Buying An Apartment Building Beginners

Over the last century, countless real estate investors have grown their wealth exponentially by buying apartment buildings. But, before they became successful investors, they all started as beginners, eager to purchase their first multifamily property.

buying an apartment building beginners

Most people purchasing a single-family home will do so through a real estate agent; and, similarly, most investors buying an apartment building will want to work with a commercial real estate broker. A good commercial broker can help you identify quality apartment properties in your area, will have a good understanding of real estate investment fundamentals, and may even be able to help you negotiate on the sale price.

Contaminants/Health Risks: In addition to having shared utilities, older apartment complexes may contain contaminants such as asbestos or lead paint. These issues typically will need to be remediated by a new owner, which can be very expensive. Ordering an inspection early on in the decision-making process can help you determine whether a building has these issues, and, if so, how serious they are.

Plumbing Issues: Plumbing can be yet another issue faced by the owners of older apartment buildings. Repairs can be expensive, and additional contamination issues may arise if the building has lead pipes.

The first step in buying an apartment complex is to learn about the different types of apartment buildings so that you can decide which is right for you. You'll need to consider your goals and what you want to achieve to ensure the apartment building you buy can meet them.

Once you've settled on the building type, you'll need to pick a market. Choosing a market is one of the most critical factors for success with your investment. A negatively trending market can be disastrous, whereas getting into the right market at the right time can make the apartment building one of your best investments ever.

Once you have a budget, a target market, and a cash flow forecast in mind, you will want to start getting pre-approved for financing. Securing financing is one of the most important aspects of buying an apartment complex, so be sure to take it seriously, and prepare all the paperwork your lender will ask for, including detailed financials.

Be ready to spend a few months or years stabilizing your investment and getting all the finances in order. Once you start to get tenants on auto-pilot, you might even consider expanding with a new apartment building.

The first thing to consider is whether buying a specific apartment complex is a good investment and if you have time to manage the property. Owning a few small rental properties are easier to manage, and tenants are easier to work with on a 1-to-1 basis. With an apartment complex, there are more potential vacancies and large scale problems you might face.

Generally speaking, most apartment buildings are a good investment. However, not every building is automatically a good investment. Each should be evaluated separately. You should consider things such as age, condition of the property, price per square foot (compared to the rest of the market), and the local real estate market. Knowing how to calculate price per square foot, cap rates, and how to search for comps is critical.

The downside is that apartment buildings tend to require a hefty down payment. Buildings are usually much more expensive than the average house. This makes a 20% down payment significantly more expensive as well. You should expect to make a down payment of over $100,000 as even the most affordable buildings with just a few units will cost over $500,000.

Another downside of an apartment building is the fact that you will be working with multiple tenants. With a rental property, you might find a tenant for 12 months and then check in every few weeks. With an apartment building, you might have 6-8 tenants you are checking in with regularly, and then you might have to advertise the opening of your other 6-8 apartments. It is a lot more work to keep the income coming in. Of course, you could hire a property manager and other staff, but all this eats away at your profits.

Over the last 12 months, the average sales price for an apartment complex was $1,598,091. However, the median sales price was only $238,400. This means that a lot of apartment buildings are generally affordable for beginning investors. You will not have to spend millions of dollars to get started, although that option is likewise available to you.

Multi-unit buildings lower risks since vacancies are less impactful, and property maintenance costs can be spread across multiple singular units. However, learning how to buy an apartment complex is inherently more complex (no pun intended) and significantly more expensive than buying a single-family property. Plus, the costs and maintenance requirements are much higher.

The real estate sales and brokerage industry undeniably provides access to the largest body of residential and commercial properties for sale, including apartment buildings. Real estate salespeople have access to one or more local multiple listing services (MLS), listing all the properties for sale by every agency in the area, including multi-family and apartment complexes. The most dedicated real estate agents have rich expertise in the local market, plus skills and resources to find and evaluate data on apartment buildings in your area.

Gross operating income is the total rent and other income collected from the property minus vacancy, but before additional expenses. If you are buying a vacant apartment building, you may need to perform a potential rental income (PRI) analysis based on a rental market analysis.

Financing for apartments and investment properties is fundamentally different than residential purchases. You will likely use commercial lending as opposed to residential lending because of the size and price point of the building purchase. Financing options include:

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. I realized that the whole processisn't 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 riskof a few vacant units hurting my cash flow.

The average cost of buying an apartment building depends on what you define as an apartment building. If you consider buying a duplex, triplex, or fourplex an apartment building, then 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. 041b061a72