Beginners Guide to Buying an Apartment Building
Most people dream of buying a home, which is fine, but an apartment building? Not on most people’s to-do lists. But if you’re looking for an investment property and want higher returns, it should be on yours.
Buying a multi-unit building is usually for investment only, unless you want to live there too, or you’re generous and have an enormous family. It’s a substantial amount of money (read: risk), and you need to be willing to put in the time, effort and dollars to make it happen successfully. However, as daunting as it may sound, it can mean great returns, as many a wealthy real estate tycoon can attest. Here’s the recipe, and it’s no secret: do your homework and take precautions; you’ll be on the path to success.
Choosing Investments with Strong ROI
If you've never done any real estate deals before, partner with an experienced investor. They can educate you on permits, working with contractors, common expenses and repairs, financing and a hundred other skills you'll need. They will want you to put up the bulk of the money and do more of the gopher work, but this is a much cheaper way to learn the ropes than by making expensive mistakes on your own.
That famous real estate refrain – location, location, location – is famous for a reason. You can change the paint color or throw out those pink flamingos on the front lawn, but you can't change the crime rate, the local schools, the neighborhood's walkability.
One lucrative approach is buying an old building and having it rezoned for multiple units. This requires an intimate knowledge of your jurisdiction's zoning laws, the rezoning process and perhaps the administrators themselves (and their favorite cigars or cookies). Learn these ropes with a partner first.
A more common strategy is to find a property at a bargain price that needs renovation, and charging premium rents after renovating. This also adds to the future value of the property should you choose to sell it either post-renovation or at a later date.
Renovating usually requires permits, a vetted contractor and a strong grasp of going rates for the work in question. Always try contractors on small jobs first, then gradually build them up to larger jobs. Never use a contractor for the first time on a large-scale apartment building renovation.
Aside from the purchase price and repair costs, which can cost millions of dollars, there are (of course) ancillary costs that will weigh down the ROI party balloons. These include permit fees, legal fees, property inspections, vacancy rates (always overestimate these), estimated annual repairs and maintenance (overestimate these too), taxes and insurance. If the building is in turnkey condition and just changes owners, sure you can start collecting rent immediately, but beware of anything that is too easy. Go back through your profit & loss projections and make them more conservative; turnkey usually means high cost and low return.
Financing Challenges – And Overcoming Them
More units usually means more return, since they come with a higher price tag and fewer competitors able to finance it.
In some ways, financing an apartment building purchase is not so different from financing a single home purchase. You may be able to borrow 80% of the total cost, which takes care of the lion’s share of the investment, at rates not too much higher than home buyers’ if your credit is strong and you can show stable income. The bank will assume a 25% vacancy rate and let you include 75% of the projected rents from the building as part of your income.
To cover the down payment and any repair costs, some creativity might help. While banks don’t like to see any part of the down payment borrowed, people really do borrow from friends and family, and there’s always credit card financing. Crowdsourcing the money can work too, to raise money online from strangers. You could even try putting other assets up as collateral to the bank, to avoid a down payment altogether, but beware of putting everything you own up as collateral in case the deal goes bad somehow. No one wants to be homeless over an investment gone wrong.
Tips for Managing Multi-Unit Buildings
Property management is not as easy as it looks, and is a discipline unto itself. But doing it yourself, at least early on in your real estate investing career, will make you a much better investor. Here are some tips to get you started:
- If you do nothing else, be thorough and aggressive with tenant screening. Most landlord-tenant problems can be avoided by screening potential renters' credit and criminal reports, verifying their employment and income, talking to their current landlord and walking through their current home to see how they live.
- Read up on Fair Housing rules, which can be far more complex and dangerous than you think.
- Use state-specific lease agreements, that protect you, your assets and your interests.
- Every communication with renters should be in writing. If you talk to a tenant on the phone, send a notice to them summarizing what you discussed. Keep records of every communication; landlord-tenant court is packed with people every day for a reason.
- Serve eviction notices on the day the rent becomes late, every time, like clockwork. No exceptions.
If you’re serious about the endeavor, you’ll see pretty quickly how exciting buying an apartment building can be. Be savvy and sensible, and soon enough you’ll be onto your second income property (and early retirement).