A Beginner’s Guide to Buying an Apartment Building

Buying an apartment building is a big investment. Here’s what you should think about before becoming an owner. 

How do you know if you’re ready to buy an apartment building?

As long as you have the capital available to invest and are prepared to put the proper amount of work into taking care of the property and your tenants for as long as you plan to own, you’re ready! Just be sure to know the risks...

The differences between buying an apartment building and buying a house

Single-family homes are usually more affordable than apartment buildings, making them an attractive option for first-time buyers. They also allow owners of multiple properties to diversify by location and, when it comes time to sell, offload a smaller portion of your properties versus selling an entire apartment building at once. On the other hand, apartment buildings may be easier to maintain since all rental units are at the same location. 

In terms of the buying process, the main difference between an apartment building and a house is that apartment buildings are commercial properties and single-family homes are residential properties; if you want to purchase an apartment building you’ll be using a commercial real estate agent. Additionally, while home buyers will likely be getting loans from a bank, there are a few more options for commercial loans for multi-family buildings, such as those from Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (HUD).

Buying an apartment building vs. buying a multifamily house

Apart from size and therefore cost, the biggest difference between purchasing an apartment building or a smaller multifamily house is that buildings with fewer than five units qualify for certain types of financing, especially if they are owner-occupied. If you purchase a multifamily house with fewer than five residences and then choose to live there, not only will you be eligible for low-interest, low-down payment Federal Housing Administration (FHA) loans, you may be able to significantly subsidize your housing costs with your rental income.

Things to consider before buying an apartment building

Here are the important considerations to make before buying an apartment building:

Ownership

  • How long do you plan on owning the property? Are you going to renovate and flip it as soon as possible or is this a long term investment?

  • What is the average days on market for investment properties in your area?

Loans

  • Will you want to borrow from a bank, Fannie/Freddie, HUD/FHA, or commercial mortgage backed securities?

  • Banks may not be your best bet as they tend to offer loan-to-value (LTV) ratios of around 70-75% with variable rates and full recourse, meaning they could come after your personal assets if you default.

  • Fannie Mae/Freddie Mac loans offer loan-to-value ratios of up to 80%, with fixed and variable rates of as low as $750,000.

  • HUD loans are appealing for long term owners at up to 85% LTV ratios, fixed rates, non-recourse, and fully amortizing at 35+ years.

  • CMBS loans have similar terms to HUD loans, but tend to require a higher down payment, making them a good solution for buyers with more capital.

  • How much of a down payment can you afford?

Finances 

  • Will rental income cover insurance, taxes, utilities, loan repayment, maintenance costs, and other expenses? 

  • How will you split utilities and other costs between your tenants?

  • How will any sudden and/or lengthy vacancies affect your budget?

  • Does this property have potential for long-term appreciation?

  • Do the rent payments have potential for long-term appreciation?

Tenants

  • Do you prefer short or long-term rentals? How does this impact the bottom line of your investment?

  • How will you find tenants? Will you hire an agent?

  • Will you live in the building, making it owner-occupied?

  • Are you able to invest time in finding high-quality tenants?

Upkeep

  • Will you handle maintenance yourself or hire a property manager?

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