Buy an Apartment Building

Purchasing an apartment building can be a great move, so long as you invest in one that fits with your budget. You should work with a real estate agent to find appropriate properties and then analyze the financial history of the building. Get a “rent-roll” that lists the number of units and the amount of rent charged for each. Also obtain a profit and loss statement from the landlord. Use these documents to determine how much you can borrow. It’s vitally important that you hire an inspector to look over the property before you close on the purchase. You don’t want to buy a building with unforeseen problems.

Steps

Locating the Right Building

1. Work with a real estate agent. An agent can help you find appropriate properties in areas that are worth investing in. You could do a lot of this research on your own by looking online and talking to other investors in the area. But an agent can save you time and money.
   • Ask other landlords which agent they used and if they would recommend this person. Ask what they liked about him or her.
   • Find an agent who does real estate work full-time. Someone who works part-time might not follow the market closely.
   • Also make sure the agent has experience purchasing apartment buildings.
2. Identify the type of building you want. There are different types of apartment buildings you could buy. You should talk with a real estate agent about your preferences.
   • For example, a building might be mixed use. This means it has apartments in it along with commercial real estate that you could rent out.
   • A building that is occupied will be easier to finance, so check to make sure how many units have a tenant.
   • Also consider the size of the building. A loan for an apartment building with one to four units will not be much different than a loan for buying a house. However, if the building has five units, then a lender will consider it an apartment building.
3. Visit buildings. You want to see the building in person, so tag along with your real estate agent to look. Take notes as you walk through the buildings. Unless you are trying to flip a building, you might want to avoid any apartment building that is too run down.
   • Ask the current owner about tenants. Check how many units are rented, how long the tenants have been there, etc.
   • Question the current owner about why they are selling. Perhaps the owner wants to switch investments, or maybe the neighborhood is going downhill and they are losing money. The reason why they are selling could influence whether you purchase the building.
   • Don’t make an emotional decision. Instead, try to analyze each building as an investment.
4. Request the rent-roll from the seller. To properly assess the building, you should request certain information from the seller. For example, make sure to get the rent-roll, which should include the following:
   • complete list of units
   • names of tenants
   • terms of each lease
   • monthly rent
   • size of the units
   • numbers of bedrooms and bathrooms in each unit
5. Analyze what you could be charging for rent. The current landlord might be undercharging rent. You should research what the market rates are in the area and calculate the likely rent accordingly.
   • Check websites like padmapper.com to see what rents are like in the neighborhood. However, you should go around and see the properties in person to check that they are equivalent to the units in the building you have looked at.
   • You can also call property management companies and ask what they think you could charge for your units.
6. Calculate likely expenses. You should ask the current owner for the building’s Profit and Loss statement (called the “P & L”). However, you should study it critically. The seller has an incentive to bend the truth. You can double check some of the information by doing the following:
   • Estimate the amount of maintenance necessary. Newer units might need around $500 per unit a year.
   • Obtain tax information by calling the county assessor’s office.
   • Get an insurance quote from a company that insures commercial properties.
   • Call property management companies and ask how much they charge. They usually charge a percentage of your gross expected rent.
7. Determine how much you can spend. You need to understand the finances of being a landlord. Lenders will want to see that your property is profitable before lending the money. You also want to confirm in your own mind that you’ll be able to make your loan payments. Consider the following:
   • Most lenders will probably want 25-30% as a down payment. Check if you have this amount of money.
   • You’ll need to calculate the net operating income. This is the amount of money you’ll make minus expenses.
   • Analyze your cash flow. This is the amount of money coming in relative to the amount you are spending.
   • If you don’t know how to analyze the finances, then contact a Certified Public Accountant who can help you.
8. Make an offer. Your offer will depend on how much money you want to borrow and what you think the apartment building is worth. Talk with your real estate agent about what is a realistic offer.
   • In a hot real estate market, you might not want to be aggressive because buyers might be snapping up buildings. Instead, you can expect to pay close to what the seller is asking.
   • Negotiate at least a 90-day escrow period. This will give you 60 days to have inspections done and then an additional 30 days after that to close.
9. Hire an inspector. You should have the building inspected before going through with the purchase. Make sure that the inspector has experience with commercial properties. You can find an inspector by asking your real estate agent.
   • Before hiring, ask the inspector what they will check. A standard inspection will look at electrical wiring and the building’s structure. If you want more checked, then make that clear to the inspector.
   • If there are problems with the building, then you can have your lawyer approach the seller and request a credit. This credit will reduce your purchase price.

