Real estate investing is a great way to get some passive income to build up your nest egg or even pay off some of that college debt! While some start off with a smaller property (think single family home or duplex), diving investing in an apartment building might not be such a bad idea!
It shouldn’t surprise you to find out that buying an apartment building starts way before locating your real estate agent. Apartment buildings take a lot more research and capital than smaller investment properties—which roughly translated, means more work. Here’s how to buy an apartment building.
How to Buy an Apartment Building
Straight up—buying an apartment building is no easy feat. But don’t worry, we’ve got you covered from the initial “should I buy…?” phase to managing your tenants.
Is buying an apartment building right for me?
While the dollar signs you see associated with buying an apartment building may have you mesmerized, make sure buying an apartment complex is right for you. To make the decision a bit more cut and dry for you, here’s a pros and cons list. Remember that this depends on the location you are buying in.
Pros of Buying an Apartment Building
Here are some of the top pros to buying an apartment building.
If you’ve ever bought and rented out a single family home, then you know all about the months of hoarding money to cover your mortgage during the months of vacancy and repairs.
That’s not as common with apartment buildings.
If one tenant really messes up their unit, you still can rent out the rest of your units and get money from them while you complete the repairs in the one unit.
Additionally, it’s not as big of a deal when one tenant moves out because you are still getting rent from the rest of your tenants. While it’s nice to have a full apartment, it’s not as urgent as it would be in single-family homes.
Recurring Income from Apartment Buildings
You are probably looking into purchasing an apartment building for the recurring income. That monthly flow of cash is fantastic—as long as the deal is right and you’ve bought a great investment. You’ll definitely want a positive cash flow to offset the mortgage and other expenses that arise when owning an investment property.
Apartment Building vs. Single Family Homes: Lower Per-Unit Maintenance Costs
With a single-family investment property, you’ve got to replace the roof, plumbing, or electrical and lose out on several month’s rent because of it. In an apartment building, however, you’ve got one roof to many units, meaning you’ll still have money left over to go toward the mortgage.
Financing for Apartment Buildings
With many single family home investments, your lender will take a look at your credit score and analyze your own personal debt. While they’ll definitely look at it in the le apartment lending process, they typically pay more attention to the financial performance of the apartment building as a whole. This includes the rentability, possibility for income, and past vacancy rates.
Cons of Buying an Apartment Building
You’ve got to worry about a lot more on the managerial side of investing with apartment buildings. Here are some of the big cons.
Difficulty Selling Apartment Buildings
Smaller investment properties are usually easier to sell than apartment complexes. That’s because the capital is usually quite a bit more intense than the money needed for a single family house or even a quadplex. If your apartment doesn’t perform as well as you hoped, you may be looking at quite a difficult selling process in the future.
Apartment Building Management
Buying an investment property larger than four units usually makes managing the property a full-time job. From vetting new tenants and cleaning out old units to making repairs—the manager has to be on top of their game if the apartment complex runs smoothly.
One way to go about managing an apartment is to hire an onsite manager or property managing company. If you go this route, budget anywhere from 10-to- 20% of your gross monthly rental income to go toward the manager.
If you’re feeling brave, you could always hire a handyman or two and tackle the managing yourself. Going this route means you can expect to deal with many complaints, as well as regularly vetting tenants and marketing.
High Maintenance Costs of Owning an Apartment Building
Yes, the cost-per-unit repairs are typically smaller than owning four units or less, but the tenant turnover rate quickly makes up for it. With the painting, cleaning, and minor repairs needed to get new tenants in, you’ll have to have a large portion of money set aside. Beyond that, the occasional eviction is also a costly process.
Financing an Apartment Building
This typically isn’t a venture you go into alone. From a single partner to multiple investors—you’ll need a healthy amount in capital upfront. You’ll want to know where this money is coming from before you lock in your deal.
As for choosing a lender, it depends on your situation. Larger banks are known for being more lenient with first-time buyers, but their terms aren’t necessarily the best. Make sure to shop around for the best rates for your situation.
How to Find an Apartment Building to Buy
If this is your first time buying an apartment (or any investment), we strongly suggest you use a real estate broker, specifically a commercial real estate broker. They’ll have been around the apartment block a few times and know what to look for in terms of cap rate, area, and price point.
You may want to talk to another commercial real estate investor and see which broker they used. You’ll want one that is an expert in the area and experienced in apartment deals.
For tips on locating your investment property, go here.
Getting an Inspection on a Commercial Property
Naturally, you’ll want to save as much money as possible in your investment. The best way to do that is to get an inspection of the property before you close. If possible, you’ll also want to walk the property yourself to get an idea of the work that needs to get done.
The disrepair might be significant, and if so, you may be able to negotiate that in the price or get a credit toward fixing those repairs. If there is extensive damage, factor in the opportunity costs involved as you may not be able to rent it out before you put down even more money on it.
After the inspection, it’s time to go through your lender. If you’ve come prepared, it should run pretty smoothly and you should have your new property in hand in 60 days. At that point, it’s up to you to make sure it makes money.
It’s a good idea to keep a spreadsheet of all the costs associated with your investment and the money coming in as well. And remember to keep the receipts from the repairs and other business meetings. They’re tax write-offs which ultimately means money back into your pocket.
For additional help during the investment process, check out our investment archive where you’ll find a treasure trove of information for your next venture.