How to Buy an Apartment Building?

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|10 min read

When becoming a real estate investor or building a portfolio, you can purchase either single-family rental properties or apartment buildings. Apartment buildings have multiple units under a single title, whereas a single-family home will just have one unit (however, accessory dwelling units are becoming increasingly common).

Apartment buildings give you built-in diversified income streams. However, each unit typically demands a lower rental rate than a house and doesn’t benefit from appreciation at the same level as single-family residences.

Buying an apartment building is a significant investment decision that can lead to steady income and long-term capital growth. However, it requires substantial financial commitment, thorough market analysis, and strategic planning.

This guide provides a clear framework for navigating the purchase process, from initial market research to closing the deal. Whether expanding your investment portfolio or entering the real estate market for the first time, this guide will serve as a practical resource for purchasing and managing an apartment building.

Two Types of Multifamily Real Estate

Multifamily properties are designated into two separate classes: residential multifamily and commercial multifamily properties. While both asset classes are excellent investment properties, approaching their acquisition and management is different.

Residential Multifamily Real Estate

Residential multifamily properties typically consist of buildings with fewer than five residential units, such as duplexes, triplexes, and fourplexes. These properties are often financed with residential mortgages and are governed by local residential tenancy laws.

Investors usually choose residential multifamily properties for their simpler management structures and the ease of obtaining financing through conventional mortgage loans. The investment focus here is often on long-term capital appreciation and stable rental income.

Commercial Multifamily Properties

Commercial multifamily properties, on the other hand, include buildings with five or more residential units, such as apartment complexes, high-rise condominiums, and larger apartment buildings.

These properties are considered commercial real estate and require commercial real estate loans, often with different terms, including higher interest rates and shorter amortization periods. The management of commercial multifamily properties can be more complex, typically necessitating professional property management services.

Investors in commercial multifamily real estate are often attracted by the scalability of operations and the potential for significant cash flow. Furthermore, when buying an apartment complex, investors often have either a value-add plan that will allow them to increase rents, or they expect rents to increase due to economic conditions.

How Much Does it Cost to Buy an Apartment Building?

Buying an apartment building might appear impossible, but it doesn’t have to be. The cost of a multifamily building depends on many of the same factors as single-family properties. However, there are additional factors that are taken into account, including:

  • Location: Properties in high-demand areas tend to be more expensive due to the higher demand for housing in these areas.
  • Property Condition: Newer buildings or those that have been well-maintained or recently renovated usually command higher prices.
  • Rental Income: Higher rents and lower vacancy rates lead to a higher net operating income, elevating a property’s price.
  • Market Trends: When demand is high, prices increase. T
  • Operating Expenses: The costs associated with managing and maintaining the property, including property taxes, insurance, utilities, and repairs, affect the net income and, consequently, the building’s valuation. Like any business, owners want to maintain low operating costs.
  • Financing Costs: Market interest rates impact demand. When lending is favorable, it can increase buyer activity.

Unlike single-family properties, multifamily real estate prices are less tied to the finishes, layout, and school district than they are to the property’s profitability.

What is a Cap Rate and How Does it Impact the Cost of Apartment Buildings?

A Capitalization Rate, or Cap Rate, is a key metric used in real estate to estimate the return on investment for an income-producing property. It is calculated by dividing the property’s Net Operating Income (NOI) by its current market value or purchase price. The formula is as follows:

cap rate formula is NOI divided by Purchase price

The cap rate is often used to estimate the value of an apartment building. A lower cap rate typically indicates a lower-risk investment with a higher property value. In contrast, a higher cap rate suggests a higher risk but potentially higher returns, often leading to a lower property value.

For example, if an apartment building generates an NOI of $100,000 and the cap rate for similar properties in the area is 5%, the estimated value of the building would be $2,000,000 ($100,000 / 0.05).