Finding Financing

1. Review your credit history. A lender will pull your credit history to decide if you are a good credit risk. For this reason, you should review your credit history before applying for a loan. You can get a free credit report from each credit reporting bureau every year by visiting www.annualcreditreport.com or calling 1-877-322-8228.
   • Study the report for errors. For example, information might be included on your report that isn’t yours. Instead, it might belong to someone else with a close name or Social Security Number. Also, credit reports sometimes list the incorrect payment status on accounts or don’t include remedied problems, such as an account paid in full.
   • If you find errors, then dispute them with the credit reporting bureau whose report contains the error. It can take up to 60 days to complete the dispute process, so plan accordingly.
2. Understand commercial loans. There are two types of loans available to purchase apartment buildings. A non-recourse loan is secured with the building itself. They are available to certain buyers if the building is worth $2.5 million.
   • The other type is a recourse loan. With this loan, you will be personally liable on the loan. This means that if you default, the lender can come for your personal assets, such as your home.
   • Loans can be long term (up to 30 years) or short term (five, seven, and 10 years).
   • Interest rates can be fixed or variable. If you pick a variable rate, then the interest rate will change as the loan matures.
3. Gather required documents. You’ll need to submit quite a bit of paperwork to a lender when you apply for a loan. You will probably need to submit the following, so gather it ahead of time:
   • property description, including year of construction and number of units
   • pictures of the property
   • map showing the property’s location and competitor apartment buildings
   • plans for upgrades
   • information on rents
   • copies of floor plans
   • purchase price and closing costs
   • names of others involved in the transaction (such as attorneys, real estate brokers, and title companies)
4. Apply for a loan. You can apply for a loan with many different lenders and the choose the one that offers the best terms. Share your supporting documentation with them and then complete the required application.
   • After you submit the application, a loan officer will review your application. They may reach out to you for additional information.
   • You’ll then receive a term sheet or letter of intent from all lenders you applied to. This document will identify all the parties, the type of security, the amount financed, and other key terms. The purpose is to make sure everyone understands the terms of the loan.
   • You sign the letter of intent or term sheet for the most attractive loan. Submit it to the lender. You may need to pay a deposit at this point or submit supporting documents, such as an appraisal.
   • Wait to receive the final, full loan commitment from the lender.

Closing the Sale

1. Hire a lawyer. You should avoid trying to draft legal documents yourself. Instead, hire a real estate lawyer so that it is done right. In addition to writing the purchase agreement, your lawyer can handle other tasks:
   • Negotiate with the seller if repairs need to be made before closing.
   • Set up escrow.
   • Research the title to make sure that it is clear.
2. Create a business to own the building. Many owners hold the apartment building through a business, such as a limited liability company (LLC). If you own it through an LLC, then you will be personally shielded from any liability related to the building.
   • For example, if someone slips and falls, they might sue the owner for negligent maintenance. If you own the building through an LLC, then the person suing you can’t get your personal assets.
   • However, if a bank requires that you sign a personal guarantee on a loan, then the bank can come for your personal assets.
   • You can create an LLC on your own by filing Articles of Organization with your state. Alternately, you could have your attorney create it for you.
   • You will also need to get any necessary licenses and permits required by your state and local governments. You can check with your state’s Secretary of State website for more information.
3. Perform pre-closing diligence. Commercial real estate closings are generally more complex than simple residential closings. Accordingly, you need to do more diligence. Discuss the following with your lawyer, who should guide you through the process:
   • Have an ALTA title survey done. A typical mortgage plot plan is not sufficient for commercial real estate.
   • Find an escrow agent.
   • Review tenant leases.
   • Analyze zoning restrictions.
   • Review the assignment and assumption of tenant leases.
   • Consider assignment of any service contracts to the building.
   • Review disclosures about the property.
   • Identify any required permits, especially if you intend to make improvements on the property.
4. Attend the closing. If you are buying the building as an LLC, then remember that your business representative must attend the closing. The closing package should contain the following documents:
   • quitclaim deed
   • title affidavit
   • other affidavits
   • assignments of leases
   • assignments of contracts
5. Hire a property management company. You must decide whether you want to live onsite and manage the property. If not, then you’ll need to hire a property management company. The company will handle the daily management of the property. For example, they will make sure rent is paid on time and also coordinate to have repairs made.
   • You can find a property management company by talking to other landlords or contacting your nearest apartment association. You might also look online.
   • Be sure to interview potential candidates about their business experience and the services they offer.
   • Ask how much they charge. Typically, a property management company will charge 5-10% of the rent you collect.

Sources and Citations

See also

• Buy Property in a Retirement Community
• Save Money when Buying Your First Home
• Determine Land Value
• Buy a House with Bad Credit
• Buy Your First Home With Bad Credit
• Prevent Identity Theft
• Read a Land Survey
• Buy an Apartment Complex
• Get a Quit Claim Deed
• Get Started in Real Estate Investing

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