A Step by Step Guide to Buy an Apartment Complex

By: ROS Team

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For most new investors, buying apartment complex can seem like a daunting task. Either because the property is too expensive or the buying process is too difficult or time consuming. A smart investor always seeks wise advice and does research on how to buy an apartment building before diving in.

Here are Some Things to Consider as you consider Buying an Apartment Complex:

Apartment Complex Types

Before you actively begin a property search, it is essential to understand the different types of apartment buildings on the market.

We’ve listed the main types here:

Class A: These apartment buildings are at least ten years old and offer an array of property amenities.

Class B: These buildings are between 10 and 20 years old; they’re in good structural shape and may offer fewer amenities than a Class A apartment building.

Class C: These apartment buildings are no more than 30 years old and have few or no property amenities. These buildings also often require renovations.

Class D: These buildings are 30+ years old and are often located in lower-income areas. They also usually require extensive repairs and rarely have any property amenities.

Apartment Complex

Assess the Pros and Cons

Before you actively begin your search for an apartment complex to buy, think about whether or not purchasing an apartment complex is your cup of tea. Ownership of this type of property has unique challenges that you may not experience when owning one or two single-family rental properties. Make every effort to weigh the pros and cons of buying an apartment complex before you embark on the journey.

Pros of Buying Apartment Complexes

  • Recurring Income: The biggest advantage of buying apartment complex is the recurring monthly income it generates. If your finances are sound and the deal is right, a good apartment building will provide you with regular monthly income as a positive return on your investment.
  • Diversified Source of Income: If you have ever been a landlord of a house or duplex, you’re probably familiar with issues surrounding vacancy. A lack of tenants translates to low or no income. However, in an apartment complex, you can mitigate the effects of a lower vacancy rate. Even if one apartment is unoccupied, there are other units that can generate enough income to pay operating expenses and, perhaps, generate a profit.
  • Lower Maintenance Costs: Larger scale maintenance works in favor of the owner. If there are materials left over from repairing one unit. You can use them for other units and avoid wasting materials.
  • Additional Sources of Income: Owning an apartment complex allows you to add additional sources of income. Such as coin operated laundry facilities, ATMs, and vending machines. You can also allow tenants to rent parking spaces. You can also charge a premium monthly rent amount for upgraded kitchens and bathrooms, upgraded appliances, and air conditioning units.
  • Financing: Financing for an apartment building purchase is mainly based on the financial performance of the building, not your personal credit or finances. Lenders will focus on how well the building performs economically when determining whether or not to approve a loan request.
  • Valuations Based on Rental Income: The value of the investment is largely determined by the building’s ability to generate revenue. So, if you can increase the value of the property, you can also increase the rent you charge.

Cons of Buying Apartment Complexes

  • Intensive Management: Management becomes much more extensive when there are 4+ units. It is difficult to effectively manage the building part time. So you’ll either have to take over property management as your full time job or you will have to outsource it, which will reduce your profit margin by 8 – 12%.
  • High Tenant Turnover: Tenants in apartment complexes are much more likely to move than tenants who rent single-family homes. On average, an apartment tenant will stay in the same apartment for less than two years. By contrast, the average tenant who rents a single-family house lives in it for over five years. This means you’ll have to explore how to best mitigate tenant turnover if you buy an apartment complex.
  • Less Tenant Care: Another disadvantage is tenants tend to care less about maintaining an apartment unit than they do a single-family dwelling. In fact, most tenants who rent single-family homes treat the property as if it’s their own home. As a result, you may have more frequent repairs as an apartment building owner.

Terms to Consider When Evaluating Properties

Once you’ve decided on the type of apartment building you want to buy. You’ll then need to study the following financial concepts and terms, which you will likely hear during the buying process:

  • Rent Rolls: You will need this document to track future cash flow issues based on your tenant history. It includes information like the current tenant names along with their security deposit amounts, lease terms, apartment size (i.e. the number of bedrooms and bathrooms in the apartment unit), and the present rent amount.
  • Occupancy Rates: As the name suggests, this identifies the number of rent-paying tenants who live in the building as well as the cost of maintenance.
  • Vacancy Rates: The number of empty apartment units in the building at any given time; underwriters, appraisers, and lenders use this calculation to estimate the effective rents.

Required Documentation for Financing

This is the final phase of apartment buying, so make sure you follow these steps to prepare the required documentation needed to secure a loan.

1) Property Appraisal

 Before you reach out to the bank for a loan, you should get the property professionally appraised. Appraisers use different approaches when completing this process. It may include estimating the property’s value based on the potential income it could generate. This is known as the income approach.

Another approach is the comparative approach in which appraisers estimate the value of the property based on the sales of similar properties.  A third approach is the cost approach in which appraisers estimate the building’s value based on what it would cost to rebuild it on the current lot.

2) Physical Needs Assessment

This document will include the property’s current condition. It also provides what needs to be replaced or repaired.

3) Environmental Assessment

Like the physical need assessment, the environmental assessment documents the environmental issues associated with the apartment building that could pose a threat to residents and the community.

4) Property Survey

This document provides the property’s boundaries and incorporates notes of any title issues that could affect how the property.

Consider Your Return on Investment

Buying an apartment building requires a considerable financial investment, so you’ll need to calculate the return on investment (ROI). ROI is a factor that considers how much money you have invested in purchasing the property and how much income you are earning from it. Apartment complexes are revenue generators, but they also require a larger upfront investment. Keeping all factors in mind, calculate how long it will take before you see a return on your investment.

You’ll also want to consider the following factors:

  • Location

Location can make or break you as an investor. It’s in your best financial interest to keep units occupied if you’re thinking of buying an apartment complex because it will help you realize the return on your investment sooner.  When evaluating location, consider factors like the potential for increased property values over the coming years, crime and safety data, and the area’s economic health and employment opportunities.

  • Utility Costs

When tenants share utility costs, they are more likely to overuse them and increase the operating costs of the apartment building. One way to handle this problem is to adopt a ratio utility system in which you divide total monthly utility expenses by the number of units.

  • Health Hazards

You have to make sure the apartment building is safe. So you’ll need to have the property inspected, preferably by a professional. You will have to address any identified issues, so if the identified issues are too extensive for you financially. You will have to decide whether it’s worth proceeding with the building purchase.

  • Insurance

Older buildings are likely to cost more to insure. So, before you make an offer to the seller, you should always inquire about current insurance premiums. Get quotes from multiple insurance providers and use that information to calculate your ROI.

  • Facility Issues

Facility issues like bad plumbing or a faulty roof can cause problems if not repaired immediately. So keep upfront costs in mind when deciding which type of apartment building to buy.

Engage a Real Estate Agent

You can search for available properties on your own, but partnering with a real estate agent can provide you with access to a larger market of available buildings. Agents have access to the Multiple Listing Services (MLS) database and can help you find apartment buildings in the right location and at the right sales price. In addition, agents are familiar with the real estate market and can provide assistance during the buying process.

Secure Financing

Once you’ve found a property to buy, you’ll need to secure a commercial loan to finance your purchase. You can apply for loans with private lenders, use seller financing if it’s available, or apply for a loan through government-sponsored lenders like Fannie Mae or Freddie Mac. You’ll likely be in a relationship with your lender for the next 25 years or until you’ve repaid the loan. So take your time to find the lender who offers the best rates.

Final Words

Buying apartment complex is essentially a capital game and it is typically best suited for more experienced investors. If you feel buying an apartment building is right for you, prepare for an exciting journey.  Take time to understand what it takes to buy an apartment complex before you actively begin searching for one to buy. The more hours you invest during the planning phase, the smoother the rest of the process with being.