Buying apartment buildings is more involved than investing in single-family or small multi-unit properties. There are pros and cons to apartment investing, and investing in apartments requires a deeper level of understanding of the financial and management aspects of real estate investment.
If you are searching for apartment financing, check out Patch of Land. They offer short term commercial loans from $250K – $3MM with rates starting at 10%. They can help you purchase and renovate your next apartment building. Get pre-qualified online in minutes and funded in as little as 7 business days.
Buying an apartment can be broken down into the following 7 steps:
Step 1 – Determine Whether Buying an Apartment Building is Right for You
Compared 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 Buildings
There 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.
One 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 Units
If 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 Costs
Economies 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 Income
The 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 Own
Unlike 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 Rents
When 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 Buildings
Buying 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 Units
Once 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.
When 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 Care
Even 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 Units
When 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 Building
If 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 Purchase
Consider 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 Units
Generally, 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 Complex
Apartment 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.
Most individual investors purchase class “B” and “C” properties because of their cost is conspicuously lower than class “A” properties, yet they don’t demand the repairs and renovation and intensive management that class “D” properties require.
Return on Investment
How much a building returns is a function of its size and how much cash you have invested in the property. A smaller building with fewer units isn’t going to have the money making potential of a larger property, but it won’t require as much cash to purchase and it won’t be as management intensive either.
Larger buildings, with more rental units, can produce more income, but they will require a larger upfront investment. Plus, the larger the number of units, the more you’ll need to consider how complex day-to-day management will be. If you have to hire a property manager or engage the services of a property management firm, it will bring down your cash flow and profits.
Scott Bierbryer, Co-Founder/Chief Operating Officer of apartment search firm VeryApt.com notes:
“If you are buying an apartment property, particularly on the smaller side, you have to be particularly scrappy with managing the property and handling any repairs. Apartment owners have to be highly responsive and anticipate problems that they never think of during initial purchase like pests, a broken elevator, or if the internet goes out. Otherwise, they must be willing to pay for a property management company that will, which might mean a 5% annual property management fee.”
Step 3: Locate a Building to Buy
There are many ways to locate an apartment building to buy. You can search yourself, without professional help. Local Real Estate Investment Associations (called REIAs) may be helpful with buying apartment buildings. Or, you can enlist the services of professionals including real estate agents, commercial real estate agents, and even business brokers.
Search On Your Own
Searching for properties yourself can be time-consuming, but that doesn’t mean it will be unproductive. One of the greatest advantages of searching for properties not handled by real estate agents is that the seller is not paying commission. That’s potentially 6% or 7% that you might be able to negotiate off asking price.
Plus, you may be able to get fairly favorable terms by working directly with the seller. You may even be able to negotiate owner financing with the seller and not have to get an outside loan.
Local Real Estate Investment Associations (REIA’s)
If you lean towards searching for an apartment building yourself, consider joining your area’s local real estate club. These are typically called Real Estate Investor’s Associations (or simply REIA’s). These groups allow you to network with other investors, some of whom may have apartment buildings for sale, or know of someone who does.
Real Estate Agents
There’s no discounting the fact that the real estate industry provides access to the largest body of properties for sale – and that covers buying apartment buildings. Every real estate agent has access to one or more Multiple Listing Services (MLS) that list all the properties for sale by every agency that participates in that MLS. Multiple-unit properties and apartment buildings will be in that database of properties for sale.
The downside to working with an agent is that a commission will be involved in the sale. Typically, as a buyer, this isn’t coming out of your pocket; it comes out of the seller’s proceeds. However, the 3%-10% commission will be factored in the price, so it effectively makes the price of the building slightly higher. Plus, agents know the market and know how to determine values, so buildings will tend to be priced at maximum market value.
Be aware, not every agent or even agency is experienced with apartment buildings. So, you’ll want to be sure you are working with someone who is competent in handling multi-unit properties in the size range you are seeking.
Commercial Real Estate Agents are Helpful When Buying an Apartment Complex
Commercial real estate agents specialize in the categories of property that would include buying apartment buildings. They handle them all the time and probably have better access to listings of apartments for sale than a typical residential real estate office. For example, they may have access to listings with other commercial brokerages that are not part of the typical MLS.