Investors use the cap rate to gauge the potential return of an investment and to compare different properties. A higher cap rate can attract investors looking for higher returns in exchange for higher risk, potentially impacting the demand and cost of the building.

Cap rates vary by market and property type. Investors can determine if a building is priced appropriately by analyzing cap rates of similar properties in the same market. Properties priced with a cap rate significantly lower than the market average may be overvalued, while those with higher cap rates may be undervalued.

The cap rate reflects the perceived risk of investing in a property. Properties in stable, established areas with consistent rental income typically have lower cap rates due to perceived lower risk. In contrast, properties in less established or more volatile markets may have higher cap rates to compensate for higher perceived risks.

A property’s cap rate summarizes its value and provides a simple metric for comparing it with other assets. Understanding cap rates helps investors make informed decisions about real estate investment valuation, risk, and potential return.

Pros of Investing in an Apartment Building

Investing in apartment buildings is often seen as a gateway to significant wealth creation in real estate. These investments offer multiple income streams and can lead to long-term financial stability.

Steady Cashflow

Apartment buildings provide a steady cash flow through rental income. For example, a building with 20 units renting at $1,000 each can generate $20,000 monthly. The income from this building can pay off any mortgage, cover operating costs, and contribute to passive income for the investor.

Scaleability of Investments

If you own ten single-family homes, you must worry about the costs of each asset. Investing in apartment buildings allows for scalability within a single property. While you may have many leases associated with the property, you only have one property management, insurance, and property tax bill. Consolidating income sources into a single asset allows diversification and simplifies management.

Use of Leverage

Using leverage is a powerful tool that sets real estate apart from other investment avenues like the stock market. Debt enables investors to buy larger assets without purchasing them outright. For example, purchasing a $1 million apartment building with a 30% down payment allows an investor to control a significant asset with only $300,000.

Potential Income Tax Benefits

Investing in apartment buildings offers several tax benefits that can significantly enhance the profitability and appeal of this investment type. Two of the most impactful tax advantages are depreciation and the opportunity to engage in 1031 exchanges.

Depreciation is a non-cash deduction that reflects the perceived decrease in the value of the property over time due to wear and tear. For tax purposes, apartment buildings are typically depreciated over a 27.5-year period, according to the Modified Accelerated Cost Recovery System (MACRS) set by the IRS.

A 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows investors to defer paying capital gains taxes on an investment property when it is sold as long as another “like-kind” property is purchased with the profit gained by the sale.

This process can be repeated multiple times, allowing investors to continually defer capital gains taxes while potentially upgrading to larger or more valuable properties.

Property Appreciation

Over time, apartment buildings typically appreciate in value, increasing an investor’s equity. Appreciation usually happens when rental rates increase or cap rates decrease.

For instance, a building purchased for $1 million might appreciate to $1.5 million over several years, offering a potential $500,000 gain on sale in addition to the income generated during ownership. This could happen if rental rates increased by 50% or if cap rates decreased from 7% to 4.6%.

Cons of Investing in an Apartment Building

Investing in an apartment building, while potentially lucrative, comes with challenges, downsides, and risks. Before investing in an apartment building, understand these aspects to make informed decisions and prepare for the demands of property ownership.

Management Demands

Managing an apartment building requires significant time, effort, and knowledge. It’s easy to become overwhelmed by management demands, especially when dealing with older buildings. Investors must deal with various tasks, including tenant screening, lease management, rent collection, maintenance issues, and responding to tenant complaints.

Hiring a property management company can alleviate these burdens, but it also introduces additional costs, reducing the overall profitability of the investment.

Maintenance and Upkeep

Regular maintenance and occasional significant repairs are necessary to keep an apartment building functional and appealing to tenants. These responsibilities can be costly and require ongoing attention. Neglecting maintenance can lead to bigger, more expensive problems down the line and negatively affect the property’s value and the quality of life for the tenants.

