HOW TO START BUYING & INVESTING IN APARTMENT COMPLEX BUILDINGS

buy an apartment complex

Should you buy an apartment complex?  Over the years I’ve purchased quite a few single-family homes, and I’ve even acquired a number of duplexes along with one fourplex, but I’ve never purchased an apartment building. 

Buying an apartment complex has always intrigued me, though.  Maybe it’s primarily an ego thing to own an apartment building, or perhaps it’s that business side of me that says, “Hmmm…one building; lots of tenants.”  In either case, I’m going to explore how buy an apartment complex in this post. Let’s get started.

What defines an apartment complex?

Before we jump in, let’s make sure we understand just what defines an apartment building. First of all, any property designed for residential use that is 4 units or less is not an apartment, so single-family homes, duplexes, triplexes, and fourplexes are not apartments.  

Thus, a residential complex with 5 or more units would be considered an apartment.

Are you in a position to purchase an apartment?

The decision to buy an apartment complex is much more of an emotional and financial commitment that buying a single-family rental.  We’ll discuss apartment building financing a bit later, but, for now, you’ve got to consider that the down payment will likely be hefty.  

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Additionally, depending on the size of the complex you purchase, overnight you’re inheriting a lot more tenants than you previously had, so you want to carefully consider whether or not you are prepared and willing to endure the emotional, mental, financial and even physical commitments that come with buying an apartment complex.

Financing apartment buildings

Getting financing for an apartment building isn’t the same as qualifying for a single-family rental property.  Apartments require commercial lending, and the underwriting requirements are more complex.

Here’s a quick summary of some of the main financing options for apartment buildings.

Government-backed financing

If you want to keep your down payment as low as possible, then getting a government-backed loan may be the route to consider, and you’ve got 3 options: Fannie Mae, Freddie Mac or FHA. I’ll quickly break down each one.

Fannie Mae loan to buy an apartment complex

Fannie Mae offers a number of financing options for real estate investors to buy an apartment complex.  Here are two of them:

Fannie Mae Multifamily Small Loan Program

  • Loans from $750,000 – $5,000,000
  • Up to 80% LTV purchase and refinance
  • Loans are assumable
  • Finance up to 3% of closing costs
  • 90% minimum occupancy required
  • Tax returns not required

Fannie Mae DUS Multifamily Loan Program

  • Apartment loans from $3 million
  • Non-recourse with standard carve-outs
  • Up to 80% LTV purchase and refinance
  • Customized fixed rate terms from 5-30 years
  • 30-year fixed rates – Multifamily Loan for Life
  • Credit facilities starting at $25 million
  • Mezzanine financing available
  • Early and extended rate locks

Freddie Mac loan to buy an apartment complex

Freddie Mac offers two loan programs for apartment financing.

Freddie Mac Multifamily Small Balance Loan Program

  • loans ranging ($1MM-$7.5MM)
  • Non-recourse
  • No yield maintenance – step down prepay
  • Converts to ARM at end of fixed term
  • Highly competitive interest rates
  • Up to 80% LTV
  • 30 year amortization
  • Full term interest only available
  • No replacement reserves
  • No underwriting floor rate maximizes proceeds
  • Tax returns not required
  • Assumable
  • Cash out refinances

Freddie Mac Apartment Loan Program Overview

  • Apartment loans from $5 million
  • Non-recourse with standard carve-outs
  • Up to 80% LTV
  • Interest only payment options
  • Customized fixed rate terms from 5-30 years
  • Tiered risk based pricing
  • Lease Up and Moderate Rehab programs
  • Supplemental loans available
  • Mezzanine financing available
  • Early and extended rate locks

FHA apartment loan

HUD 223(f) apartment loans are available for the acquisition or refinancing of 5+ unit multifamily properties and are a great financing option for borrowers looking for maximum leverage and longer fixed rates and terms.

There are no income or rent restrictions under Section 223(f) unless otherwise required by a project based HAP contract or other regulatory agreement. HUD FHA 223(f) insured mortgages are non-recourse with no market – economic or population – restrictions.

  • Loan sizes above $1 million – no maximum
  • 83.3% LTV for market rate apartments
  • 87% LTV for project based rental assistance
  • Up to 35 year fixed rate terms
  • 1.17 minimum DSCR
  • HUD insured mortgages are non-recourse

For more on the guidelines & advantages/disadvantages with this FHA loan program, click here.

Hard money

Hard money can be a great short-term alternative to bank financing that can help you purchase or renovate an apartment…or both.  

Hard money lenders tend to be companies who are professional money lenders. They are not banks, but they operate in a similar fashion in that they loan out other people’s money for profit.  

For instance, a hard money lender may have $50M at their disposal that they can borrow at 10%.  Their hope is to turn around and loan that money out at 12-15% percent, on average, and make a nice spread.

