Buying An Apartment Complex: A Beginner’s Guide To Apartment Investing

Apartment investing is gaining popularity in today’s real estate market. For the better part of a decade, median home values have been on the rise, and rental prices have done their best to keep pace. As a result, cash flow opportunities have become more prevalent on a national level. Today’s rental rates are nothing short of exciting to anyone who owns a rental property, let alone an entire apartment complex. It is worth noting, however, that it’s not enough to simply start investing in apartment complexes without any idea of what to do; you have to go in with a plan. Those with a sound strategy in place may find that apartment investing can provide unparalleled passive income for years to come.

Is Buying An Apartment Complex A Good Investment?

Buying an apartment complex can absolutely be a good investment, especially if the proper steps are taken to mind due diligence and mitigate risk. At the very least, a wise investment may simultaneously allow apartment owners to pay down their lofty mortgages with other people’s money, and do so passively. Additionally, attractive tax benefits (like rental property depreciation) will allow apartment complex owners to keep more of the money they make each and every year. That said, there are certainly caveats that must be taken into consideration; after all, owing an apartment complex is a massive undertaking. Therefore, the only way to decide if an apartment complex is a good investment (outside of cash flow) is to weigh the most common pros and cons.

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The Positives Of Apartment Investing

There are, without a doubt, several benefits that coincide with apartment investing. However, the most coveted aspects of investing in apartments are as follows:

• Recurring income

• Diversifying income across several units

• Mitigating risk across several units

• Lower maintenance costs per unit

• The ability to pay off the mortgage using other people’s money

• Financing is typically based on the property’s potential

• The building’s value is often a function of the rents it generates

The Negatives Of Apartment Investing

While apartment investing has become synonymous with a lot of benefits, it’s a lot more complex than residential investing and more susceptible to drawbacks for those who aren’t prepared. Therefore, when weighing the positives of owning an apartment complex, be sure to also consider the following:

• The overall process is more complex than renting out a single-family unit

• Buying apartments for investing requires extensive management

• Tenant turnover varies dramatically from their single-family counterparts

• Tenants tend to care less for the property in a multi-unit building

• Apartment complexes have high maintenance costs

How Much Do Apartment Owners Make?

Apartment owners can make enough money to warrant the initial investment if they find the right deal and take the appropriate precautions. If for nothing else, apartment investing is a very lucrative business for those that invest wisely and do everything in their power to mitigate their exposure to risk. That said, investing in a multi-unit apartment building is absolutely worthwhile if the investor is ready for the responsibility that comes with owning a commercial property, and finds a good deal with positive cash flow and a high enough return on investment. A wise investment should be able to offset (at the very least) the cost of ownership, and then some. That way, the owner will be able to cover the mortgage and operating costs, build equity, and perhaps even pocket a good amount of positive cash flow. Investing in apartments has become a very real possibility for investors of just about every level, and it’s about time more people started realizing their own potential.

How Much Does It Cost To Buy An Apartment Complex?

There is no universal price on the acquisition of apartment complexes. Apartment complexes will vary in prices dramatically from city to city. The number of units, condition of the property, location, and a number of other indicators are factored into the cost of buying an apartment complex—not the least of which are unique to each property. Most apartment complex purchases will require at least 10% down, which is a task in and of itself on large, multi-unit buildings.

What Qualities Should I look For In An Apartment Complex?

Everyone’s definition of a sound investment and great apartment complex is different. Whereas many investors covet the condition of their investment, others could just as easily place their priorities elsewhere. The fact of the matter remains: the qualities that make up a good apartment complex are subjective. It is worth noting, however, that there are several qualities that show up more often than others:

• Cash Flow: Cash flow represents the amount of money an apartment complex is either bringing in or losing on a monthly basis. Cash flow can be negative or positive, with every investor favoring the latter for obvious reasons. Positive cash flow indicates that an investor’s assets are liquid and making money.

• Capitalization Rate (Cap Rate): Capitalization rate is a tool—one used by investors to identify an asset’s potential. Perhaps even more importantly, however, a property’s cap rate awards savvy investors the ability to compare assets. It is the cap rate that will be used to help pick an asset and compare it to the competition.

• Location: The golden rule of real estate. Nothing is more important to an apartment investing career than the location in which the investor’s assets are located. The location will determine everything from the cost to the income potential and demand.

• Demand: Every good investment property needs demand. Vacancies are the worst thing that can happen to a landlord. Therefore, investors will want to make sure there are renters in the local market to fill their units.

• Net Operating Income (NOI): The NOI is used to determine the income produced by a property after accounting for operating costs. As it turns out, the NOI also helps investors calculate the cap rate.

How Do You Buy An Apartment Complex?

1. Get Your Finances In Order

2. Determine Whether Or Not You Should Buy

3. Choose Which Type Of Apartment Complex Suits Your Long-Term Strategy

4. Find The Right Apartment Complex

5. Research The Apartment Complex & Its Surroundings

6. Make An Offer

7. Finance The Purchase

8. Close On The Apartment Complex

Those interested in buying apartments for investment purposes must get their finances in order before they do anything else. That way, they’ll be able to formulate a more strategic starting point. After all, even the best investors wouldn’t know how to invest in apartment buildings if they didn’t know how much money they had to spend. With a better idea of how much money they have to work with, investors will be able to narrow down their search for the perfect apartment complex and avoid wasting time on assets they can’t afford.

Unlike their residential counterparts, apartment complexes will require commercial loans, of which there are three typical options: conventional loans, seller financing, or private loans.