Commercial Real Estate Agents’ commission structures tend to be a bit higher than residential offices, so be prepared to see commissions more in the 7%-10% range. Again, this may not come out of your pocket, but it does influence the asking price of the building.
Commercial real estate agencies tend to be a bit more sophisticated than residential firms and will be quick to throw around financial principles you may not yet be familiar with. Don’t be timid; let them know you are a beginner and enlist their assistance in clarifying things you don’t understand. Plus, they regularly work with creative purchase ideas (like owner financing) which residential agents may shy away from.
Business brokers sell businesses, but their offerings include mixed-use buildings (commercial buildings also containing residential units), apartment buildings, and even entire apartment complexes. They can be a great source of potential deals.
Similar to commercial real estate agents, business brokerages are fairly sophisticated offices. That might mean that they know how to craft and present a creative office. But, it also means they’re accustomed to talking in business finance terms even if you’re not. Don’t be afraid to ask them to clarify what you may not yet understand. In time, you will; until then, don’t be off-put by their lingo.
Step 4: Evaluate Potential Apartment Purchases
When you are buying apartment buildings, and are evaluating potential purchases be sure to assess the location, consider the number and sizes of the units, note the property’s amenities, and pay attention to construction details.
Then, do two assessments of the finances. Begin by doing a ballpark examination of the basic numbers to see if they indicate it’s even worthy of consideration. If the ballpark examination points to a candidate property, then do a full evaluate the building’s financials.
Assess the Apartment Building’s Location
As with any real estate investment, you want to purchase an apartment building in an area that is desirable. Steer clear of blighted neighborhoods no matter how enticing a cheap purchase may seem. While some investors make class “D” purchases in tough neighborhoods work, there are plenty of good investments elsewhere.
Better located properties provide a stronger base of tenants, better tenants who will take better care of your property, higher rents, and a greater chance of appreciation for the building.
When Buying an Apartment Complex, Consider the Number & Size of Units
Mentioned earlier, if you are considering buying apartment buildings, you’ll want to consider how many units each property has. But, you’ll also want to consider the size of those units, in terms of square footage, number of bedrooms, baths, and so forth.
Studio or efficiency units can be difficult to rent outside of college campuses and high population areas. One bedroom units are easier to rent than studios, but your best bet is two bedroom units and larger. A couple, particularly with a child will want that second bedroom. Even a single person may want a second bedroom for guests or as a home office. So, it opens up a larger market of potential renters than a one bedroom does.
Note the Property’s Amenities
Amenities help drive interest in your property. These can include everything from washers and dryers in the units, to covered parking or garages, and even swimming pools. There more amenities the property has, the more desirable it will be to tenants.
Pay Attention to Construction Details When Buying Apartment Buildings
There are common problem areas when looking at apartment buildings. The top five are:
1. Flat Roof
Flat roofs tend to breed all kinds of problems, particularly related to leaks. However, it’s somewhat hard to avoid them because so many older apartment buildings have flat roofs. Just be aware they can be problematic.
2. All Frame Versus Brick
If a building is all frame, it’s prone to exterior paint and rot issues. That means the more exterior wood, the more exterior maintenance you’ll have to pay for. It also causes a more expensive insurance rating for fire.
3. Old Plumbing
If the building is more than about 3 decades old, and the plumbing has never been replaced, be prepared for a constant stream of plumbing repairs. Old pipe has probably already started to deteriorate. More important, you can have issues with lead in the connections, meaning even costlier repairs to remove it.
4. Shared Utilities
Older apartments often have shared systems such as common water or common electricity. That means the landlord pays that utility and either absorbs it in the rent or tries to prorate it among tenants. Experts agree this tends to be problematic. For example, since tenants feel it’s they aren’t paying for heat, it’s not uncommon for some to raise the thermostat to 80 degrees in winter, then open a window! Bottom line: don’t buy buildings with common utilities.
5. Asbestos and Lead Paint
Old buildings often contain asbestos in the insulation, older HVAC systems, and exterior siding. Additionally, the interior may be painted with lead-based paint. Depending on where you live, you may have to mitigate those issues, and it can be costly. In fact, one of the reasons why the owner may be selling is because they are faced with lead or asbestos abatement and can’t afford it. It’s important to have a building inspector look for those materials and check with your city and state to find out what remedies are required if they are present in the building.
