How to Buy an Apartment Building: Multifamily Acquisition Explained
Mastering (or at least understanding) how to buy an apartment building is a valuable skill for real estate brokers, lenders, and investors. In this article, we’ll dive into the multifamily acquisition process and provide essential insights to guide you on your investment journey. Understanding the various types of apartment complexes on the market and some of the essential questions to ask before acquiring an apartment complex will help investors position themselves for a successful purchasing process.
Read on to learn how to buy an apartment building.
Why Invest in an Apartment Complex?
Multifamily mainly comprises apartment complexes and has long been regarded as one of the most secure real estate property classes. Multifamily has shown to be an excellent long-term investment. While other asset classes, including offices and retail, have been riskier throughout the pandemic, multifamily has remained a safe bet.
Tenants tend to rent for years at a time, which makes these investments so dependable. Rents are usually consistent, and tenants make regular payments. According to CBRE, multifamily occupancy will stay above 95% in the near future. Meanwhile, as more individuals work from home, office space usage has fallen.
Another significant advantage of apartment complexes is that having numerous tenants rather than just one or a few reduces the risk a landlord faces compared to other commercial real estate investments. For example, a retail property may have one or two tenants, but you’re left with nothing if they leave. An apartment complex, on the other hand, has several tenants.
Acquiring a tenant for residential property is also faster and easier than securing other types of CRE tenants, such as an office or retail center, where the procedure is more complex and time-consuming. It often entails discussions and landlord spending on tenant improvements. Apartment contracts are usually straightforward and standard, and apartments are sometimes leased in a single day.
The Potential Disadvantage of Investing in an Apartment Complex
Buying just one apartment complex means an investor will not have a diverse portfolio of asset classes. If a neighborhood becomes unpleasant, attracting tenants for the apartment complex may be challenging, and rents may suffer. Apartment complexes also have higher maintenance costs than other forms of property, which the landlord solely bears.
Maintenance is frequently compounded because each unit has its air conditioner and equipment. Apartment complex management takes more time and is less passive than other CRE assets, such as those with NNN leases. Even with a property manager, a landlord must monitor and supervise the property management and approve unforeseen expenses and rental rate changes.
How Much Does It Cost to Buy an Apartment Complex?
There is no one-size-fits-all response to how much an apartment complex costs. The cost will differ based on the location, the number of apartment units, and the building’s quality.
Types of Apartment Complexes
Low-Rise Apartment Buildings
They typically have up to four floors and can be purchased as a single structure or a collection of linked apartments. Townhomes, duplexes, rowhouses, and garden-style complexes are examples of low-rise apartments. These complexes have more parking, greater facilities for seniors and the disabled, and more flexibility in negotiating lease terms.
Mid-Rise Apartment Buildings
Mid-rise buildings typically feature 5-9 stories and are located near more amenities and entertainment hubs. They include suburban and urban condos and apartments, college dormitories, motels, and affordable housing complexes. These buildings feature additional benefits, such as local shops, restaurants, and entertainment areas.
High-Rise Apartment Buildings
High-rise structures with ten stories or more must survive severe winds, hurricanes, earthquakes, and other natural disasters while still providing a realistic escape route for their occupants. These include luxury apartments, metropolitan college dorms, hotels, or government-subsidized housing.
Mixed-Use Apartment Buildings
Mixed-use structures are very popular among investors. As the name suggests, they make use of their spaces in a variety of ways. Shops, for example, may line the ground floor, while residential flats may occupy the upper stories. A mixed-use apartment can include office, educational, retail, and residential spaces.
How to Buy an Apartment Building?
Purchasing an apartment complex involves research, patience, effort, and funding. The fundamental steps are outlined below.
Determine What You’re Looking for, and Your Budget
When looking through internet ads or trying to find the perfect home, you should first identify your budget, the type of apartment complex you want, and the desired condition. Should the property be renovated, or should it be stabilized? Do you want to fix and flip or invest for long-term profit?
Research Potential Markets
Investors can research potential markets once they know what they are looking for. The markets an investor seeks may also be determined by their experience level. For more seasoned landlords who already have several assets under management and have developed a management company they work with, it’s far easier to buy out of their footprint to a spot that they can’t readily get to
Find the Property
After determining your budget, property size, and location, the next step in how to buy an apartment building is searching for listings. A commercial real estate investment sales broker can also assist you in finding a good deal because they are sometimes aware of publicly unavailable listings. The best deals are rarely advertised on the market.
For First-Time Buyers: Create a Legal Entity to Hold the Property and Shield You From Liability
As a first-time buyer, you must create the legal structures required to purchase commercial property and protect yourself from liabilities. This phase will necessitate the services of an attorney. Most CRE lawyers advise you to allow them to form a limited liability corporation (LLC) on your behalf, and you may also require an LLC for the property itself.
As implied by the name, LLCs restrict the liability of your assets in many—but not all—worst-case scenarios, including the failure of the investment. You can hold off on creating an LLC until you locate a property you are interested in buying because doing so with a lawyer is quite straightforward.
Even if you have an LLC set up, it’s crucial to remember that lenders who demand a personal guarantee put your assets at risk. Attorneys usually recommend that your business partner have an LLC if the purchase is a joint venture (JV).
Research and Inspection of the Potential Property
Locating a property that interests you is simply one aspect of the process. The other aspect is ensuring it is a good and lucrative investment. Examining the property’s financials to see if it will cash flow is necessary.
This is accomplished by checking existing leases, rent rolls, maintenance reports, and tax returns and knowing about additional costs such as tenant and landlord-paid utilities. Chatting with the property manager will also aid you in learning more about the day-to-day operations of a property.
Send a Letter of Intent (LOI)
If you’ve located a property that meets your criteria for preliminary research, the next step is to write a letter of intent to the owner. This is especially true when working with an investment sales broker and looking at properties not listed on public sites. An investment sales broker should be open to helping you with this process.
An LOI is a legal document that does not obligate you to purchase. That is not the same as a sales agreement. If you intend to buy the property for less than the asking price, your LOI may also serve as a bid. Anticipate a yes, no, or counteroffer from the seller or investment sales broker.
Finalize a Purchase and Sale Agreement (PSA)
If your LOI is approved, the next step is to send the seller a PSA, a formal document often drafted by the buyer’s real estate attorney, who finalizes the transaction. This contract will contain information such as how much time the buyer has to complete inspections and a deposit amount, as well as legal matters such as representations and warranties.
Conduct Inspections of the Property
The buyer will have a set time frame to execute the inspections specified in the PSA. Generally, the due diligence period lasts between 30 and 90 days. During this time, the buyer can conduct inspections and ensure that the seller’s disclosure of the property is correct.
After the buyer and seller sign the PSA, the next phase is to get finance. Meeting with a banker to explore the financial products accessible to investors for financing multifamily real estate is recommended. A mortgage broker can assist you in navigating the various financing alternatives available and determining the best fit. The financing process typically takes 45 to 90 days.
The transaction will be fully completed when you become the new property owner on closing day. A frenzy of documents must be prepared, signed, scanned, and emailed or faxed to the lender and title company –preferably a day or two beforehand. The title company will present all parties with a settlement statement that reflects the flow of all funds at closing.
Apartment complexes are among the most profitable commercial real estate assets. Therefore it’s important to know how to buy an apartment building the right way. They lessen the risk for the landlord by diversifying revenue streams from numerous tenants and are part of a solid asset class. Finding an off-market apartment complex may be worthwhile for investors with patience and time to earn greater returns.