELOC to pay for the down payment. If neither of these are viable, try trading something for the down payment, such as a car, boat, or other property.