Examine the Basic Numbers for the Property
There are several basic numbers you can eyeball on the property as you are evaluating it. These will provide a preliminary look at the property’s potential before you make a more thorough examination of the property’s financials.
Get the current rental amounts for every unit. Total those and multiply by 12 to get a ballpark idea of the gross annual rent. This is called the rent roll. A tool used by investors, based on the rent roll to compare apartment building purchases is the gross rent multiplier. It compares the value of the building as a function of rents.
Occupancy rate tells you how much of the time the building is occupied. Vacancy rate is the opposite figure; it tells you how much of the time a building is vacant. Ask the seller and the agent about the occupancy or vacancy rate on the building. Check with real estate agents and landlord groups in your area to find out what the typical vacancy rates are. Compare the figures for the building you are considering to local industry averages.
If the rates seem overly good, then you may not be getting honest information from the seller. If they are poor, try to determine why the occupancy rate isn’t better. There may be opportunities – such as making simple enhancements to units – that can both attract tenants and/or keep them longer.
Cost Per Unit
This is a simple figure that is calculated by dividing the building’s purchase price by the number of units it contains. It will give you a point by which you can compare it to other apartment buildings you are considering buying, and compare the figure against local average per-unit pricing. This figure can become a good bargaining tool if you want to purchase the building but you feel the cost is too high.
Evaluate the Full Financials
Looking at the basic numbers gives you a snapshot of how the property looks financially. But, before you may any offer, you need to get a complete set of financials for the property for at least the prior year – preferably several years.
Numbers like rental income, expenses, vacancy rates and certain ratios are examining the vital signs for a building and will certainly affect your ability to finance an apartment project. These numbers include:
Gross Operating Income
Gross operating income is the actual rent collected on the property. It’s what actually comes in the door allowing for vacancy.
Expenses when buying apartment buildings include interest, insurance, advertising, maintenance, property and other taxes (not income taxes), fees, management expenses, and professional services (like legal help).
It’s important to know what the total expense load is for the year, and what the pattern of expenses look like each month. Some months will have higher expenses than others, and it’s good to be aware of that.
Net Operating Income
Net operating income is what remains from income rent after paying all expenses. This is also known as cash flow. It’s a good idea to examine net operating income both annually and as a monthly figure. Net operating income is also known as cash flow. Cash flow can be a positive figure, meaning you made money during the period; or it can be negative, meaning the property cost you money during that period of time.
Here is an example of computing Net Operating Income for a 6 unit building, each unit renting for $600 per month:
|Potential Rent Roll||$3,600||$43,200|
|=Gross Operating Income||$3,240||$38,800|
|=Net Operating Income (Cash Flow)||$1,080||$12,960|
In this example, the cash flow is positive, throwing off $1,080 in monthly income, or $12,960 per year!
The table above is a simplified version of presenting the monthly/annual finances. You should be provided with what is referred to as a Cash Flow Statement, Income Statement, or Profit/Loss statement. Fundamentally, these are the same thing. What they provide is a complete picture of the financials, particularly by itemizing all the expenses. So, the profit/loss statement allows you to examine each expense category instead of one lump sum like you see above.
The capitalization rate (or cap rate for short) shows the rate of return on the investment. It’s an important figure that allows you to compare one investment scenario against another, or one property against another. The formula is
Cap Rate = Net Operating Income/Purchase Price
Let’s use the example from above, and say the building cost $200,000 to purchase.
Cap Rate = $12,960/$200,000
Cap Rate = 6.48%
Is 6.48% a good figure? It depends on a couple of things. First, it depends on comparison with other units in your area and other units you may be considering. If you are looking at two other prospective properties and their cap rates are 11% and 12% respectively, then the one above isn’t as good a choice. Or, if cap rates in your area average 9%-10%, the building above still pales by comparison.
It also matters how you buy the property. In the example above, let’s presume the $25,920 included interest of approximately $7,000 for the year. If you had paid all cash for the building, you would not have incurred the interest cost. So, your expenses would have only been $18,920. As a result, the net operating income would have been higher by $7,000, or $19,960.