Purchasing Requires Significant Upfront Capital

Investing in apartment buildings typically requires substantial upfront capital. The down payment for commercial real estate properties, like apartment buildings, is often higher than for residential properties, ranging from 25% to 30% of the purchase price or even more.

Additionally, investors must consider closing costs, appraisal fees, property inspection fees, and potential immediate repair or renovation costs to make the property appealing to tenants or to comply with regulations.

Before purchasing, due diligence is necessary, which can lead to considerable expenses before ownership and income begins.

Market Risks

The real estate market is subject to fluctuations influenced by economic conditions, interest rates, employment rates, and other factors. These fluctuations can affect property values, rental demand, and the overall profitability of an apartment building investment.

For example, an economic downturn can lead to increased unemployment, higher vacancy rates and decreased rental income, negatively impacting the investment’s return.

Tenant Relations

Dealing with tenants can be one of the most challenging aspects of owning an apartment building. Issues like late rent payments, property damage, and tenant disputes can be common and require time, legal knowledge, and interpersonal skills to resolve.

High tenant turnover can also affect the financial stability of the investment, leading to lost income and increased costs for marketing and preparing units for new occupants.

Steps to Buy an Apartment Building

Buying an apartment complex is not the same as purchasing a single-family home as an investment.

When investing in apartment buildings, your financing options differ, and you need to understand the rental market.

Step One: Set Your Budget

When deciding how much you are going to spend on an apartment building, there are several factors to consider, such as:

  • How much cash you are willing to invest.
  • If you want to undertake renovations or buy something “turnkey.”
  • What your target loan-to-value is.
  • How much positive cash flow you need.
  • Whether you’re buying a residential or commercial property, it impacts the loan products available.
  • Your risk tolerance.
  • Your income (depending on the type of loan).

If you have yet to decide what kind of apartment building you’d like to buy, talking to a commercial and residential mortgage broker can be helpful. They can help you review your financials and educate you on what loan products are available for your purchase.

Start your journey to owning an apartment building. Connect with a top local mortgage broker with FastExpert.

Step Two: Decide on Your Market

If you start your search without a target market in mind, you will end up searching blindly through thousands of options. You need to narrow your search to a specific area. Don’t pick a city just because home prices have recently increased.

An increase in single-family home values doesn’t necessarily equate to a rise in rental rates. Buyers who target these markets often get caught in scenarios where they overpay and don’t see their desired returns.

Metrics you should review when evaluating a real estate market for investing include:

  • Population growth: If the city is growing, there will likely be increasing demand.
  • Employment rates and job market stability: When unemployment increases, household numbers decrease, leading to lower demand and an increase in vacancy rates.
  • Economic diversification: Investors should pick a market that has a diverse economy, meaning there are major employers from several industry sectors.
  • Rental yield: Not all markets offer the same rental yield. Typically, “higher risk” markets have higher rental yields.
  • Historic rent growth: Research the average rent prices and their growth over time. Markets with steadily increasing rent prices can indicate a strong demand for housing and future growth potential.
  • Regulatory environment: Some cities have strong landlord and tenant laws. Consider picking an investor-friendly city if you are becoming a remote investor.
  • Property price trends: Home prices aren’t as big of an indicator of an apartment market’s growth capacity, but they should be considered. Consistent appreciation in property values indicated demand for housing.

Ultimately, if you want to buy an apartment complex, you need to decide whether you’re going to purchase close to your home or if you want to target a specific market as a remote investor.