The vast majority of today’s apartment complex loans are underwritten by institutional lenders and banks. Otherwise known as conventional loans, this form of financing has become synonymous with today’s lowest interest rates. However, what borrowers gain from lower interest rates may be offset by a lot of red tape, waiting, and loan durations. Conventional commercial loans, for example, tend to coincide with terms that last between five to 20 years, oftentimes with amortization periods longer than the loan duration itself. On top of that, it’s a lot harder for borrowers to qualify for a conventional loan than either a private loan or seller-financed loan.

Private loans, on the other hand, tend to have higher rates than their conventional counterparts. However, their steeper prices offer something conventional loans can’t compete with: speed of implementation. The speed in which a borrower may receive funding is second to none, and can be had in a fraction of the time it usually takes a conventional loan to go through; that’s a huge advantage when competing over a property with other investors. Sometimes, the speed in which you are able to have the money in a seller’s hands will make the difference between landing a deal and missing out on it altogether.

After a source of funding has been determined, investors need to think about whether or not buying a commercial apartment complex is the right move for their specific situation. At this time, investors will need to make sure buying an apartment complex will accomplish the goal they originally set out to achieve in the first place. In other words, apartment investing is simply one of several exit strategies made available to today’s investors. Investors will need to weigh the pros and cons of investing in apartments. Do the pros outweigh the cons enough to follow through with such a costly purchase? Can you reach your goal any other way? Are you ready for the responsibility of owning an entire apartment complex? How much different is apartment investing from single-family home investing? Investors must be comfortable with their answers to these questions (and many more just like them) before they move forward.

Once confident in their decision to proceed, investors will then need to decide which type of apartment complex they want to invest in. Once again, this will require the investor to take a deep, unbiased look at themselves to determine what they are comfortable investing in. This step will require investors to mind due diligence and research a lot of things, not the least of which include their financial situation, the number of units they want to invest in, and a familiarity with each type of property class (A, B, C, or D). Perhaps even more importantly, now is the time to confirm which type of apartment complex will help realize the investor’s goals. What does the return on investment and cash flow look like? How profitable (if at all) will the investment be?

Upon uncovering which type of apartment investing strategy is best suited for the investor, they must then use their own criteria to find a complex that fits all of their needs. See why it’s so important to know what you want out of an investment before you even start looking? Knowing what you want will make the search a lot easier. Not only that, but you are more likely to realize your goals if you know what you want out of an apartment complex before you invest in one.

In searching for a worthy apartment complex, investors need to consider everything. What’s the predicted cash flow? How many repairs does the complex need, if any at all? Is there local demand for rental units? What’s the expected net operating income (NOI)? What’s the capitalization rate? What type of future development is planned in the area? Why is the owner selling? Remember, the location in which an apartment complex is located is just as important as the complex itself, if not more so.

It is important to mind due diligence and confirm the purchase will result in positive returns over time. To make things easier, it’s a good idea to hire a commercial broker; there’s a good chance they will be able to find what you are looking for (if it even exists). They will also be able to help evaluate the building and the potential of the surrounding area.

In the event you find a complex that meets all of your criteria, proceed to make an offer and be prepared to negotiate. Just remember one thing: any attempt to counter should be met with data. If you want to lowball the original asking price, be prepared to give detailed information as to why. It is also worth noting that making a great offer will require an appraisal. Getting the property appraised will help formulate a great offer price; one that will help insure profits when it finally comes time to rent out the units (if they aren’t already rented).

If the inspection and appraisal meet your approval, the final step is to secure the financing we already talked about and close on the property.

One Of The Best Cities To Invest In Apartment Buildings

It is entirely possible to find lucrative apartment complex opportunities in just about any market. The median home value across the country has risen almost exponentially for the better part of a decade, and rental prices have done their best to keep pace. At the very least, today’s real estate market prices are incredibly attractive to anyone who owns a rental property, let alone an entire apartment complex. In the last year alone, rents across the country increased an average of 1.5%. According to apartmenlist.com, the national median rent for a one-bedroom apartment is $955, and a two-bedroom apartment will cost an average of $1,185 a month.

Rental asking prices are promising just about everywhere for landlords, but Austin, Texas looks particularly attractive at the moment. For starters, rental asking prices have increased at a rate that is more than twice the national average in the last year, 3.6% and 1.5% respectively. As a result, landlords can expect one-bedroom apartments to fetch about $1,169 a month and two-bedroom apartments to earn about $1,443 a month—both of which are more than their national counterparts. It is worth noting, however, that apartment complexes in Austin are appealing to today’s investors for more than their current cash flow rates. In addition to the latest increase in year-over-year rental increases, Austin is on the brink of an encouraging population increase. In the last ten years, Austin’s population has grown 32.8%. However, promising employment opportunities, a growing tech industry, and relatively affordable housing give reason to believe Austin will continue to see an influx of people in the coming years, which bodes incredibly well for apartment complex investors.

Summary

Those considering an investment in apartment buildings are, no doubt, aware of their incredible potential. The way today’s rental market is shaping up is very encouraging, and smart investors who get in now may reap passive income rewards for years to come. However, apartment investing—especially investing in entire complexes—requires an unparalleled mind for due diligence and an attention to detail that surpasses that of single-family homes. Those who are able to carefully navigate the apartment investing waters, however, will likely have a valuable asset contributing to their rental portfolio for quite some time.

Key Takeaways

• Is buying an apartment complex a good investment in today’s marketplace? The answer is simple: Yes, if you can find the right deal.

• Investing in apartment complexes is more challenging than single-family homes, but the payoff can be a lot bigger.

• Learning how to invest in apartment buildings starts with knowing what you want out of the process.