Buying an Apartment Complex Is Easier Than You Think

Apartments

If you can buy a rental property, you can buy an apartment complex.

Moving into the world of commercial real estate can be pretty intimidating. It’s a different world, but it’s a lot simpler than you probably think. That’s especially true of apartment buildings. If you can own a rental property, you can handle owning an apartment building.

A couple of key assumptions

This article will start with the assumption that you already have an understanding of rental real estate. Of course, I can’t provide a full course in apartment investing in the space provided here.

My focus will be high level, and I’ll try to relate the larger scale apartment to more common single-family rental investments that many of you likely already have in your portfolio.

Finally, with any investment in a specialized niche like commercial real estate, it is absolutely critical to hire a professional to assist you with your specific situation. Start here, and then turn to a reputable real estate broker, appraiser, or other experienced professional to fill in the gaps.

Moving into the world of commercial real estate can be pretty intimidating. It’s a different world, but it’s a lot simpler than you probably think. That’s especially true of apartment buildings. If you can own a rental property, you can handle owning an apartment building.

A couple of key assumptions

This article will start with the assumption that you already have an understanding of rental real estate. Of course, I can’t provide a full course in apartment investing in the space provided here.

My focus will be high level, and I’ll try to relate the larger scale apartment to more common single-family rental investments that many of you likely already have in your portfolio.

Finally, with any investment in a specialized niche like commercial real estate, it is absolutely critical to hire a professional to assist you with your specific situation. Start here, and then turn to a reputable real estate broker, appraiser, or other experienced professional to fill in the gaps.

In the world of real estate, this ratio is called the capitalization rate, or cap rate, and it’s calculated by dividing earnings into the price. Think of it as the inverse of the P/E ratio, and it’s shown as a percentage instead of a multiple.

Therefore, a lower cap rate indicates a more expensive price relative to the property’s income-generating ability.

For example, a highly sought after property in a very strong local market may have a cap rate of 6%, making it pretty expensive (the equivalent of a high P/E ratio in stock market terms). It’s expensive because the property’s NOI is just 6% of its total value. A lesser property in a lesser market may be cheaper with a cap rate of 13%.

Apartment buildings are a big ticket purchase. You’ll want financing.

Taking out a bank loan to purchase the apartment building is typical. These investments can be huge, so some debt is expected to achieve a more acceptable return on investment.

For retail investors, most banks will require at least a 15% down payment, if not more. Each bank has varying requirements and will look at each deal on a case-by-case basis. It’s in your best interest to shop around. Interest rates and other loan terms will vary, but anticipate a five- to 10-year loan with payments based on a 15- to 20-year amortization.

All of these terms are negotiable. Don’t be afraid to push back on the bank, especially if you receive approvals from more than one institution.

Even Warren Buffett is buying apartments

The Oracle of Omaha is doing it, applying his world-renowned stock investing principles to real estate. You can do the same thing.

Moving from a single rental house to an apartment building is a pretty big leap, and it’s understandably intimidating. Apartments are a big-ticket item, but with that big price tag comes big profit potential.

Do your homework, ask for help from trusted professionals, and stick to proven value investing principles. Do that, and your single rental property could be the start of a real estate empire.

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