Step Three: Find a Real Estate Agent

Securing the right real estate agent is a crucial step in buying an apartment building. The agent’s expertise in the multifamily property market can be invaluable, providing insights, guidance, and access to the best available properties that match your investment criteria. When evaluating professionals, you want to find an agent who:

  • Focuses on your target market. If you’re buying in another state, you need to find an agent who works and operates their businesses in that area.
  • Specializes in multifamily properties. An agent focusing on apartment buildings will better understand the market dynamics, valuation, and potential returns of such investments.
  • Has a strong track record that reflects their expertise. An experienced agent will have a proven history of successful transactions. They can provide case studies or references from past clients to demonstrate their success and reliability.
  • Applicable market knowledge. Your agent should know market conditions, trends, occupancy levels, and property values. Ask them about any upcoming developments or changes in the local area that could affect an investment’s profitability.
  • A broad network with access to on and off-market listings. Often, the best deals are found off-market, so it’s important that you find an agent who is connected with other agents and has access to off-market listings.
  • An alignment with your investing goals. Your real estate agent should understand your investment objectives and be committed to helping you achieve them. Whether you are looking for steady cash flow, long-term capital appreciation, or a mix of both, the agent should align their search and recommendations with your goals.

Start connecting with experienced investment agents with FastExpert. FastExpert makes it easy to read reviews and explore agent track records, saving you time when finding the right professional for your acquisition.

Step Four: Conduct Market Research

This step focuses on understanding property valuations and identifying the most strategic areas for purchasing an apartment building, considering different property classes (A, B, or C).

Research current property prices in your target market to understand what apartment buildings sell for. Analyze sale price trends and compare them across different neighborhoods and property types. This will give you a clear picture of the investment required and the potential for future appreciation.

Determine which areas within your target market offer the best investment potential. Look for neighborhoods with solid growth indicators, such as new infrastructure developments, commercial investments, and improving socio-economic factors.

Lastly, you need to understand the difference between classes of properties in your area:

  • Class A properties are newer, high-quality buildings in prime locations with high rent and fewer maintenance issues. They require a larger upfront investment but offer stability and low vacancy rates.
  • Class B properties are typically older than Class A and may need some renovation but are generally in good condition. They offer a balance between investment and potential for appreciation, often appealing to investors looking for value-add opportunities.
  • Class C properties are older, often in less desirable locations, and require significant maintenance or upgrades. They are less expensive to purchase but carry higher risks due to the potential for higher vacancy rates and ongoing maintenance costs.

For each property class and location, evaluate the investment potential by considering factors like the cost of acquisition, the potential for rent increases, ongoing maintenance expenses, and the area’s economic growth prospects. This analysis will help determine where your investment can yield the best return.

Your goal is to become a real estate expert in your target market.

Step Five: Analyze Potential Properties

After narrowing down your target market and property class, the next step is to evaluate individual properties based on several critical financial and physical criteria.

  • Start by assessing the income-generating potential of each property. Examine the current rent roll and check for any opportunities to increase rents. Analyze market rental rates to see if the property’s rents are competitive or above market.
  • Review operating expenses and look for inefficiencies. Operating expenses include all costs necessary to run and maintain the property, such as property management fees, maintenance and repairs, utilities, insurance, and taxes. Scrutinize the historical operating expenses to identify areas where costs can be reduced or are unusually low, possibly indicating an error or mismanagement.
  • Inspect the physical condition of the property. When touring a property, look for structural integrity, age and condition of the roof, plumbing, electrical systems, and the overall state of the interiors and exteriors.
  • Ask about historic occupancy rates and the length of leases. Occupancy rates directly impact the income from the property. Evaluate the current and historical occupancy rates to ensure they are stable and aligned with market averages.
  • Look for opportunities to add value. Identify areas where value can be added, such as renovating units, adding amenities, or improving operational efficiencies.
  • Conduct a comprehensive financial analysis using all gathered data. Calculate key investment metrics such as the cap rate, cash-on-cash return, internal rate of return (IRR), and total return on investment. These metrics will provide a clearer picture of the property’s financial performance and help you compare different investment opportunities objectively.

Step Six: Make an Offer and Negotiate

After thorough research and analysis, the next step in acquiring an apartment building is to make a competitive offer and negotiate the purchase terms. If you purchase a commercial apartment building, you may start your offer process with a Letter of Intent (LOI), which opens the door to negotiations and due diligence. A letter of intent (LOI) typically includes:

  • The proposed purchase price.
  • Terms of the sale.
  • Due diligence periods.
  • Closing date.
  • Any contingencies or conditions that must be met before finalizing the transaction.

