The Ultimate Guide to Buying An Apartment Building
Step 1 – Determine Whether Buying an Apartment Building is Right for YouCompared to investing in single-family and small multi-family properties, deciding whether buying apartment buildings is a good investment requires strong examination of the benefits and downsides. You must consider the capital involved, how larger buildings with multiple units impact income, expenses, and cash flow, and how apartment tenants contrast to those for smaller rentals.
Benefits of Buying Apartment BuildingsThere are many benefits to owning an apartment building. These include recurring income, diversifying the income across many units, lower per-unit maintenance costs, the possibility of extra sources of income over and above the rents, financing based more on the property’s financials than your own, and the buildings value often a function of rents.
Recurring IncomeOne of the main reasons for buying apartment buildings is ongoing income. If the deal is right, and the finances sound, a good apartment building will throw off recurring monthly income.
Diversifying Income Across Many UnitsIf you are a long-term investor who typically buys single-family properties, you are probably familiar with a common problem. That is, if your property goes vacant, you lose 100% of your rent! On the other hand, apartment buildings mitigate the effects of vacancy. If one unit goes vacant, you still have the others to generate rent to cover expenses and perhaps still generate positive cash flow.
Lower Per-Unit Maintenance CostsEconomies of scale work in the favor of the apartment building owner. For example, if you have to redo a roof, it’s not just for one unit. That repair serves all the units in the building. If you need to repaint, you can use the same paint for multiple units and not have wasted materials resulting from only one unit’s need.
Extra Sources Of IncomeThe larger the building, the more likely you can add vending machines and coin operated laundry. In congested cities, you might be able to rent parking spaces. All of these provide extra income for the owner.
Financing Based More On The Property’s Financials Than Your OwnUnlike a single-family unit, financing for apartment buildings is based mainly on the financial performance of the building as opposed to your personal financial and credit situation. So, banks will look mainly at the financial situation with the building for approving a loan.
Building’s Value Is Often a Function Of RentsWhen buying apartment buildings, the value of the investment is determined in great part by the financial performance of the building. So, if you can increase the rents, you can increase the value of your holding. Ryan Coon, the co-founder and CEO of Avail, an online property management platform for DIY landlords echoes the advantages: “A multi-unit apartment substantially lowers risk. A vacancy in a large building is less impactful than a vacancy in a single family home or smaller apartment building. Landlords of multi-unit properties are able to spread the cost of maintaining the property more than the cost of maintaining multiple singular units. For example, replacing a roof on one apartment building with 4 units is likely cheaper per unit than replacing roofs on 4 single family homes.”
Downsides to Buying Apartment BuildingsBuying an apartment building is more complex than acquiring a single-family home or even small multi-unit property. The management will be a bit more intensive and the nature of tenants will be different. In addition, expect maintenance to be more of a regular issue.
More Intensive Management Than With Single-family UnitsOnce buildings are larger than 4 units, management becomes a much more intensive process. The ability to manage the property yourself becomes an issue, and you need to consider some form of outside management. One option is hiring a professional property management company. In other cases, you’ll hire an onsite manager. Both of these come with additional costs and the need to supervise the manager.
Tenant TurnoverWhen tenants move into a single-family dwelling, it tends to be more for the long-haul. They get to know the neighborhood, their kids go to local schools, etc. Tenants in apartments, on the other hand, are much more transient. In a single-family home, it’s not uncommon for a tenant to stay 5 years or more. In an apartment, you’re lucky if a tenant stays more than one year. So, you have to expect tenants turnover, and you will constantly be in the mode of marketing for, and renting to, new occupants.
Less Tenant CareEven a renter in a single-family dwelling will tend to treat the property like their own home. An apartment, on the other hand, is a different animal. Tenants don’t tend to treat apartments with the same care. So, damage and maintenance needs will be much more prevalent with apartments.
Higher Overall Maintenance Than With Single-family UnitsWhen buying apartment buildings, be prepared for turnover and general lack of care tenants give to their units. You’ll have more ongoing maintenance with apartments than single-family units. On a per-unit basis, maintenance costs will be lower the more units a building has (particularly when compared to a single-family dwelling). However, the overall cost of maintenance will be higher in an apartment building even with similar square footage to a home. Over at Avail, CEO Ryan Coon cautions investors that when major problems arise, such as a boiler break causing loss of heat to the entire building, they impact more tenants and are more expensive to fix. Replacing the piping system for one bathroom, or even for an entire house is much cheaper than replacing the piping for a five-story building.
Step 2: Consider the Type of Apartment BuildingIf you’ve decided that buying an apartment building is a good option for you, the next step is to consider the type of apartment building to acquire. This involves examining your personal and financial criteria for the purchase, the number of units desired, understanding the class of apartments available for purchase.
Examine Your Personal and Financial Criteria for the PurchaseConsider your level of ambition and risk threshold since both will affect the kind of apartment investments you’ll consider. The two main considerations along those lines are the number of units and the return on investing you’re seeking.
Number of UnitsGenerally, you can consider anything larger than 2 units an apartment building. If you are fairly conservative and only looking to supplement your retirement or have a sideline income, you may want to stay with buildings no larger than 4 to 6 units. If you’re looking for larger incomes, and willing to take on associated risks, you’ll consider larger buildings like 12 or even 20 unit buildings.
Know the Types and Classes of Apartments When Buying an Apartment ComplexApartment buildings come in a variety of forms. There are converted old houses with multiple units, small six-plexes that were built specifically as rentals, garden apartments with two stories and perhaps a dozen or more units in a single building, all the way to multi-story mid-rise and high-rise apartment buildings and apartment complexes containing scores of rental units. In the U.S., there’s a rating scale with letters ranging from A to D which attempts to classify the caliber of apartment buildings.
- Class “A” – are newer luxury rentals generally 10 years old or less or substantially renovated if older. The will typically take the form of garden, mid-rise, or high-rise buildings. Class “A” apartment complexes have amenities such as pools, tennis courts, and clubhouses.
- Class “B” – can be up to 20 years old, and may be dated but are well-constructed and maintained. These complexes may or may not have amenities, but they do, the facilities are more dated than those found in Class “A” apartment properties.
- Class “C” – can be up to 3 decades old, with limited or no amenities. The properties may have an apparent need for renovation and repair.
- Class “D” – will typically be over 30 years old and usually in lower socioeconomic areas, often with subsidized housing. Amenities are not typically present, and buildings will usually have an apparent need for renovation and repair.