Buy an Apartment Complex

Buying an apartment complex is a long, sometimes complicated, process. It’s important for you to find an apartment complex you think has potential to make money. If necessary, work closely with a real estate agent to find properties and with an accountant to analyze the financial potential of an apartment complex. To apply for a loan, gather required information and approach several lenders. Also hire a real estate lawyer to help you prepare for closing.


Finding an Apartment Complex

  1. Choose which type of complex to buy. You might want to buy an apartment complex that consists of only apartment buildings. However, you should also consider buying a “mixed use” complex. This type of complex also contains commercial real estate you can rent out.
    • A complex that isn’t currently mixed use could be converted. However, the zoning must allow for it.
    • Also think about what amenities you want your apartment complex to have. For example, it may have a fitness facility, swimming pool, or common areas to hold private functions.
  2. Consider hiring a real estate agent. You’ll want to buy a complex in an area that isn’t declining, and an agent can help you identify these areas.[1] Talk to other apartment complex owners about whether they worked with an agent and if they would recommend them.
    • Ideally, you should go with someone who works as an agent full-time. A part-timer might not know the market inside and out.[2]
    • Of course, you can research apartment complexes on your own. Check online, talk to other investors, and drive around neighborhoods. However, an agent with experience in apartment complexes can save you time.
  3. Visit apartment complexes. Always visit a complex in person before deciding to buy. You should walk through all of the buildings on the complex and view any common areas. Take notes, and ask questions. Buying an apartment complex is a big investment, and you shouldn’t go forward unless you feel comfortable with the condition of the buildings.
    • Don’t walk through only one building on the complex. If you do, then you might assume the other buildings are in equivalent condition. Be skeptical if the seller’s agent resists showing you all buildings in the complex.
    • Remember to visit in the evening so that you can check out the security features at the apartment complex. Walkways should be well-lit, doors properly locked, and no one should be loitering around the premises.
  4. Talk to the current owner. You can gain a lot of valuable information by meeting with the current apartment complex owner. Be prepared to ask relevant questions. For example, ask about the following:
    • How many units are rented? It will be easier to finance an apartment complex that is being rented.[3]
    • How long have tenants been there? A complex with long-term tenants may be more stable.
    • Why is the owner selling? Retiring or switching investments are legitimate reasons. However, an owner who is selling because they are losing money is a red flag.
  5. Ask for information on current tenants. You’ll want to know the details about their leases. Ask for the “rent-roll,” which should contain the following information:[4]
    • list of tenants and their units
    • dimensions of each unit
    • lease terms
    • rent amount
    • number of bedrooms and bathrooms in each unit

Analyzing Profitability

  1. Estimate how much you can charge in rent. You shouldn’t buy an apartment complex unless you can afford it. Analyze whether the current landlord has rented units too cheaply or whether the rent is in line with the market rate.
    • Find comparable apartment complexes online. Look at how much they advertise their units for. The website is a great resource for finding out rents.[2]
    • You can also ask different property management companies what is the market rate in your area.
    • If the complex has commercial space, then a real estate agent can also help you figure out how much to charge.
  2. Estimate your expenses. Apartment complexes need constant maintenance, so you need to analyze the expense of upkeep. Get the profit-and-loss statement from the current owner. However, don’t trust it 100%. The owner might fudge some numbers to make the apartment complex more attractive. Double check the expense information:[2]
    • Get the complex’s tax information from the county assessor.
    • Estimate property management costs by contact a property management company. Ask how much they charge. Typically, their fee is based on a percentage of the expected rent.
    • Calculate the amount of maintenance needed. If you’ve never run an apartment complex before, talk to a current owner. Ask how much they spend annually repairing each unit or the grounds.
  3. Run the numbers. Lenders won’t give you money to buy an apartment complex unless you can show that it will be profitable. Work closely with an accountant to crunch numbers and create the necessary financial documents to show a lender. You can find an accountant by contacting your state’s society of public accountants.[5]
    • Calculate your net operating income, which is your gross income less expenses.
    • Create a cash flow analysis. Show how the amount of money you have coming in compares to the amount you will be spending.