So, the cap rate would be $19,960/$200,000 or 9.98%
Due Diligence Items When Buying Apartment Buildings
If you’ve decided to move forward with a purchase, you need to add a few items to your investigation. Some of these are important enough that you should write them as official requests into the contract and make the offer subject to your approval of what you see. That way, the seller has to provide the information – and you can back out of the deal if the details aren’t to your liking.
Determine Why the Owner is Selling
When buying apartment buildings, try to ascertain why the owners are selling. The situation that the sellers are faced with is an important component for negotiating the deal. For example, if a seller wants to retire and move to the Sunbelt his/her motivations are very different than if faced with a property needing major repairs.
Of particular concern is trying to unearth something amiss with the property that the seller tried to hide. Undisclosed problems can cost you dearly and you want to try your hardest to uncover issues before they become your issues!
Obtain Copies of Leases
The only real way to know what the rent roll will look like is to get copies of every lease. Those will show you, not only the rent amounts, the terms of the lease, who is coming up for renewal, whether they’ve been allowed to keep pets, what their security deposits are and so forth. Plus, after you take ownership, the leases become yours, so you need to be familiar with them.
Request Prior Owner’s Tax Returns for the Apartment Complex
Often, the books for a property, as expressed by the profit/loss statement will be quite different than what is reported on the owner’s tax return. Request both and investigate any discrepancies. For example, if the seller shows $12,000 in net operating income on the books, but only $9,500 on the tax return that should send up some warning flags and should be verified.
When you are seriously considering buying an apartment building, and definitely as a contingency in your contract, you want to get a building inspector to evaluate the property. Apartments are complex and often have shared systems, are various levels of condition throughout each unit, and potential issues with common areas that tenants never experience or report. You’ll want a detailed inspection report of what needs to be repaired. That report will become a negotiating tool in the purchase.
Step 5: Make an Offer
Making a good offer on a property involves appraising the value of the building and clearly knowing how rents affect the value of an apartment investment, as you prepare your offer.
Appraising the value of an apartment building
Appraisals for apartment buildings are different than for residential properties. There are 3 methods that will be used side-by-side: 1) market value; 2) replacement cost; and 3) income approach.
Market Value Approach
Appraising market value will look at other, similar properties and their selling prices. If you are considering the purchase of a 6-unit building, containing all 2-bedroom units, the appraiser will look at similar buildings and what they sold for over the prior year. Market value, per-unit is considered in this approach.
Replacement Cost Approach
Replacement cost examines the amount it would cost, on a per-square-footage basis to build a similar building. If you are looking at a 4-unit building of 4,000 square feet, and construction costs in your area run $100 per square foot, then the replacement cost will be valued at $400,000.
The income approach uses the net operating income and local capitalization rates to determine the value of the investment. To accomplish this, take the net operating income and divide it by the cap rate.
Value = Net Operating Income/Cap Rate
For example, If the net operating income of the building is $46,000 and the cap rate in your area is 10%, then:
Value = $46,000/10% = $460,000
Rent Affects the Building’s Value
Because the income approach is a common tool in appraising apartments, it’s important to understand that, if you can raise the rents you can increase the value of the building.
Let’s say you purchased the above building, and realize the rents are below market. Let’s also say, you own the building for two years, and in that time are able to raise the rents by 20%. For sake of simplicity, let’s just carry that 20% increase to the net operating income, making it $55,200. Using the income approach, the building’s value would then be:
Value = $55,200/10% = $552,000.
You’ve been able to increase the value of the building over $90,000 in two years just by increasing the rents!
Step 6: Finance the Purchase
When buying an apartment building, successful funding requires understanding the types of financing for apartments, recourse versus non-recourse loans, lender required reserves; and, because it affects net operating income, how lenders look at occupancy as part of the loan approval process.
Types of Financing For Apartments
Financing for apartments is fundamentally different than with residential purchases. Commercial, as opposed to residential lending, is what you will likely use, with conventional loans, seller financing, or private loans your typical options.