Additionally, hard money lenders charge points and fees, such as origination fees, which you pay up front and on top of the interest paid throughout the life of the loan.  

The benefit to hard money is that it’s widely available, it’s an alternative to bank-financing and you can get large amounts of capital to finance the purchase or rehab side of your investment.

The two biggest disadvantages to hard money is it’s expensive, and oftentimes there are a number of hoops to jump through to access the money such as lengthy applications, appraisals, inspections and draw requests – similar to what you may experience getting money from a bank.

If you decide to pursue hard money, you can easily find hard money lenders by doing an internet search.

Owner financing

Also known as “seller financing”, owner financing is another viable way you can buy an apartment complex if you lack enough cash to purchase the property or can’t qualify for bank financing or other investment property loans.  With owner financing, the buyer is making payments to the seller just like they would a bank.

Assumable mortgage

With assumable mortgages, the buyer is taking over (assuming) the seller’s existing mortgage on the property.  In essence, the lender behind the mortgage is transferring the mortgage along with its terms from the seller to the buyer.  

The advantage for the buyer is its cheaper and faster to close as an appraisal will likely not be required, and you will probably save on other financing-related fees.  

Additionally, the buyer could save on interest if the interest rate on the mortgage being assumed is lower than what banks are offering at that time.

Portfolio loans

Portfolio loans are handled by banks and other lending institutions that hold their loans in-house in their loan portfolio as opposed to selling them on the secondary mortgage market to entities like Fannie Mae & Freddie Mac.  Lenders who offer portfolio loans are known as “portfolio lenders.”

Since portfolio lenders don’t sell their loans, they are not concerned with abiding by the underwriting requirements imposed by Fannie Mae & Freddie Mac.  This allows portfolio lenders to be more flexible with their lending practices – making them much more investor-friendly.

How to find apartment buildings for sale

It’s best to work with a commercial real estate agent to uncover apartments for sale in your area.  Additionally, here are a few sites to check out:

Loopnet
Cityfeet
Point2homes

reasons to buy an apartment complex

Investing in apartment buildings certainly has its advantages.  Here are 4 of them:

Lower purchase price per unit

Compared to single-family homes, the price per unit for apartment buildings will be less since you have multiple units within a single structure.

Income diversification

Since you’ve got multiple tenants within one property, your income is diversified across multiple units as opposed to a single-family dwelling where you’ve only got one tenant, and if that tenant leaves, so does all your income for that property.

Extra income sources

Apartment buildings also provide the opportunity for you to have extra income sources such as coin laundry, parking, vending machines, etc.

Banks look more at property financials

While banks still look at the borrower’s financial profile, when it comes to apartments, banks look more at the financial situation of the apartment when determining a lending decision.

reasons not to buy an apartment complex

Maintenance needed

Compared to single-family homes, apartments need more maintenance.  You’ve got a larger building, many tenants. You’ll likely have some landscaping needs, a pool, workout area, etc. All this needs to be maintained.

Tenant churn

While it may be common for tenants to remain in a single-family home for several years, this is not common with tenants renting apartment units.  Higher tenant churn means more maintenance for you in between tenants.

Management requirements

While having a lot of tenants in one building has its advantages, it certainly increases your management responsibilities.  While I’m a strong believer in self-managing, taking on a high volume of tenants overnight might be more than you can handle on your own.  

Depending on the size of the apartment building, you should consider hiring a property manager or even employing an onsite property manager.

Harder to sell

There’s certainly a smaller market of people looking to buy apartment buildings compared to 2-4 unit multi-family or even single-family homes, so getting out of apartment ownership won’t be so easy in the short-term.

Tenant disputes

With multiple tenants living above, below and beside each other, you will have tenant disputes, and guess who they are going to call?  You guessed it. You.

This is probably another reason to consider outsourcing your apartment property management.

How to determine an apartment’s value

When considering an apartment’s value, you should first add up the gross rents for the year. Let’s assume an apartment receives $10,000/month in gross rents or $120,000 for the year.

Once you have that number, you need to consider a GRM.  GRM stands for Gross Rents Multiple. GRM is a number you will multiply against your annual rent to help determine the value.

For instance, if the GRM was 10, then you’d take $120,000 x 10 for a value of $1,200,000.

The GRM, though, can be tough to figure.  To determine this, you’ll want to work with a local commercial real estate agent.

buy an apartment complex: Final thoughts

Making a decision to buy an apartment complex can be an exciting and lucrative next step in your real estate investing career.  

Be sure to do your due diligence. Use the tips I’ve provided in this post to determine the apartment’s value, the best financing option for you and carefully consider whether or not acquiring an apartment is the best move for you personally.

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