With the world as we know it morphing into something new, relying solely on salaried income to set yourself up for retirement later in life can be a risky move. Many people minimize this risk by choosing to invest their money.
One of those investment opportunities is the purchase of an apartment building.
In this guide, we’ll show you how to invest in an apartment complex. Whether you choose to purchase an apartment building on your own, partner with one or more associates, or choose any of the many other methods of investing in apartments, your journey starts here.
Starting with this complete strategy guide will set you up for success in your purchase of an apartment building. With the knowledge you gain from the guide below, you’ll be able to better understand the process of buying an apartment complex. When it comes time to make the purchase, you can feel confident in your decision and strategy.
Before we discuss the particulars, let’s first focus on the ways in which you can buy an apartment building.
The steps involved in purchasing an apartment building, while complex in nature, are rather straightforward. In fact, they involve some of the same processes as buying a house. However, there are different ways of purchasing, or investing, in an apartment building, as we’ll discuss below.
You can, as an individual, purchase an apartment complex. While that might seem like a daunting task, it is entirely possible. You will take on more risk as an individual, but the returns could be greater depending on which property you choose.
If taking on the responsibility of an entire apartment complex overwhelms you, there is another option: partner(s). You can search out investment partners on your own and choose who you’d like to work with. Depending on who you partner with, you could set your own terms and work out a deal amongst one another in terms of responsibilities and commitment.
On the other hand, partnerships without much in the way of legal documentation are risky at best. Oftentimes working with friends and/or family is hard; your relationships outside of investing could suffer based on your interactions in investing in an apartment complex.
However, there are plenty of alternatives to simply picking up an investment partner on the street (or among your closest of kin). You can participate in a crowdfunded real estate venture, a syndication, a real estate fund, or a real estate investment trust.
Investing in an apartment complex can be a great way to minimize the headaches of ownership while still reaping the benefits. A real estate investment trust (REIT) allows you to work with partners to purchase an apartment building in a structured setting that’s meant to streamline the investment process by dividing up the responsibilities.
Created by a sponsor, the REIT also includes a trustee and manager. If you invest in an REIT, you’ll become a unitholder, who indirectly holds the REIT assets. REITs can be publicly traded or privately owned and are typically considered a long-term investment. Payouts come as an annual dividend, which can be diminished by high management and/or transaction fees.
A syndication works in a similar way to an REIT, in that there’s a structure put in place (typically an LLC) to divide up the responsibilities of investing in an apartment complex. While a syndication relies on a group of investors to purchase properties, the sponsor takes on the most investment, while individual investors cover the rest.
Syndicators are referred to as general partners, while investors become limited partners. Investors are paid a preferred return, while sponsors charge an acquisition fee. Syndications make money through rental income as well as property appreciation, much in the same way any investment in real estate would.
Real estate funds are another way to invest in an apartment complex. Unlike REITs, real estate funds offer a wider diversification, as you’re investing in different opportunities, from real estate-related stocks to individual REITs.
Bought directly from a real estate fund company or an online broker, real estate funds pay out similar to the way in which syndications do. Values appreciate over time, increasing your return on investment (ROI).
However, some real estate funds don’t trade like stocks. There are certain private real estate investment funds that are professionally managed funds that invest directly in real estate properties. These are available only to accredited, high-net-worth investors and typically require a large minimum investment.
Creating your own syndication is possible, too. First, you’ll want to select an asset class. In this case, it will be apartment complexes. Next, you’ll want to seek out training regarding both the purchase and management of apartment complexes, as well as syndication itself.
You’ll want to operate your syndication under a business name. Once you’ve chosen your name, next comes customers. Building an investor base should come before researching and prospecting any properties. A security attorney can draft up the necessary legal documents while you line up investors and seal the deal.
Researching how to invest in an apartment complex is a great first step in the process. But where do you go from here?
The first step in purchasing an apartment building as an individual is to create and register a business name. Operating as a business helps to protect your personal assets in case things go south. This is especially true for recourse loans, that grant the lender access to the assets of the entity purchasing the apartment building.
Next, you’ll want to contact and hire a traditional real estate agent, a business broker, or a commercial real estate agent. Commercial real estate agents typically have a higher commission rate than traditional real estate agents, while brokers have their own system of fees. Alternatively, you can also seek out a real estate investment association (REIA).