Commercial as Opposed to Residential Lending
Apartment buildings will often be financed with commercial as opposed to residential loans. While residential loans may be an option for 2-4 unit buildings, particularly if you are going to live in one of the units, you should familiarize yourself with commercial loans.
To see how much commercial financing you qualify for, check out Patch of Land. They provide short term commercial loans from 250K to $3MM with rates starting at 10%. Prequalify now.
Unless the multi-unit building is 4-units or less and you plan on living in one of the units, government loans such as Federal Housing (FHA) and Veterans Administration (VA) loans are not available. The vast majority of apartment financing comes in the form of commercial loans from banks and financial institutions.
Private Loans & Seller Financing
The exception to the conventional apartment lending landscape is private financing. The most common is owner financing in which the seller will allow you to make periodic payments after supplying a decent down payment. Sellers of commercial or investment property like apartments are usually more willing to offer seller financing than homeowners because it’s strictly a business proposition – and the interest they earn means a greater return on their investment.
Because of the potential to earn a healthy interest rate, you might also find private parties willing to lend money on good apartment deals. Instead of you going to a bank, these parties will provide the purchase money and you’ll make payments to them.
Recourse Versus Non-Recourse Loans
With a recourse loan, the lender can pursue financial remedies beyond the building itself should you default on the payments. With a non-recourse loan, the lender can only go after the building itself. Non-recourse loans are the obvious choice, but harder to get.
This brings up an important point about not buying an apartment building in your personal name. Because of the complexities and risks inherent in apartment ownership – not the least of which is putting your personal finances at risk – you should only buy apartment buildings in corporate form. Your accountant and attorney will help advise you about whether a limited liability company (LLC) or corporation is a better choice, but purchase apartment investments through your entity, not personally as a sole proprietor.
Lender Required Reserves
Lenders will typically require you to maintain one or both of two common types of reserves. The first is interest reserves which will help ensure you can meet the periodic payments. The other is cash reserves to ensure you can meet operating expenses, insurance, taxes, and repairs.
Combined, reserves may total as much as 6 months of payments, so be prepared for a fairly big chunk when financing your apartment building purchase.
Lenders Look at Occupancy At Part of the Loan Approval Process
Because net operating income is so important for apartment real estate investing, lenders will look favorably on properties with good market potential, high occupancy rates, and long-term tenants. This is another argument in favor of buying good-grade properties in good areas. Remember; income affects value.
Step 7: Close on the Purchase
Three things to consider when closing on an apartment investment include: 1) selecting an escrow agent or title company experienced with apartments; 2) closing on a financially advantageous day of the month; and, 3) having security deposits properly transferred to you.
Selecting an Escrow Agent or Title Company Experienced With Apartments
As with any kind of real property purchase, you need to select an escrow agent or title company which will help you close the transaction. In some states, attorneys handle real estate closings. In other states, title or escrow companies are used. Whichever is the case in your state make sure the company has experience with apartment investments and always get title insurance to protect your ownership.
Closing on a Financially Advantageous Day of the Month
Rents are paid in advance. Mortgages payments are made in arrears. So, closing right after rents are collected, provides almost a full month of cushion before your next mortgage payment is due. This is tactic that experienced investors use to pad the purchase a rental property.
Having Security Deposits Properly Transferred to You
When you close on the property any security deposits become your responsibility. Most states require landlords to keep the security deposits in a separate trust account. Even if your state doesn’t require this, don’t make the mistake of thinking that possession of several security deposits is a cash windfall.
That money is technically the tenants until such as time as it may be required for damage or unpaid rent; it’s not yours to spend. So, make sure security deposits are properly designated at closing, and get them into a bank account separate from the general one used for the property.
Bottom Line: Buying Apartment Buildings
Investing in an apartment building involves several steps. It begins with determining whether apartment buildings are a good investment choice for you. Next comes searching for, and financially evaluating, various buildings that fit your criteria. Once you’ve found a building, you must obtain financing, which in most cases will come in the form of commercial lending. Finally, is the closing, with an eye towards unique characteristics involved with multi-units.
If you’re wondering how to finance your apartment building, check out Patch of Land. They’ll fund up to 70% LTV on deals from $250K to $3MM. Rates start at 10% and you can get pre-qualified online in minutes and funded in as little as 7 business days.