Obtaining Financing

  1. Check your credit report. You are entitled to one free credit report each year. Your lender will look at your personal credit history, so you should pull it and check for errors.[1]Dispute anything that is wrong.
    • For example, accounts might be listed that aren’t yours, or an account might be improperly listed as in default or collections. Also, the credit limit might be wrong.[6]
    • Start early. The entire dispute process can take up to 60 days to complete, and you’ll want a clean credit report before you approach lenders.
  2. Learn about commercial loans. Loans for commercial real estate are not the same as loans you take out to buy your own home. Generally, loans can be for 30 years or as short as five or seven.[1] Interests rates may also be variable or fixed.
    • If you can get a non-recourse loan, then the building will secure the loan as collateral. However, non-recourse loans are not available for all borrowers, and the building typically must be worth at least $2.5 million.[1]
    • With a recourse loan, you remain personally liable for the loan. In the event of default, you can be sued, and you might lose personal assets. Recourse loans are riskier, but it might be the only type of loan you can get as a new landlord.
    • Commercial loans also require a down payment around 30% of the purchase price.[1]
  3. Make the owner an offer. Discuss what is a reasonable offer with your real estate agent, which will depend on the state of the local market. If the market is hot, you may need to pay the asking price—or even more.
    • No matter how hot the market, insist on a 90-day escrow period. You’ll want at least 60 days to get an inspection. That’ll leave you with 30 days to review documents before closing.[2]
  4. Have the building inspected. Hire an inspector with experience in commercial properties.[1] Find an inspector by getting a referral from a real estate agent or talking with another apartment complex owner.
    • Check ahead of time what will be inspected. Ask if you need to hire a specialty inspector to inspect a swimming pool or tennis court.
    • If the inspector finds problems, ask the seller for a credit, which will reduce the amount you pay.[2] Alternately, the seller might make the repairs before closing.
  5. Collect required information for the loan application. You must give the lender information about the apartment complex when you apply, so collect the following before approaching a lender:[1]
    • pictures of the apartment complex
    • floor plans
    • map of the surrounding area
    • description of the property (e.g., number of units, year it was built, etc.)
    • expected upgrades
    • rent information
    • purchase price
    • names of real estate agents, attorneys, and title companies involved in the transaction
  6. Apply for your loan. Approach multiple lenders so that you can compare their offers. Ask for an application and submit it with your supporting documentation. If the loan officer needs more information, then supply it as soon as possible.[7]
  7. Compare loans. After approving you, the lender will send you letter of intent or a term sheet. Analyze it carefully. It will specify the amount you can borrow and other terms. Choose the loan whose terms are best for you.
    • Sign the term sheet or letter of intent for the lender you choose. At this point, you may need to pay your deposit.
    • The lender should follow up with a full (and final) loan commitment.

Closing on the Apartment Complex

  1. Hire an attorney. You’ll need to sign many legal documents before you can buy the apartment complex. Don’t try to do everything yourself. Instead, you should hire an experienced attorney to draft and review all documents.[1] The attorney can do the following:
    • Draft, negotiate, and review the purchase agreement.
    • Seek credits from the owner to make necessary repairs.
    • Ensure the title is clear.
    • Set up escrow.
  2. Create a limited liability company to own the apartment complex. If someone is injured at the apartment complex, they might sue you because you were careless in your upkeep. If you lose the lawsuit, then the injured person can come after your personal assets, such as your own home. By owning the complex through an LLC, your personal assets are shielded.[1]
    • Owning the building as an LLC doesn’t protect you from all lawsuits. For example, your lender can sue you if you default on a recourse loan. Nevertheless, owning the apartment complex as an LLC will offer significant protection against personal injury and other lawsuits.
    • Start an LLC by filing appropriate documents with your Secretary of State and obtaining the necessary permits or licenses. Your lawyer may also help you, since this can be time-consuming.
  3. Review contracts and disclosures. You’ll have to perform significant due diligence along with your attorney to close on a real estate contract. For example, you’ll need to do the following:[8]
    • Have an appropriate title survey completed. Generally, a mortgage plot plan is insufficient. Instead, you’ll need an ALTA title survey.
    • Review any disclosures about the property. For example, the owner might disclose that something is wrong with the property that wasn’t caught by the inspector.
    • Review the tenant leases and documents for their assignment.
    • Consider the impact of zoning restrictions on the apartment complex. If you want to convert a complex to mixed use, then this is a key step.
    • Review service contracts for the apartment complex.
    • Obtain required permits to make repairs.
  4. Attend the closing. Your attorney should attend the closing along with a representative of your LLC (if you formed one). You should receive various documents at the closing, including a quitclaim deed and assigned leases and contracts.
  5. Hire someone to manage the apartment complex. Depending on the size of the complex, it might be impracticable to manage the property yourself by living onsite. Instead, you should hire a property management company. They will manage the property by collecting rent and scheduling repairs.[9]
    • Check the costs. Generally, property management companies charge 5-10% of rent collected.
    • Talk to other landlords to get referrals. Alternately, you can check with your local apartment association.
    • Compare property management companies based on more than price. Also look at the services they offer.

Sources and Citations