Think of it as the first step of your purchase.

When purchasing a residential apartment building, you typically directly submit your offer, which includes the purchase price, financial terms, contingencies, and timeline.

The negotiation process of any purchase can involve lots of back and forth between agents. It’s common for sellers to counteroffer, especially in a competitive market. Be prepared to negotiate on price, terms, and other aspects of the sale.

During this process, keep your investment goals and limits in mind to make informed decisions. The purchase price and terms may vary as inspections and further due diligence unfold.

Your real estate agent will have valuable insight into the market and negotiation strategies. Be open to their recommendations on adjusting your offer and responding to counteroffers.

Step Seven: Due Diligence and Inspections

Performing detailed due diligence ensures you have a complete picture of what you are buying and can make an informed decision. Due diligence involves a comprehensive review of all aspects of the property, including:

  • Financial records
  • Leases
  • Tenant profiles
  • Maintenance history
  • Legal compliances.

Professional inspections are a vital part of the due diligence process. They involve a detailed examination of the physical condition of the property, including its structure, systems (like electrical, plumbing, HVAC), and common areas.

Do not skip necessary specialized inspections for roofs, foundations, and environmental assessments (like soil tests or checks for hazardous materials).

While inspections can be costly, they are essential to protect against unforeseen expenses post-purchase. Issues identified during inspections can lead to renegotiating the purchase price or terms or even abandoning the purchase if significant problems are discovered.

Step Eight: Finalize Financing

By this point, you should have been actively working with your loan broker and narrowed down your financing options. Your lender will conduct its due diligence, including appraising the property, reviewing the building inspections, and verifying financials.

Be prepared to facilitate access to the property and provide any additional information the lender requires to complete their assessment.

Review and finalize the terms of your loan, including the interest rate, loan duration, amortization schedule, and any covenants or prepayment penalties.

Provide your lender with all necessary documentation to complete the loan process. Financing an apartment building usually requires additional documentation than a single-family residence.

Expect to have to provide the property’s financial statements, rent roll, lease agreements, your financial statement, and any entity documents if purchasing under a business name.

Step Nine: Close the Deal

Closing the deal on an apartment building purchase is the culmination of your investment journey. Before the closing meeting, you will receive a set of documents to review. These typically include the closing statement, mortgage agreements, title documents, and transfer deeds.

Carefully examine these documents to ensure they accurately reflect the terms of the contract and that there are no unresolved issues.

Before finalizing the purchase, conduct a final walkthrough of the property. This is your last chance to ensure that the condition of the apartment building is as agreed upon and that any required repairs or modifications have been completed.

On the closing day, you will sign the remaining legal documents and transfer the funds to complete the purchase. With the deal closed and the property officially yours, the next step is to transition ownership.

This includes notifying the apartment complex tenants of the change in ownership, setting up new accounts for utilities and services, and coordinating with property management if you’re using a management company.

Start Your Apartment Complex Investment Journey

There’s a reason that multifamily buildings have become one of the most sought-after asset classes for investing. An apartment complex has the capacity to generate passive income and long-term capital growth.

But what makes them even more attractive is that they are almost always in demand. People will always need a place to live, and homeownership is increasingly becoming out of reach, which gives investors confidence in the longevity of the multifamily sector.

Are you ready to become an apartment complex landlord? Start your investment journey by partnering with a specialized real estate agent who understands your target apartment market. With expert guidance, you can navigate the complexities of real estate investment more effectively and identify opportunities that align with your financial goals.

Find apartment real estate agents with FastExpert. Save time by reading reviews and track records all in one platform. With FastExpert, you can find the best professional to help you find your next investment property.

Kelsey Heath

Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate and is now a sought-out guest and ghostwriter.

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