An escrow or title company will handle your closing transactions, but you’ll likely have to apply for a loan. These loans can be commercial, which is most common, or private, depending on the seller’s situation. If they want to offer financing, you’ll commit to a schedule of payments with a hefty down payment.
If you choose to go with a commercial loan, there are a few documents you’ll need to have ready. Inspection documents are typically a must, along with an appraisal. You’ll also want to obtain a copy of every existing lease, as well as the tax returns from the previous year. As you gather these documents, you can also play with the rental property calculator. It allows you to see how much you can make depending on a number of factors.
As you do your research, there are a few things you’ll want to look for when it comes to purchasing an apartment building. The list below should be considered a starting point, not an exhaustive resource.
- What is the property’s CAP rate? This is calculated by dividing the net operating income (NOI) by the market value/purchase price. A higher CAP rate traditionally translates to a higher ROI, but new properties may have a lower CAP rate and require less maintenance.
- Determine how many units are in the apartment building. Properties of four units or less are subject to a residential mortgage, while any more than four units requires a commercial loan.
- Is this property a value-add? Properties that need significant improvement are known as value-adds. These properties require more of an investment up-front but can provide high ROIs once those repairs are complete.
- Gather information from financial statements and any other documentation on the property. This includes inspection reports, maintenance logs, utility billing procedures, insurance claims, etc.
Finally, you’ll want to figure out what class your potential apartment property falls into. Class A buildings are 10 years old or newer, with Class B properties adding 10 years to that lifespan. Class C buildings are in the 30-year range, which leaves Class D properties hitting the 40-year mark.
If you don’t plan on approaching a purchase as an individual, there are particulars you’ll want to familiarize yourself with as an investor. For instance:
- Is the building under rent control?
- What is the occupancy rate of your prospective purchase?
- What repairs are necessary for the building?
- What is the surrounding area like, in terms of demographics, amenities, etc.?
- What environmental concerns are associated with the area in which the apartment complex resides?
- Does the apartment building have (or will it support) other types of income?
You’ll also want to ask yourself how long you plan on holding onto the property. Many of the investment opportunities above require a commitment of a few years, but some can be passed onto heirs within a will. Defining your commitment level will help you decide which investment opportunity is right for your ROI expectations.
These days, investments can be done through real estate investing apps. Crowdfunding companies such as EquityMultiple and Fundrise have their own apps that connect investors with potential real estate opportunities.
If you plan on investing in individual properties, look into EquityMultiple. This platform is best for commercial real estate and is easy to use. There’s a good investment selection to choose from and the company works with both non-public REITs as well as other real estate funds.
However, in order to become an investor on EquityMultiple, you will need to be accredited. Minimum investments land in the ballpark of $5,000, which may be a steep price for those just starting out in their investment journey.
Beginners should find more real estate investment opportunities on Fundrise. This platform doesn’t require accreditation and cuts out the middleman to offer you a lower introductory pricing system.
In fact, you can invest in your first real estate property for just $10. This gets you the starter account, which is one of five levels associated with a specific investment tier. While investments on Fundrise should be considered a long-term opportunity, the platform reports they implement a “value investing” strategy that uses the buy low, sell high mentality.
With all this information at your fingertips, you might be stuck as to where you should go next. After all, with so much to think about, taking a step in the right direction could seem tricky.
That’s why you should start with your own goals. Do you expect to hold the apartment for the long-term and live off the cash flow or flip it after increasing the property value? Figure out how long you’d like to invest in an apartment complex and tailor your search and loan-seeking efforts to that timeframe. Short-term fix-and-flip properties can give you momentum, while long-term buy-and-hold properties could be a blessing for your heirs.
If investing with others sounds like the way to go, check out your options. Research the opportunities we mentioned above (such as REITs, real estate funds, syndication, etc.) to find the right fit for your goals. Give the crowdfunding apps a whirl as well, especially if you’re not looking to invest too much in the beginning.
Apartment buildings can be a good investment for many investors. With so many opportunities in terms of approach and ROI, risks can be minimized to varying degrees. Those investing in apartment complexes should consider them to be long-term investments, however.
Investing in apartments varies when it comes to specific dollar amounts. Crowdsourced real estate investments may require as little as $10 to invest, while other opportunities require a loan and up to 30% down.
Owning an apartment building can be extremely profitable. Apartment buildings offer investors multiple ways to earn a return on their investment, from the purchase of the building itself to the amenities that come with that property. Partner investing, in whichever form you may choose, can also be a way to increase your profits while only investing a small amount.