How to Buy an Apartment Complex in 7 Steps
PUBLISHED SEPTEMBER 27, 2019
Melanie is a certified business advisor with over 25 years of experience in real estate investing. Her expertise is highlighted throughout Fit Small Business’s real estate financing, property management, and real estate investing content.
Buying an apartment complex is more involved than investing in single-family properties and requires a deeper understanding of managing property finances. Typically, you can learn how to buy an apartment building in seven steps, including deciding if apartment complexes are right for you and what type of apartment to purchase.
If you need financing when buying an apartment complex, check out CoreVest. They offer short-term and long-term apartment complex loans with short-term loans up to 90% of the cost. Apply online and get prequalified in just a few minutes.
Visit we buy houses Roseville
Buying an apartment building can be simplified into the following seven steps:
1. Decide if Buying an Apartment Complex Is Right for You
Before you start an apartment investing business, you want to make sure it’s the right investment strategy for you. Compared to purchasing single-family homes and small multifamily properties, an apartment building requires more research, more time, and oftentimes more capital and additional expenses. It’s important to weigh the pros and cons before buying apartment complexes.
Pros of Buying Apartment Complexes
There are many benefits to apartment investing. These include recurring income, spreading income across many units, lower per-unit maintenance costs, and the potential for extra income beyond collected rents. Lenders typically base their financing criteria on the property’s performance. The property’s value is often determined by rental income and its overall performance.
Recurring Income
One of the main reasons for buying apartment buildings is ongoing income. If the deal is right and the finances are sound, a good apartment building will throw off recurring monthly income as a positive cash-on-cash return.
Diversifying Income
If you’re an investor who rents single-family properties, you’re probably familiar with a common vacancy problem. If you have no tenants, you lose 100% of your income. Apartment buildings mitigate the effects of a high vacancy rate. If one unit goes vacant, you still have the others to generate income to cover expenses and perhaps still generate positive cash flow.
Lower Per-unit Maintenance
Economies of scale work in favor of the apartment building owner. For example, if you must redo a roof, it’s not just for one unit. That repair serves all the units in the building. If you need to repaint, you can use the same paint for multiple units and not waste materials resulting from only one unit’s need.
Extra Sources of Income
The larger the building, the more likely you can add additional sources of income, such as vending machines, ATMs, and coin-operated laundry facilities. Renting parking spaces and space for billboard advertising can also provide additional income. One pro tip is to charge additional monthly rent for air conditioning units, upgraded appliances, and upgraded kitchens and bathrooms.
Revenue-based Financing
Unlike a single-family property, financing for apartment buildings is based mainly on the financial performance of the building (as opposed to your personal financial and credit situation). So, banks will look mainly at the financial situation with the building for approving a loan. This is advantageous if your FICO score is low.
Valuations Based on Rent Rolls
When buying apartment buildings, the value of the investment is determined in great part by the financial performance of the building. So, if you can increase rents, you can increase the value of your holding.
“A multi-unit apartment substantially lowers risk. A vacancy in a large building is less impactful than a vacancy in a single-family home or smaller apartment building. Landlords of multi-unit properties are able to spread the cost of maintaining the property more than the cost of maintaining multiple singular units. For example, replacing a roof on one apartment building with four units is likely cheaper per unit than replacing roofs on four single-family homes.”
– Ryan Coon, Co-founder and CEO, Avail
Cons of Buying Apartment Complexes
Buying an apartment building is more complex than acquiring a single-family home or even a small multi-unit property. The management will be a bit more intensive and the nature of tenants will be different. In addition, expect more frequent maintenance and property management to be more expensive.
“An additional con of buying apartment complexes is that it can be a relatively illiquid asset. It can be time-consuming and costly to sell an apartment building, and it often involves scheduling conflicts and working with real estate agents. This can put an investor in a difficult situation if they need cash quickly.”
– Todd Stoddard, Blogger, Investor, Simply Urban
Intensive Management
Once buildings are larger than four units, management becomes a much more intensive process. The ability to manage the property yourself becomes an issue, and you need to consider some form of outside management.
One option is hiring a professional property management company. In other cases, you’ll hire an onsite manager. Both come with additional costs and the need to supervise the manager. Typically, property managers charge 10% to 12% of gross monthly rents.
High Tenant Turnover
When tenants move into a single-family dwelling, they usually plan to stay for a long time. They typically become more invested in the property, engage more in community events, and become familiar with the neighborhood. Tenants in apartments, on the other hand, are much more transient.
In a single-family home, it’s not uncommon for a tenant to stay five or more years. In an apartment, tenants stay, on average, less than two years. When buying an apartment building, plan for tenant turnover and higher marketing costs to acquire new tenants.
Less Tenant Care
A renter in a single-family dwelling will tend to treat the property like their own home. However, tenants in an apartment are different. Tenants sometimes don’t treat apartments with the same care, so repairs and maintenance beyond normal wear and tear will be much more common with apartments.
Higher Maintenance Costs
When buying an apartment building, be prepared for higher tenant turnover and less care of the units. You’ll also have more ongoing maintenance with apartments than with single-family properties. Per-unit maintenance costs will be lower the more units a building has, but more time is needed for maintenance and repairs.
Overall maintenance costs are typically higher in apartment buildings. Avail CEO Ryan Coon cautions investors to consider that when major problems arise, such as heating system failure, it will impact more tenants, and repairs will be more costly. Replacing the plumbing system for a single-family home with one bathroom is cheaper than replacing the plumbing for a five-story building.